Introduce a Wealth Tax

Wealth taxes are imposed on the market value of total assets minus the market value of total liabilities owned by households. In the US, comprehensive wealth taxes have never been implemented, while most European wealth taxes have been repealed due to administrative complexities and disappointing revenue gains.

Wealth taxes impose a heavier tax burden than may be apparent. For example, consider an investor who owns a long-term bond with a fixed rate of return of 5 percent each year. A 5 percent annual wealth tax would equal a 100 percent income tax rate because the wealth tax would take all this taxpayer’s capital income.

This option imposes a 5 percent annual tax on net wealth above $1 billion. A wealth tax rate this high would invite substantial avoidance behavior, significantly reducing the revenue potential of the tax with an estimated avoidance rate of approximately 33 percent. It would also discourage saving among high-income taxpayers, leading to significant declines in wealth from increased consumption.

Domestic saving would fall, but foreign investment into the US would increase, preventing a decline in output but causing more of the returns to American investment to flow to foreigners. The smaller budget deficit would reduce federal government borrowing as well as interest payments to foreigners, but GNP would still decline on net by 0.1 percent. A wealth tax would almost certainly have large transitional effects, including dramatic swings in foreign capital flows and the trade deficit. These estimates do not account for the increase in compliance costs that would result from a wealth tax regime.

On a conventional basis, this option would decrease the primary deficit by $1,506.9 billion over the budget window. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 167.1 percent by 2056.

A wealth tax would be concentrated on the top 0.1 percent of tax filers, decreasing this group’s after-tax income by nearly 10 percent in the long run.