An Economic Perspective on Wealth Taxes

An Economic Perspective on Wealth Taxes

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Updated April 1, 2022
An Economic Perspective on Wealth Taxes
The idea of imposing a tax on individual wealth has
Selected Policy Considerations
appeared in policy debates with increasing frequency.
Enactment of a wealth tax would represent a significant
Proponents of a wealth tax have primarily argued that such
change in U.S. tax policy. The change would raise a
a tax would achieve three objectives. First, a wealth tax
number of policy issues and questions that Congress may
would mitigate rising wealth inequality. Second, the tax
choose to consider.
would raise significant revenue that could be used to
address debt and deficit concerns, and fund a variety of
Revenue Yield
social policies. Finally, the tax would capture some income
The Joint Committee on Taxation (JCT) would provide
sources that currently are not taxed (e.g., unrealized capital
Congress with an official revenue estimate of any wealth
gains or types of imputed income).
tax proposal. A number of outside think-tank and academic
researchers have proposed revenue estimates of wealth
This In Focus presents an economic perspective on wealth
taxes, which vary depending on the assumed design of the
taxes. Because no federal wealth tax currently exists, the
tax.
discussion in this In Focus is primarily in terms of a
general wealth tax. Designing such a tax would require
For example, the Tax Policy Center (TPC) examined three
careful consideration about a number of specific issues.
stylized wealth taxes:
Where appropriate, the discussion highlights specific points
of consideration.
1. a tax equal to 1% of net wealth over $20
million ($40 million for joint filers);
Overview
2. a tax equal to 1% of net wealth between
At its most basic level, wealth is the value of all assets (e.g.,
$20 million and $100 million ($40
stocks, bonds, real estate, art) owned by an individual
million and $200 million for joint filers)
minus the value of their liabilities. As shown in Figure 1,
and 2% of net wealth over $100 million;
the concentration of wealth in the top 10% (i.e., top 1% plus
and
next 9%) of the wealth distribution in the United States has
3. a tax equal to 1% of net wealth between
increased over the past 30 years. The increase has been
$100 million and $1 billion and 2% of net
largest for the wealthiest households. The share owned by
wealth over $1 billion.
the top 1% rose by the greatest amount, from 23.4% in the
third quarter of 1989 to 31.4% in the fourth quarter of 2020.
The TPC estimates these three versions would raise $1.1
Over the same time period, the holdings of the top 1% of
trillion, $1.6 trillion, and $800 billion in revenues,
the wealth distribution have shifted toward stocks and
respectively, in the first 10 years, though they emphasize
business holdings.
the revenue estimates are highly uncertain.
Figure 1. Share of Total Wealth by Wealth Percentile
Group in the United States, 1989 to 2020
The uncertainty surrounding wealth tax revenue estimates is
illustrated by the broad range of estimates of a legislative
proposal by Senator Warren (S. 510). The proposal would
levy a 2% tax on net wealth above $50 million plus a 1%
surtax on wealth over $1 billion. Annual estimates for this
proposal range from $117 billion (Smith, Zidar, and Zwick)
to $300 billion (Saez and Zucman). The $300 billion figure
is an increase from an earlier $275 billion estimate. Saez
and Zucman partly attribute the revised estimate to an
increase in the concentration of wealth. Authors of these
estimates have noted the difficulty in determining the
magnitude of behavioral responses and avoidance behavior
that would occur if the proposal were enacted.
Valuation
Determining the value of assets is a crucial aspect of

implementing a wealth tax. Valuations of bank accounts
Source: Board of Governors of the Federal Reserve System.
and assets that are readily traded on financial markets, such
Notes: Quarterly data from Q3 1989 to Q4 2020.
as stocks and bonds, would be relatively straightforward,

