What is a wealth tax?

A tax on your net worth, not just your income

Derek Silva

By

Derek Silva

Derek Silva

Personal Finance Expert

Derek is a personal finance editor at Policygenius in New York City, and an expert in taxes. He has been writing about estate planning, investing, and other personal finance topics since 2017. He especially loves using data to tell a story. His work has been covered by Yahoo Finance, MSN, Business Insider, and CNBC.

Updated August 9, 2021|7 min read

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A wealth tax on the net worth of the ultra wealthy has been proposed by multiple politicians, notably Sens. Bernie Sanders and Elizabeth Warren. They estimate wealth taxes would raise billions in federal tax revenue each year, while only affecting 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.

Supporters of wealth taxes hope to decrease wealth inequality. According to 2018 Census data, wealth inequality has reached its highest level on record. Wealth disparities are also likely to increase because of COVID-19 as certain communities struggle to come out of the economic downturn caused by the pandemic.

Opponents of a wealth tax point to the fact that other countries have failed to create a sustainable wealth tax that brings noticeable tax revenue. They propose closing the tax loopholes that wealthy people currently use to avoid income taxes. There’s also a question of whether the Constitution allows for a wealth tax, or if a constitutional amendment is necessary.

Key Takeaways

  • A wealth tax would apply to your total net worth, not just to your annual wages and income

  • The most popular wealth tax proposals would only affect Americans with at least $32 million of wealth — the top 1% of the population

  • Supporters of a wealth tax would like the use the additional revenue (potentially billions of dollars annually) to pay for social services like universal healthcare and free community college

  • A dozen European countries have attempted a wealth tax since 1990, but only a four remain in effect

What is a wealth tax?

A wealth tax is a tax on someone’s entire net worth, which includes their income and all other assets: personal savings, investments, the value of property or real estate, and valuable personal property, such as jewelry or artwork.

The United States has never had a true wealth tax. The most similar current tax is the federal estate tax: When someone dies and their estate (the collection of everything they owned) is passed on, the estate must pay a tax if its overall value is above a certain threshold. However, estate tax isn’t the same as a wealth tax because the entirety of the individual’s wealth isn’t taxed during their lifetime. (In 2021, only estates worth more $11.7 million owe any federal estate tax.) Inheritance tax is also similar since it taxes all assets you inherit, but there’s no federal inheritance tax, only six states have a state-level tax, and many family members are exempt from paying it anyway.

Learn how to calculate your net worth.

Why some people want a wealth tax

Economists and politicians have proposed taxing wealth instead of income as a way to decrease wealth inequality in the U.S. by ensuring that rich people pay their fair share of taxes. Raising income tax rates wouldn’t be as effective because the wealthiest tax filers often make most of their money outside of their salaries and thus can avoid many taxes.

A recent ProPublica tax analysis shows that the 25 wealthiest Americans paid an overall tax rate of 1.1% of their reported income. Some billionaires, like Warren Buffet and Jeff Bezos, had an overall tax rate under 1%. Meanwhile, the median American family paid an average tax rate of 14%. More broadly, the Treasury Department estimates that the tax gap — the difference between how much tax U.S. filers should pay versus how much tax people actually pay — will increase to $7 billion over the next decade.

Some experts also want a wealth tax because it could raise billions in annual tax revenue for the federal government. The additional revenue would help the government to fund programs that lower college tuition or provide universal healthcare (sometimes called Medicare for all). So for many people, the ultimate goal of a wealth tax is to decrease income inequality in the U.S. by redistributing money from millionaires and billionaires to the Americans who need it most.

How much revenue would a wealth tax raise?

How much a wealth tax would raise depends on the specific proposal. There have been a number of wealth tax proposals, each with different tax rates and each affecting people at different income levels.

Bernie Sanders has estimated that his wealth tax plan would raise $4.35 trillion over the next decade. [1] Elizabeth Warren has estimated that her wealth tax would raise $3.75 trillion over a decade. [2] Looking annually, previous estimates by economists Emmanuel Saez and Gabriel Zucman show that Elizabeth Warren’s wealth tax would have raised as much as $198.9 billion in revenue in 2019. [3]

Who would have to pay a wealth tax?

