Wealth tax

A wealth tax is a form of taxation, which is a manner of making citizens pay for government programs. Though taxes are utilized all over the world, wealth taxes are particularly unpopular. At one point, wealth taxes were common throughout Europe, but in the last decade, most European countries have removed their wealth tax systems.

Wealth taxes are a tax on a citizen’s assets. They are commonly contrasted with income taxes, which are taxes on the amount of money a person earns. Wealth taxes are typically used to redistribute money, working to close the gap between the rich and the poor. They discourage the hoarding of large amounts of wealth.

Many critics argue that wealth taxes are bad for a strong economy. They consider the accumulation of wealth into the hands of a few people to be a driving force of economic growth. Critics also believe that wealth taxes tend to drive the rich out of their home countries, removing a valuable economic resource. Finally, wealth taxes are difficult to administer and maintain, requiring their own unique form of bureaucracy. Government agencies must track the assets of wealthy individuals, looking for changes in their annual holdings. In most cases, it is simpler and more efficient to track income instead.

Background

The first recorded form of taxation comes from the civilization of ancient Egypt. Passages in the Bible describe how the pharaoh had tax commissioners claim one-fifth of all the grain citizens harvested. As civilization developed in ancient Greece and Rome, taxation practices continued to spread. The Rosetta Stone, an ancient tablet famous for its use in translations, describes ancient Greek taxation practices.

New types of taxes were developed over time. Some taxed specific property, others taxed consumer goods, and still others taxed inheritances. These taxes were all designed to redirect wealth to the government, often to fund government programs. In many cases, taxes were used to increase a country’s capacity for war.

Taxes in Europe and North America were controversial in the eighteenth and nineteenth centuries. The concept of "taxation without representation" was one of the primary reasons that the American colonies rebelled against Britain, resulting in the creation of the United States. The United States funded most of its federal revenues through tariffs, specialized taxes on imported goods. However, in 1913, the Sixteenth Amendment granted the states the authority to tax the income of individuals and businesses. This led to the development of the income tax, a graduated tax on the income of all US citizens. Originally, the income tax was primarily used only on the highest percentages of American earners. However, repeated wars and economic developments required additional funding, and the bulk of income taxation was shifted to average Americans.

Overview

A wealth tax, also called a capital tax or an equity tax, is a tax based on the market value of an individual’s assets. A wealth tax is typically contrasted with an income tax, which taxes a percentage of the money people earn. Most countries in the Western world do not use a wealth tax, and instead use income tax as the primary method for funding federal programs. Many European countries previously utilized wealth taxes as a supplemental form of government income. However, some European countries, such as Germany, Iceland, and Sweden abolished their wealth taxes. The United States uses property taxes, which serve as an additional tax based on the value of land owned by citizens. Some experts view property taxes as a form of wealth taxes.

Unlike income taxes, which serve primarily as a means of funding government programs, wealth taxes typically work to reduce the gap between the rich and the poor. They disproportionately target the wealthy, discouraging the mass accumulation of money. In a system with a strong wealth tax, individuals with the highest incomes have an incentive to quickly spend their money, returning it to the economy. Some critics of wealth taxes argue that discouraging the accumulation of wealth is not good for the economy. They believe that the mass accumulation of wealth is a major driver of economic growth.

Others contend that wealth taxes could unfairly harm people who own valuable assets but earn little income. For example, someone who owns a large quantity of land but lacks a high-paying job might be significantly disadvantaged by a strong wealth tax. For this reason, some wealth tax systems only apply to assets over a certain value. In 2020, France’s wealth tax only applied to real estate assets worth more than eight hundred thousand US dollars. This exempts the lower- and middle-class citizens from the tax, while still redistributing money away from the super-rich.

Many critics of wealth taxes point to the policy’s gradual decline throughout Europe as proof that they do not work. Wealthy citizens leave countries with strong wealth taxes, which hurts their economies. For this and other reasons, wealth taxes have been on the decline throughout the twenty-first century

Furthermore, implementing wealth taxes is not always easy. A country needs a robust government program for appraisals. To catalog the wealth of only its richest citizens, a government must have trained inspectors and bookkeepers dedicated explicitly to the task. US Senator Elizabeth Warren proposed a wealth tax as part of her run for the Democratic presidential nomination in 2020. Her proposal included a significant increase in the budget of the Internal Revenue Service (IRS), the agency dedicated to enforcing taxes in the United States. Then, in 2024, the Supreme Court's decision to uphold a previously enacted tax on foreign income bolstered Congress’s ability to potentially impose a wealth tax by not directly declaring a wealth tax unconstitutional.

Bibliography

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“If a Wealth Tax is Such a Good Idea, Why Did Europe Kill Theirs?” NPR, 2019, www.npr.org/sections/money/2019/02/26/698057356/if-a-wealth-tax-is-such-a-good-idea-why-did-europe-kill-theirs. Accessed 2 Jun. 2020.

Tankersley, Jim. "Democrats' Dream of a Wealth Tax Is Alive. For Now." The New York Times, 20 June 2024, www.nytimes.com/2024/06/20/us/politics/democrats-wealth-tax-supreme-court.html. Accessed 2 July 2024.

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“What Is a Wealth Tax?” Fox Business, 2020, www.foxbusiness.com/money/what-is-a-wealth-tax. Accessed 2 Jun. 2020.