Why the US Needs a Wealth Tax
February 11, 2021
By Emily DiVito
For decades, the rich and powerful have taken advantage of the United States economic system, yielding extreme concentration of wealth at the very top and producing off-kilter, dysfunctional economic outcomes. Since the 1970s, the top 0.1 percent of US households have dramatically increased their wealth share from 7 to 20 percent, while the bottom 90 percent have seen their wealth share plummet to 25 percent.
One of the most effective ways to rectify these economic distortions and inject fairness into the US tax code: a wealth tax.
The US federal tax code is primarily aimed at income—money coming in on a recurring basis, including payments from labor, like wages. It takes little notice of a person’s wealth—the value of their assets (real estate, savings, investments, etc.), minus debts.
The US federal tax code is “progressive” in that it levies a higher tax rate on those who can most afford it. However, decades of uneven cuts to the income, corporate, and estate taxes, and increases in payroll taxes, have dramatically reduced rates for the wealthiest at the same time that income and wealth inequality have soared.
Since 1979, incomes for the top 0.1 percent increased by 349 percent, nearly 15 times as much as they increased for the bottom 90 percent of earners over the same period. These enormous, and growing, incomes accumulate year after year, creating huge fortunes for the very rich: Today, the top 0.1 percent hold nearly as much wealth as the bottom 90 percent.
Taxing income at higher rates and with fewer loopholes is important, but it doesn’t touch the wealth the very top has already amassed, and it doesn’t fairly measure a person’s or family’s true economic status or ability to pay their fair share.
Consider two people: a teacher with little savings in the bank and a tech tycoon with $200 billion in business equity, real estate, and fine art. If both the teacher and the tycoon take home $62,000 in labor income (the national average for teachers, and not far off from Jeff Bezos’ base salary), they pay the same federal income tax. That isn’t fair, and merely increasing the income tax rate wouldn’t correct this imbalance.
A wealth tax is fair.
Under the income tax system, Americans with low-wage jobs may pay a lower nominal income tax rate than the wealthy but pay a much higher percentage of their wealth in taxes. A wealth tax can effectively reduce wealth concentration at the very top for the simple reason that, if the wealthy have to pay a percentage of that wealth in taxes each year, it becomes harder for them to amass even more wealth. While a wealth tax should not be seen as a replacement for other income and capital tax reforms, we cannot sufficiently address the concentration of wealth in the economy without a tax instrument specifically aimed at that wealth.
A wealth tax is just.
Wealth in the US is—and always has been—heavily skewed by race. Since the country’s founding, our laws and customs have ensured that white people accumulate wealth at the expense of Black and brown people. For hundreds of years, legalized slavery meant that Black people, violently forced into servitude, went uncompensated for labor often performed in direct service of white-owned enterprises. Even after slavery was abolished, overtly discriminatory policies, including redlining, continued to block Black and brown Americans from receiving fair wages and accruing assets. When Black communities did achieve economic prosperity in spite of these policies, white mobs and white power structures ravaged it.
The legacies of slavery and racism are still with us today, in policies and in economic outcomes. In 2019, median income for Black households was roughly 61 percent that of white households; for Latinx households, median income was approximately 74 percent that of white households. The typical white family, meanwhile, held eight times more wealth as of 2019 than the typical Black family, and five times more wealth than the typical Latinx family. Both of these gaps continue to widen as the pandemic rages.
Importantly, these racial wealth disparities are self-perpetuating. One wealthy generation bequeaths their wealth to future generations through inheritances and direct gifts or transfers, like payments toward college tuition or housing. Nearly 30 percent of white families receive inheritances, compared to just 10 percent of Black and 7 percent of Latinx families, and the average value of received inheritances is three times greater for white families. A wealth tax would interrupt this cycle of inherited wealth by taxing it as it accrues.
A wealth tax is targeted and effective.
A wealth tax is one of the most direct and powerful tools to raise revenue exclusively from the wealthy. By setting an exemption threshold on net worth, policymakers can ensure that households below that threshold simply do not pay the tax. To return to our previous example: Both the teacher with little savings and the tycoon with a stockpile of luxury assets theoretically pay the same federal income tax on their yearly earnings. Under a wealth tax, the tycoon would pay an additional sum on their billions. The teacher would not.
For too long, the US tax code—focused on income—has allowed the wealthy to hide and hoard their wealth. As a result, wealth inequality has skyrocketed and become a harmful feature of the US economy. A wealth tax could both rectify this imbalance and repair the damage it has caused to workers and families.