A wealth tax is a tax levied based on the market value of a taxpayer’s assets. Some industrialized countries choose to tax wealth, but the United States has traditionally focused on taxing annual income to generate money.

However, the enormous and growing wealth disparity in the United States has prompted politicians such as Sen. Bernie Sanders (I-Vt.) and Sen. Elizabeth Warren (D-Mass.) to propose a wealth tax in addition to the income tax in the run-up to the 2020 presidential election, in which they are both running. Warren submitted S.510 in March 2021, a tweaked version of her previous proposal to tax the net worth of the very rich.

A wealth tax, also called capital tax or equity tax, is imposed on the wealth possessed by individuals. The tax usually applies to a person’s net worth, which is assets minus liabilities. These assets include (but are not limited to) cash, bank deposits, shares, fixed assets, personal cars, real property, pension plans, money funds, owner-occupied housing, and trusts.

An ad valorem tax on real estate and an intangible tax on financial assets are both examples of a wealth tax. Generally, countries that impose wealth taxes also impose income and other taxes.

Only four Organisation for Economic Co-operation and Development (OECD) countries currently levy a wealth tax: France, Norway, Spain, and Switzerland. Previously, in the early 1990s, 12 countries reportedly imposed a wealth tax, indicating that the popularity of this form of taxation is diminishing.

In the United States, federal and state governments do not impose wealth taxes. Instead, the U.S. imposes annual income and property taxes. However, some consider property tax a form of wealth tax, as the government taxes the same asset year after year. The U.S. also imposes an estate tax on the death of individuals owning high-value estates. However, that levy contributed roughly just 0.5% to total U.S. tax revenues in the past couple of years.

Examples of a Wealth Tax

In effect, a wealth tax impacts the net value of the assets accumulated over time and owned by a taxpayer as of the end of each tax year. An income tax impacts the flow of the additions in value that a taxpayer realizes, whether as earnings, investment returns such as interest, dividends, or rents, and/or profits on disposition of assets during the year.

Let’s look at an example of how the wealth tax differs from income tax. Assume a single taxpayer earns $120,000 annually and falls in the 24% tax bracket. That individual’s liability for the year will be 24% × $120,000 = $28,800. What is the tax liability if the government taxes wealth instead of income? If the taxpayer’s assessed net worth is $450,000 and the wealth tax is 24%, then the tax debt for the year will be 24% × $450,000 = $108,000.

In reality, annual wealth tax rates are significantly lower than annual income tax rates. In France, for example, the wealth tax used to apply to total worldwide assets. As of 2021, however, it only applied to real estate assets worth more than €800,000 ($904,166). If the value of those assets falls between €800,000 and €1,300,000, then it is subject to a 0.5% tax. Rates continue to rise at graduated thresholds—0.7%, 1%, 1.25%—until, finally, real estate assets over €10,000,000 are taxed at 1.5%. A wealth tax cap limits total taxes to 75% of income.

Sen. Warren’s Wealth Tax

Here’s what Sen. Warren is proposing, beginning with the 2023 tax year:

• Taxpayers subject to the wealth tax: those whose net assets (i.e., assets minus debt) are valued at over $50 million, based on their 2022 valuation
• Tax rate: 2% on net assets valued over $50 million and up to $1 billion; 3% on net assets in excess of $1 billion
• Assets subject to tax: all types of assets—anything that the wealthy person owns, including stock, real estate, boats, art, and more
• Revenue effect: S.510 is estimated to raise up to $3 trillion over 10 years and to apply to approximately 100,000 households.

Upon introduction, the bill had seven Senate co-sponsors: Sens. Kirsten Gillibrand, Mazie Hirono, Edward Markey, Jeff Merkley, Bernie Sanders, Brian Schatz, and Sheldon Whitehouse. An eighth senator, Alex Padilla, later became another co-sponsor. Two House co-sponsors, Reps. Brenda F. Boyle and Pramila Jayapal, support a companion bill in that chamber. All are Democrats.

Is Wealth Tax Worth it?

Proponents of wealth taxes believe this type of tax is more equitable than an income tax alone, particularly in societies with significant wealth disparity. They believe that a system that raises government revenue from both the income and the net assets of taxpayers promotes fairness and equality by taking into account taxpayers’ overall economic status, and thus, their ability to pay tax.

