In the United States, as in many countries, wealth inequality has grown over several decades. According to the Federal Reserve Board, the share of net wealth owned by the wealthiest 1 percent of families grew from 25 percent in 1989 to 33 percent in 2019. The growth in wealth inequality has coincided with the rapid rise in the federal debt. By the end of fiscal year 2022, the federal debt held by the public was 97 percent of the gross domestic product.

The growth in both wealth inequality and government debt have spurred policymakers to seek out policies that would reverse those trends. During the 2020 presidential campaign, Senators Bernie Sanders and Elizabeth Warren proposed wealth taxes on nearly all the holdings of the very wealthy. But unique features of the US tax system, economy, and the Constitution could impede adoption of a wealth tax in the United States.

How Are Assets Currently Taxed in the US?

Some types of assets are already taxed by federal, state, and local governments. Property taxes—imposed on real estate and some types of personal property such as business equipment, inventories, and noncommercial motor vehicles—are the largest source of revenues for local governments. At the federal level, estate and gift taxes are imposed on transfers of wealth, though a high threshold—$12.92 million in 2023—ensures that relatively few estates are subject to the tax.

Taxes on capital income are much more common at the federal level in the United States. The tax treatment of capital income varies significantly, depending on the asset and the amount of time held by the taxpayer.

• Interest income and short-term capital gains (from the sale of assets held for a year or less) are generally taxed at the same rate as most other forms of income, such as wages and salaries.
• Lower tax rates are applied to long-term capital gains and most dividends.
• Higher-income taxpayers pay an additional 3.8 percent surtax on most capital income.
• Some capital gains from the sale of homes are excluded from taxable income.
• Capital income is also taxed indirectly through the corporate income tax.

Wealth Taxes in Other Countries

In 1990, a dozen member countries of the Organisation for Economic Co-operation and Development (OECD) imposed taxes on many assets, net of debt, held by taxpayers in their countries. The design of those taxes varied among countries. For example, in 2017, the tax was imposed on net wealth in excess of €67,550 in Switzerland’s Zurich canton and 1.3 million euros in France, but the maximum tax rate was much lower in Switzerland (less than 0.5 percent) than in France (2.5 percent).

The scope of the wealth taxes also differed among those countries. Broad-based taxes are generally favored by tax analysts because they do not create distortions or opportunities for tax avoidance and evasion. A broad-based wealth tax would apply to all types of assets, including bank accounts, real estate, stock, privately held businesses, pensions, yachts, vehicles, jewelry, and art.

Yet, countries with wealth taxes have generally exempted some types of assets from the base. Some assets—such as pensions—are excluded because they are viewed as addressing a social or economic policy goal; others may be excluded because of valuation challenges or liquidity constraints faced by taxpayers who may be subject to the tax. For many of those reasons, some countries have exempted certain privately held businesses (France and Spain, if taxpayers actively involved in operating the businesses) or have applied lower tax rates to these values (Switzerland).

Those administrative challenges have contributed to growing dissatisfaction with net wealth taxes. Narrow bases also created opportunities for tax avoidance and evasion, reducing the amount of collections. By 2021, only four OECD countries still taxed net wealth: Columbia, Norway, Spain, and Switzerland. France replaced its net wealth tax with a tax imposed on just two assets—property and real estate—which cannot be shifted abroad.

What Would a Wealth Tax Look Like in the United States?

Adoption of a net wealth tax in the United States would run into some of the same challenges faced by OECD countries, as well as some obstacles unique to our country.

Effect on marginal tax rates. Under current law, the variation in the taxation of capital income can distort investment decisions. Consider, for example, a wealthy taxpayer deciding between investing in stocks or bonds, each currently earning a 4 percent pre-tax rate of return, net of corporate income tax. If she invests in stock, her tax rate on her capital income would range from zero (if she earned no dividends and did not sell her stock) to 23.8 percent (if she received dividends and had capital gains realisations). Investing in bonds, she would be subject to a tax rate of 40.8 percent on interest income.

