A wealth tax is a tax on what a person owns rather than on what they earn. A wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities, and a wealth tax can be narrowly or widely defined, so depending on the definition of wealth the base for a wealth tax can vary (Tax Foundation, TaxEDU Glossary, Wealth Tax).
That one word, net, is the whole structural difference from every tax a US preparer actually files. An income tax measures a flow over a period. A wealth tax measures a stock at a moment, and it does it after subtracting debt.
How the Base Is Built
The mechanics are simple to state and hard to administer. Wealth taxes work by applying a tax rate to an individual’s net wealth, usually above a certain threshold, so a person with $2.5 million in wealth and $500,000 in debt would have net wealth of $2 million, and if the tax applies to all wealth above $1 million then under a 5 percent wealth tax the individual would owe $50,000 in taxes (Tax Foundation, TaxEDU Glossary, Wealth Tax).
Read the worked example rather than the rate. The charge falls on the excess over the threshold, not on the whole of net wealth, and the liability arrives whether or not anything was sold, earned or distributed during the year. That is the administrative problem in one line: the tax is due in cash on assets that produced none.
The United States Has Never Had One
This is the sentence practitioners need most, and it is stated plainly by the source. Comprehensive wealth taxes have never been implemented in the United States, although several other countries around the world have implemented them (Tax Foundation, TaxEDU Glossary, Wealth Tax).
Nor is it a common instrument elsewhere any more. Many developed countries have repealed their net wealth taxes in recent years, and among Organisation for Economic Co-operation and Development countries only four currently impose one: Colombia, Norway, Spain, and Switzerland, and even among these countries there is variety in the way the countries define the tax rate and base (Tax Foundation, TaxEDU Glossary, Wealth Tax).
The Constitutional Question Nobody States Precisely
Proposals for a federal wealth tax run into a clause written before income taxes existed, and the argument turns on two sentences.
The first is a restriction on Congress. No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken (National Archives, The Constitution of the United States: A Transcription). A tax that has to be apportioned among the states by population is, in practice, unworkable for a tax on wealth, because wealth is not distributed by population.
The second is the exception that made the modern income tax possible, and its wording is narrower than people remember. The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration (National Archives, The Constitutional Amendments 11 to 27).
The operative word is incomes. The amendment lifts the apportionment requirement for taxes on incomes and says nothing about taxes on holdings. Whether a tax on net wealth falls inside or outside that exception is a live constitutional question rather than a settled one. Both texts above are quoted in full, and neither of them settles it, so an answer asserted in either direction is coming from somewhere other than these two sentences.
The 1935 Wealth Tax Was Not a Wealth Tax
The name appears once in US tax history and it is misleading, which is exactly why a glossary should say so.
President Franklin D. Roosevelt’s New Deal programs forced an increase in taxes to generate needed funds, and the Revenue Act of 1935 introduced the Wealth Tax, a new progressive tax that took up to 75 percent of the highest incomes (IRS, Understanding Taxes, Theme 2 Lesson 5).
Read what the agency’s own description says the tax was charged on. It took a share of the highest incomes. It was a steeply progressive income tax carrying a political name, not a tax on net worth. Anyone who says the United States tried a wealth tax in 1935 is describing the Revenue Act of 1935, and that Act is described by the agency as a progressive tax on the highest incomes (IRS, Understanding Taxes, Theme 2 Lesson 5).
The same lesson records what happened next, which is the ordinary fate of a high-rate income tax: many wealthy people used loopholes in the tax code, and the Revenue Act of 1937 cracked down on tax evasion by revising tax laws and regulations (IRS, Understanding Taxes, Theme 2 Lesson 5).
What US Taxpayers Actually Pay That Looks Like One
Two familiar charges get called wealth taxes in conversation and neither is.
State and local property taxes are levied on the assessed value of real property rather than on net wealth, and they take no account of the owner’s debts or other assets. The mechanics are set out in real estate tax.
The federal estate tax is charged on a transfer at death rather than on a holding during life, and it is a one-time charge on the taxable estate rather than an annual charge on net worth. Its structure is set out in estate tax, and the gift tax alongside it in gift tax.
The distinction is not pedantic. A wealth tax recurs annually on the same assets. A transfer tax fires once, on an event.
Common Questions
No comprehensive one has ever been implemented (Tax Foundation, TaxEDU Glossary, Wealth Tax). Federal transfer taxes and state and local property taxes exist and are sometimes described loosely as wealth taxes, but neither is charged on an individual’s net wealth.
Among OECD countries, only four currently impose a net wealth tax: Colombia, Norway, Spain, and Switzerland, and the rate and base differ among them (Tax Foundation, TaxEDU Glossary, Wealth Tax). Many developed countries have repealed theirs in recent years (Tax Foundation, TaxEDU Glossary, Wealth Tax).
No. A tax on investment income falls on what an asset produced during a period. A wealth tax falls on the net market value of what is held, whether or not it produced anything (Tax Foundation, TaxEDU Glossary, Wealth Tax).
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