What Is Wealth Tax?

You may have heard the term “wealth tax” recently, as it’s being proposed by the current administration. This type of tax is nothing new but you may not be as familiar with it since we mainly focus on income taxation. The taxation methodology is different because you are paying tax based on your net worth instead of your income. This brings up a lot of different questions and concerns regarding its implementation.

Below, we’ll look at what the purpose of wealth tax is, goals and examples.

Definition of Wealth Tax

Wealth tax is defined as a tax that is applied to an individual or household’s total net worth. Wealth tax is different from other taxation methods in that it is looking at a household’s net worth, as opposed to income. This is in contrast to income tax that looks at income generated for a household or capital gains tax, which assesses tax on the sale of capital assets.

Ultra-high net worth families could be subject to an additional tax of 1% to 10% of their net worth on top of regular income and capital gains taxes. This could erase returns in fixed income based on current interest rates and make stocks less attractive.

Elizabeth Warren Wealth Tax Proposal

Feel free to visit Elizabeth Warren’s website to review the details of her wealth tax proposal. Elizabeth Warren’s proposal is aiming to reduce the high concentration of wealth in the United States. A relatively small number of families hold the majority of the wealth relative to the population as a whole. The idea is that a wealth tax applied to the ultra-rich will help spread out some of the wealth and narrow the gap in the country.

The argument is that these ultra-families used the labor of many middle-class families to generate their wealth and these workers should be compensated. Her solution is to tax the ultra-rich who have a net worth of $50 million or higher. This is about .10% of the population or 75,000 households.

She provides an example of an heir with $500 million of jewelry, fine art, and yachts making $50,000 per year and compares them to a school teacher making $50,000 per year. Under the current income tax system, they theoretically would be paying the same amount of income taxes.

Here is an example of the wealth tax tiers:

Here are examples of different net worth amounts and the taxes generated:

This tax system estimates an additional $3.75 trillion in tax revenue over a ten year period. The calculation will include all assets and allows for deferment of payment with interest for five years.

An exit tax of 40% on net worth in excess of $50 million would be imposed if a taxpayer renounced their citizenship.

Goals – Pros and Cons of Wealth Tax

The idea of a wealth tax may help generate additional tax revenue but it could be difficult to administer and implement. A benefit would be adding tax revenue to use it to fund programs to help the middle and lower-class households.

The idea in theory would potentially help close the wealth gap by taxing the ultra-rich. This money could then be used to fund other policies and create jobs for example. The issue is that it can be difficult to value closely held assets such as private businesses.

This can be time consuming and complex which would add to the difficulty in implementing the tax on an annual basis. This may also discourage US investment since a lot of ultra-high-net-worth individuals create companies and jobs they may seek investment opportunities elsewhere.

Examples of Wealth Tax in Other Countries

There are examples of a wealth tax system implemented in other countries. These countries include Norway, Spain, Belgium, Italy, Switzerland and Netherlands to name a few.

Each country has had different rules and exemptions in the past. The wealth tax has been repealed in many of these countries due to the costs, complexity, and lack of wealth distribution.

Do Wealth Taxes Work?

Taxation is complicated. A wealth tax makes sense in theory but if implemented there will likely be many rules and exceptions. The manpower needed by the IRS would need to be increased. A system to value assets and maintain the records would need to be developed.

I think accurately valuing property would be a huge issue. There can be large discrepancies in determining fair market value, depending on who you talk to. I’m not sure how easy this would be to put into practice since there is usually a lot more time and records needed to value assets. It will be interesting to see if anything comes of a wealth tax. The other side of the coin is putting the additional tax revenue to good use.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER™, at Applied Capital. Email him at [email protected] or fill out a contact form.

DISCLAIMER
This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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