although when such valuations were made would be
important given fluctuations in asset values over time.
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An Economic Perspective on Wealth Taxes
Valuation of land and structures within the United States
that these estimates may underestimate noncompliance at
could also likely be accomplished in a reasonable fashion
the top of the income distribution, as they are unlikely to
given the prevalence of state and local property taxes, and
fully account for tax evasion through offshore accounts and
templates used by private companies that provide appraisals
pass-through businesses.
or estimates of market values for real estate. Valuation of
land and property held abroad may be more difficult from
In addition to third-party reporting, several general design
an administrative and verification perspective.
aspects could limit avoidance or evasion. All else equal, a
broader measure of taxable wealth would offer fewer
Not all assets have a readily available market value. For
avoidance opportunities. However, the current estate tax
example, the majority of U.S. businesses are privately held
offers some insights into planning techniques that could be
(partnerships, sole proprietorships, S corporations, LLCs).
used to reduce wealth that would otherwise be subject to a
For items such as fine art, wine, antique cars, jewelry, and
wealth tax. These estate tax planning techniques include the
other collectables, there is often not a liquid market that can
use of family trusts, donor-advised funds, and related-party
be referenced for valuation purposes. Valuing intangible
loan agreements. Such tax-planning techniques may
assets (patents, copyrights, etc.) could be one of the more
warrant attention when designing a wealth tax.
difficult aspects of levying a wealth tax.
Additionally, if a goal of a wealth tax is to target income
that escapes taxation under the income tax, there is the
Still, there may be practical approaches to consistently, if
potential for the tax on an asset to be greater than the
not accurately, applying values to many assets for tax
income produced by the asset—creating an effective
purposes. Saez and Zucman highlight that Section 409A of
income tax rate greater than 100%—unless wealth tax rates
the Internal Revenue Code (dealing with deferred
are low.
compensation plans) provides a potential framework for
valuing privately held businesses under a wealth tax, and
Constitutionality
that the IRS already collects data on private businesses.
In addition to considering the economic issues surrounding
Likewise, Saez and Zucman point out that collectables are
a wealth tax, it is equally important to consider whether
often insured, which requires a valuation be made, and that
such a federal tax is permissible under the U.S.
such assets are a rather small share of total wealth.
Constitution, which requires that a “direct tax”—which
some legal scholars contend a wealth tax is—be
Some issues with asset valuation or situations where the tax
apportioned among states according to population. There is
due exceeds the taxpayer’s liquid assets could be addressed
considerable debate among legal scholars on this issue. For
using some form of retrospective taxation. This could be
more information on legal aspects of taxation, see CRS
especially useful where determining the true value is
Report R46551, The Federal Taxing Power: A Primer, by
difficult (patents, copyrights, etc.) or when a taxpayer’s
Milan N. Ball.
wealth is primarily in illiquid or non-income producing
assets. Senator Wyden proposed a type of retrospective tax
Alternative Policies
mechanism in the 115th Congress (as part of his mark-to-
Alternatives policies could potentially achieve a number of
market capital gains proposal).
the same objectives of a wealth tax. One approach that is
perhaps most closely related to a wealth tax is a proposed
Avoidance and Evasion
minimum tax contained in the President’s FY2023 budget
One of the key drivers of the range of estimated revenue
request. Under the proposal, those with wealth exceeding
yields presented earlier is the degree of avoidance included
$100 million would be subject to a 20% minimum tax on
in the estimates. Since the United States does not have a
total income, which would include unrealized capital gains.
wealth tax, these estimates are generally drawn from U.S.
Accompanying the tax would be a requirement that
estate tax data or from the experiences of other countries—
taxpayers report the value of their assets by specified
with estimates of avoidance (measured as a reduction in the
classes.
tax base) ranging from the midteen percentages up to the
midforty percentages. However, research by Saez and
A second approach could be to adopt the high-income
Zucman highlights the role third-party reporting has had in
surtax in the Build Back Better Act (BBBA; H.R. 5376).
reducing wealth tax avoidance in other countries, and
Under the most recent version of the BBBA released by the
suggests that with careful design, avoidance rates at or
Senate Finance Committee on December 11, 2021, a flat
below the lower end of this range could possibly be
tax rate of 5% would apply to modified adjusted gross
achieved.
income (MAGI) in excess of $5 million ($10 million
married filing jointly) and below $12.5 million ($25 million
Internal Revenue Service (IRS) estimates of the tax gap (the
married filing jointly). MAGI in excess of these thresholds
difference between taxes owed and taxes voluntarily paid)
would be taxed at a flat rate of 8%. MAGI generally
may offer insight into how the design of a wealth tax could
includes labor, dividend, and realized capital gains income.
limit avoidance or evasion opportunities. In particular, IRS
Thus, in contrast to the proposed 20% minimum tax,
estimates highlight the importance that third-party reporting
unrealized capital gains would not be subject to the surtax.
could have on the rate of noncompliance. In their most
recent tax gap study (covering tax years 2011-2013), the
Mark P. Keightley, Specialist in Economics
IRS found that third-party reporting reduced the
Donald J. Marples, Specialist in Public Finance
noncompliance rate by over two-thirds (from 55% to 17%).
A recent working paper by Guyton et al., however, suggests
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An Economic Perspective on Wealth Taxes

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