Published November 14, 2019|4 min read
Adding a tax on wealth has been proposed in the tax plans of multiple 2020 Democratic presidential candidates, particularly Sens. Bernie Sanders and Elizabeth Warren. They estimate wealth taxes would raise billions annually in federal tax revenue. The new taxes would also affect only the wealthiest Americans: people with a net worth of at least $32 million. That means 99% of U.S. taxpayers wouldn’t see any changes to their current taxes.
A wealth tax is a tax on someone’s entire net worth. That includes income, personal savings, investments, the value of property and real estate, as well as personal property, such as jewelry or artwork. (Learn how to calculate your net worth.)
The U.S. has never had a true wealth tax. The most similar current tax is the federal estate tax. When someone passes on an estate (a collection of everything they own), the portion of it that’s worth more than a certain value is taxed based on its overall value. However, this isn’t the same as a wealth tax because the entirety of the individual’s wealth is not taxed during their lifetime.
Economists and politicians have proposed creating a wealth tax because it could raise billions in annual tax revenue for the federal government.
For example, estimates by Emmanuel Saez and Gabriel Zucman, economists who have advocated for a wealth tax to reduce inequality, show that Elizabeth Warren’s proposed wealth tax would raise as much as $198 billion for the 2019 tax year. Warren and other candidates plan to use the additional tax revenue to fund other programs, like providing Medicare for all or lowering college tuition.
The combination of these policies is meant to decrease income inequality in the U.S. by redistributing money from millionaires and billionaires to the Americans who need it most.
Relying on income taxes can increase inequality because the wealthiest people often make most of their money outside of their primary salary. For example, Jeff Bezos, founder and CEO of Amazon, has had an annual salary of $81,840 for decades even though his net worth is more than $100 billion, according to media estimates. Business and investment income, major sources of income for the wealthy, are also taxed at lower rates.
The two main wealth tax proposals are from Sens. Sanders and Warren. Their plans would affect Americans with a net worth of at least $32 million (Sanders’ plan) or at least $50 million (Warren’s plan). Anyone with a lower net worth would not pay the wealth tax. That means less than 1% of the U.S. population would see any changes to their current taxes.
Bernie Sanders’ wealth tax plan calls for eight marginal tax brackets that range from 1% to 8%, starting with people who have $32 million in wealth. Sanders has the more aggressive plan of the two, and has said that he doesn’t believe billionaires should exist.
Bernie Sanders' wealth tax proposal
|Net worth||Wealth tax rate|
|Less than $32 million||No wealth tax|
|$32 million to $50 million||1%|
|$50 million to $250 million||2%|
|$250 million to $500 million||3%|
|$500 million to $1 billion||4%|
|$1 billion to $2.5 billion||5%|
|$2.5 billion to $5 billion||6%|
|$5 billion to $10 billion||7%|
|More than $10 billion||8%|
Elizabeth Warren’s wealth tax plan has only two brackets, starting at 1% for those with wealth of at least $50 million.
Elizabeth Warren's wealth tax proposal
|Net worth||Wealth tax rate|
|Less than $50 million||No wealth tax|
|$50 million to $1 billion||2%|
|More than $1 billion||3%|
It’s unclear. The U.S. has never had a wealth tax, so it’s difficult to say whether or not one would work. Other countries that have tried have not been the most successful. For example, France recently repealed its wealth tax.
The major challenge is enforcement. The IRS, which collects federal taxes, has had its funding and staffing cut over the past several years, hampering its ability to enforce tax rules. To improve enforcement, both Sanders and Warren have said they would increase IRS funding.
Even if the IRS could afford to enforce tax collection, there are many loopholes that allow wealthy taxpayers to avoid paying taxes. Opponents of the wealth tax say decreasing tax avoidance and closing tax loopholes would increase tax revenue enough to make a wealth tax unnecessary.
The specific language of the U.S. Constitution makes it unclear if a wealth tax is constitutional. Because the addition of new taxes is also a very partisan issue, any wealth tax would be challenged and likely find its way to the Supreme Court.
Adding it to the tax code may require lawmakers to make an amendment to the Constitution. This isn’t unprecedented though. Congress passed the 16th Amendment in 1909 in order to create the federal income tax.
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Image: Aaron Sollner