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What is a Wealth Tax?

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  • Originally Written By: Mary McMahon
  • Revised By: Bott
  • Edited By: O. Wallace
  • Last Modified Date: 06 December 2016
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A wealth tax is a tax which is levied on the wealth held by a person or entity. The tax rate is typically a percentage of the taxpayer's calculated net worth, but it can vary depending on total net worth and the taxing nation's specific laws. Several countries use this form of taxation to raise funds for the government, though arguments for and against this approach certainly exist.

Net Worth

Most wealth taxes around the world are based on net worth, which is typically found by totaling the taxpayer's assets, and then subtracting debts, such as loans and mortgages. Assets include cash deposits, real estate holdings, investments, trusts, and shares in businesses. Since wealth taxes mean that a nation's wealthiest taxpayers have to pay a proportionately higher amount in taxes than their poorer counterparts, it is considered a type of progressive tax.

Variations

In some areas of the world, a blend of wealth and income taxes can be found. In the United States, for example, taxpayers pay income taxes rather than federal wealth taxes; however, they may also be subject to other types of taxation like property taxes, which are taxes on the value of real estate, a type of wealth. As property tax revenues in many areas show, a wealth tax can be a very effective way to raise money, as people who hold valuable real estate investments can owe substantial property taxes annually.

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Advantages

Some economists have suggested that there are definite advantages to wealth taxes. These advantages are usually related to the differences between income and wealth. While nearly all people earn some kind of income, most of the actual wealth in a country is often held by a relatively small fraction of the population. Income taxes, which are based on the amount of income someone makes in a year, are sometimes heavily criticized as hitting the middle and lower classes harder because they depend on that income more. High wealth individuals, however, earn proportionally less income, and thus tend to pay less income taxes. By taxing wealth instead, more of the tax burden would go to those who have a higher overall net worth.

Wealth, and by association power, tend to be concentrated in the hands of a very small elite, these critics argue. For some nations, this concentration of power may be seen as a threat to democracy. Focusing the levying of taxes on that small group with the most wealth could create more equality by reducing how much wealth is concentrated in so few hands, while also raising large amounts of money for the government.

Disadvantages

Critics of the wealth tax suggest that defining exactly what a taxpayer's net worth is can be very difficult. Assets like privately-held businesses and real estate are difficult to value in many cases, and may not always be valued the same by different assessors. Calculating a wealth tax also usually requires more complicated administrative work, and thus costs more to manage.

Wealth taxes can also be viewed as penalties levied on the wealthy, and they can act as a disincentive to accrue wealth and to invest or save wisely. An income tax only taxes a person's wealth once — when it's earned — whereas a wealth tax, it is argued, taxes that same value each tax year. Some suggest that a wealth tax encourages capital flight out of a nation, as wealthy individuals have a strong incentive to move their assets to places without a wealth tax.

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anon219140
Post 7

Please update what are the characteristics and main objectives of the wealth tax?

anon135443
Post 6

I absolutely dislike property taxation. Anytime I make a purchase I have to take into consideration the true cost of that item. I live in a state that taxes everything, including the horse I ride.

anon120496
Post 5

For a serious and expanded discussion of the concept as it might be applied today, I recommend "A Citizen's 2% Solution: How to Repeal Investment Income Taxes, Avoid a Value-Added Tax, and Still Balance the Budget," which argues that repealing existing investment income and corporate taxes and replacing them with a 2 percent tax on net assets (above a reasonable threshold), and simultaneously flattening and reducing tax rates on earned income, would stimulate both investment and middle class real earnings - and thus consumer spending and the broader economy.

anon79568
Post 4

A millionaire couple pays one-fourth the taxes of a working middle-class family. Yes, it's easily done. See the tax returns and other calculations for the two families if you research "fair share taxes."

If you consider all our current taxes including income, social security, sales, excise, property taxes, you see that the progressive income taxes are overwhelmed by the other taxes, which are regressive and shift the tax burden to the middle class.