Now add a 1 percent wealth tax to the mix. The impact of a 1 percent wealth tax would be equivalent to a 25 percent tax on her capital income. In combination with the current US income tax, her marginal tax rates on capital income would range from 48.8 percent if she invests in stock (assuming 100 percent of the corporate tax is paid by users of corporate capital) to 65.8 percent if she keeps her funds in bonds.

Still, a wealth tax would offset a weakness of the current US income tax. Currently, capital gains can escape taxation completely. During the owner’s lifetime, the tax is deferred until the asset is sold. If the owner holds on to the asset until death, the basis is reset at the market value at that time. Thus, heirs will not pay taxes on any capital gains that accrued between the time the original owner bought the asset and their death. Because an annual wealth tax is based on the current market value each year rather than realisations, that “escape hatch” would be closed.

How Would Businesses Be Taxed?

Privately held businesses are a large share of very wealthy households’ investment portfolios. In 2019, the gross value of privately held businesses represented about 22 percent of net wealth. About one-third of the gross value of privately held businesses was held by families with over $50 million in assets (roughly the top 0.1 percent of families on the net wealth distribution), and over half of their investment portfolio was held in those businesses.

Still, the inclusion of privately held businesses in a US wealth tax base would face some of the same challenges experienced by other countries.

Ownership. Currently, income from noncorporate businesses (such as partnerships) is not taxed at the entity level. Instead, the income is passed through to each owner, who is taxed on their share. Although the partnership reports each owner’s share of the profits to the IRS, determining the identity of the individual who owns a share of the business can be unwieldly—especially when partnerships own partnerships. That challenge to the individual income tax would likely carry over to a wealth tax as well.

Role of owner. Owners vary in terms of their participation in a business, and some countries that later repealed their wealth taxes treated owners who were substantially involved in the management of their enterprises more favorably than passive owners. The US individual income tax system already differentiates between active and passive participants in noncorporate businesses, but the rules are complicated and often lead to complex avoidance strategies to categorize the owner’s activity in the most tax-beneficial manner. Similar carve-outs for a wealth tax would add another layer of incentives to the characterisation of an owner’s participation in the business.

Debt. The tax base is generally net wealth, which would encourage taxpayers to take on more debt to lower the wealth tax. For example, if the wealth tax base were narrow, investors would find it advantageous to invest in exempt assets using borrowed funds. That would reinforce an incentive already in the income tax to take on debt to reduce taxable income with deductible interest on loans, rather than draw upon the business’s earnings.

Valuation. The market value of privately held businesses is difficult to determine, especially for the many entities that are rarely—if ever—sold. Formula valuations are less burdensome than comprehensive annual appraisals and are already used for some other tax provisions (such as estate taxes and property taxes), but they are often successfully disputed by wealthy taxpayers who have the resources to challenge the tax authorities.

Can the IRS Administer a Wealth Tax?

The treatment of privately held businesses is just one challenge that would face the IRS if tasked with implementing a wealth tax. Others include addressing complicated strategies that would shift wealth (at least on paper) through trusts, gifts, intrafamily transfers, taxpayer-controlled foundations, and transfers of funds overseas.

Is a Wealth Tax Constitutional?

Ultimately, the fate of a wealth tax in the United States may be decided by the Supreme Court. The US Constitution bans direct taxes that are not collected evenly across states based on their populations. The definition of a direct tax, however, has long been debated by constitutional scholars.

Some scholars argue a wealth tax would be unconstitutional, citing an 1895 case—Pollock v. Farmers’ Loan and Trust—in which the Supreme Court ruled that an income tax was a direct tax. Others argue that case law support a much narrower definition of a direct tax. For example, in 1900, the Supreme Court decided in Knowlton v. Moore that an inheritance tax on property was not a direct tax.

But should a wealth tax be enacted and then struck down by the Supreme Court, it could still prevail. In 1913, an income tax was enacted following the adoption of the 16th Amendment to the Constitution. However, amending the Constitution requires the approval of two-thirds of both houses of Congress and ratification by three-quarters of the states.

Updated January 2024