Wealth tax plans usually affect any taxpayers whose net worth is $10 million or more, but exact details vary. The two main wealth tax proposals are from Sens. Bernie Sanders and Elizabeth Warren. The wealth tax plan from Bernie Sanders would affect Americans with a net worth of at least $32 million. Elizabeth Warren’s wealth tax plan would affect Americans with at least $50 million in net worth. People with a lower net worth wouldn’t pay either wealth tax, so less than 1% of the U.S. population would have to pay a wealth tax in both plans.

Bernie Sanders' wealth tax proposal

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 he doesn’t believe billionaires should exist.

Bernie Sanders' wealth tax rates

Net worthWealth tax rate
Less than $32 millionNo wealth tax
$32 million to $50 million1%
$50 million to $250 million2%
$250 million to $500 million3%
$500 million to $1 billion4%
$1 billion to $2.5 billion5%
$2.5 billion to $5 billion6%
$5 billion to $10 billion7%
More than $10 billion8%

Elizabeth Warren’s wealth tax proposal

Elizabeth Warren’s wealth tax (which she calls an Ultra-Millionaire Tax) has only two brackets. Taxpayers with at least $50 million in wealth would pay a 2% tax on wealth between $50 million and $1 billion. Income over $1 billion is subject to a 4% Billionaire Surtax, bringing the total tax on income over $1 billion to 6%.

Elizabeth Warren’s wealth tax rates

Net worth                Wealth tax rate
Less than $50 million    No wealth tax  
$50 million to $1 billion2%             
More than $1 billion     6%             

Would a wealth tax work?

It’s unclear. The U.S. has never had a wealth tax, so it’s difficult to say how easy it would be to administer a wealth tax or how much one would actually increase federal tax revenue. Other countries that have tried haven’t been the most successful at keeping their health taxes: 12 European countries have attempted a wealth tax since 1990 but only four countries still have one. A 2018 report showed that those wealth taxes were difficult and expensive to administer while offering little actual revenue growth in many cases. [4]

One major challenge for a wealth tax is enforcement. The new tax would require the IRS, which collects federal taxes, to create new processes and infrastructure to determine the value of wealthy taxpayers’ belongings. The IRS can’t even fully enforce the rules of the current tax system because its funding and staffing have been cut over the past several years. To improve enforcement, Sens. Sanders and Warren have proposed increasing IRS funding. Economist Gabriel Zucman, who helped Sen. Warren design her wealth plan, has said it was designed to avoid failures like those European countries have experienced.

Related: Leave about the most common types of taxes in the U.S.

Why some people oppose a wealth tax

Many opponents of wealth taxation question its legality. The specific language of the U.S. Constitution makes it unclear if a wealth tax is constitutional. Adding new taxes is also a very partisan issue, so 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. A constitutional amendment seems unlikely at the present moment, but isn’t unprecedented: Congress passed the 16th Amendment in 1909 in order to create the federal income tax.

Wealth tax opponents also argue that decreasing tax avoidance and closing tax loopholes would increase tax revenue enough to make a wealth tax unnecessary. However, there are many legal ways for current millionaires to decrease or avoid income taxes.

For example, many wealthy individuals report low annual wages but have significant additional sources of income that avoid taxation or lower their tax rates. Jeff Bezos, founder and former CEO of Amazon, has had an annual salary of $81,840 for decades, but he also owns about 10% of Amazon’s stock and his net worth is about $211 billion in 2021, according to the Bloomberg Billionaires Index. So while Bezos’ regular income (subject to income tax) is relatively low, he has potentially billions of dollars worth of stock that he could sell. Income from stock sales can qualify for lower capital gains tax rates. Wealthy people may also be able to avoid some or most tax when passing on money to their heirs, contributing to intergenerational wealth that has avoided taxation.