The working class family’s tax rate on income from work is seven times greater than the millionaire’s tax rate on investment gains and income (unrealized gains, huge tax-free retirement accounts held predominantly by the wealthy). Middle class families often pay over half their entire wealth (>50 percent of net worth) in taxes each year, while the third-richest man in the world pays less than 0.02 percent of his net worth, a tax rate 2500 times lower!

This is not only unfair but hurts our economy and the chances of the US remaining a force to build a better world. The 5-10-fold lower tax rates for investment (vs work) and wealth accumulation in the investing class (the top 20 percent now holds 87 percent of the nation's wealth.) distorts incentives, leads to too much money chasing too few worthy investments, investment bubble, bust, recession, you lose your job or take a salary cut.

There is a lot of talk about adding a Value Added Tax. A VAT, essentially an elaborate sales tax, would just worsen this unfairness and worsen the economy.

The very wealthy spend much less than they earn or own in wealth. The poor and middle-class spend most of what they earn and a high fraction of their savings. Therefore, the VAT is regressive on income and wealth. It would concentrate more wealth in the rich and encourage more over-investment, more bubbles, and more recessions. A VAT discourages consumption.

How many times have we heard the consumption by Americans represents two-thirds of our economy? So the VAT hobbles our economy and makes it less recession-proof.

A wealth tax is a much better alternative to the VAT for raising revenue. Unlike the VAT it would move us toward fairness and strengthen the economy.

If we want to make taxes proportional to ability to pay and the extent to which a household has profited from the economic infrastructure that our governments (i.e. all taxpayers) provide, we need to tax wealth, as well as income. If we add a very small wealth tax on net worth over $500,000, we could eliminate our regressive social security, sales and property taxes, cut income taxes, cut total tax payments by each middle class family by thousands, and eliminate the national deficit.

As a demonstration of the power of even a tiny wealth tax on the very richest: A 1 percent tax on the portion of any family’s net worth over 1 million dollars would cut the projected 2011 federal defect by 30 percent.

Many wealthy and trickle-down supply-siders will scream, "taxing the wealthy will kill jobs." They did when Clinton increased taxes on the wealthy in 1993. The tax increase was followed by the strongest economy with the highest job creation in decades and federal budget surpluses.

Then he and Bush reduced taxes on the wealthy, particularly on investment. What followed? More concentration of wealth and income in the richest 20 percent, one recession, one near-depression, the worst decade of job creation, massive federal deficits.

The rest of the industrial world has much less wealth concentration and they do fine. The last two global recessions started here, because of bubbles caused by wealth disparity and the favored tax rates for money made through investment.

The great depression of the 1930's started here, the last time the US allowed wealth disparity reach its current levels. -PeteG

anon70027
Post 3

It is also worth noting that as the world becomes increasingly globalized - so that individuals can choose where to live, hence the tax/benefit mix they will receive - tax competition is bound to force countries to recognize the relationship between benefits derived and the taxes they require their citizens/residents to pay.

As this happens, it seems that countries will find it necessary to use net wealth as a tax base for much the same reason that automobile insurance premiums are based on the value of the car insured: the wealthier individual generally benefits to a greater degree (in absolute dollar terms) than do poorer individuals as a result of the (different forms of) property rights created by governments.

Take away property

rights and Bill Gates loses much more (in absolute dollar terms) than does a typical homeless person.

Without mobility (nation to nation) and the corresponding tax competition that such a situation implies, governments are effectively monopolistic in their ability to "charge" whatever they want to for the benefits they provide their citizens/residents; and as a consequence even if individuals do benefit proportional to their net wealths, there is no need to make taxes reflect that since individual consumers/citizens/residents cannot choose anything else (i.e. another form of government with corresponding implied tax obligation).

-lg780032 (l.graham)

lg780032
Post 2

Actually, when thought of from the proper perspective, one realizes that most of our taxation should be done via a net wealth tax rather than an income tax, since the primary economic benefit we derive from our form of government is property rights; and we benefit from those rights in a manner that is proportional to our net wealth.

One implication of this conception of taxation is that homeowners should only be paying property taxes on the portion of their properties that they actually own - not on the entire value of the property since often much of the value of the property is owned by the shareholders of banks and other mortgage lenders.

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