Critics allege that wealth taxes discourage the accumulation of wealth, which they contend drives economic growth. They also emphasize that wealth taxes are difficult to administer.

Administration and enforcement of a wealth tax present challenges not typically entailed in income taxes. The difficulty of determining the fair market value of assets that lack publicly available prices leads to valuation disputes between taxpayers and tax authorities. Uncertainty about valuation also could tempt some wealthy individuals to try tax evasion.

Illiquid assets present another issue for a wealth tax. Owners of significant illiquid assets may lack ready cash to pay their wealth tax liability. This creates a problem for people who have low incomes and low liquid savings but own a high-value, illiquid asset, such as a home. Similarly, a farmer who earns little but owns land with a high value may have trouble coming up with the money to pay a wealth tax.

Read Also: What Kinds of Taxes Are There in Canada?

Some accommodations may be feasible to address administrative and cash flow issues—for example, allowing tax payments to be spread over a period of years or creating special treatment for specific asset categories such as business assets. However, exceptions could undermine the purpose that many attach to a wealth tax: structuring the overall tax system to make all taxpayers pay their fair share.  

The United States imposes property and estate taxes but does not have a general wealth tax. However, that could soon change. U.S. Sen. Elizabeth Warren (D-Mass.) and some of her peers are trying to push through a bill that would see households and trusts worth over $50 million get taxed a percentage of their net worth (either 2% or 3%) each year.

Proponents view the wealth tax as a way to boost the government’s public spending coffers by taking extra money from those who don’t really need it. Such a tax generally only applies to the wealthiest, and it can be argued that the money it will cost them will have zero impact on their quality of life.

Wealth Tax in the US

The Illinois General Assembly’s spring legislative session was relatively benign in relation to taxes. There were no general tax increases or decreases, apart from a modest reduction in the Corporate Franchise Tax, which increased the general exemption from the tax to the first $5,000 in liability from the first $1,000.

From my perspective, however, there were some particularly poor tax proposals introduced that luckily didn’t gain traction this spring. Though, that doesn’t mean these bad ideas won’t resurface in Springfield.

The first bad idea introduced was the Extremely High Wealth Mark-to-Market Tax Act (HB 3039)—also referred to as the wealth tax. The avowed purpose of the legislation is twofold: 1) that it’s unfair that high-net-worth individuals aren’t paying their “fair share” of taxes, and 2) the tax would generate a significant amount of new revenues for the state.

The legislation proposes that every resident taxpayer with net assets of $1 billion or more on Dec. 31 of each year will be required to recognize gains or losses on each asset as if it had been sold at fair market value on that date. The net gain would be taxed at the individual income tax rate of 4.95%.

The legislation is drafted so that the Illinois Department of Revenue could require that someone subject to this tax report it on their IL-1040. The taxpayer would calculate their Illinois base income normally, and then add this new fictional net gain to their base income. In a year where the mark-to-market calculation results in a loss, taxpayers would be allowed to take a subtraction modification in the calculation of base income to the extent of any “regular” income subject to Illinois income taxation. However, because Section 207 of the Illinois Income Tax Act isn’t amended, excess mark-to-market losses for a tax year can’t be carried forward to a subsequent income year to offset income in the later year.

Additionally, the legislation contains provisions to prevent taxpayers from shifting assets to minor children, trusts, and other entities to avoid the tax. The legislation would also require detailed reporting of assets of individuals subject to the tax.

If enacted, I believe it’s likely that this tax would be struck down by the courts due to it violating the Illinois Constitution. For example, Article IX, Section 3(a) of the Constitution forbids the imposition of more than one state income tax, and Article IX, Section 5 forbids the imposition of a personal property tax. In my view, this legislation is either an impermissible second income tax or personal property tax.

Some high earners could be in for a double hit this year if lawmakers pass a California wealth tax. The proposed legislation would impose an annual 1% tax on California residents who have a worldwide net worth of more than $50 million ($25 million for married filing separately taxpayers). If passed, an additional 0.5% tax would be imposed on worldwide net worth exceeding $1 billion ($500 million for married filing separately taxpayers), beginning in the 2026 tax year.

Lawmakers will debate the wealth tax on Wednesday, Jan 10. However, the bill needs a two-thirds vote from the State Senate and Assembly to make it onto the ballot, where voters would ultimately decide its fate.

Some high earners in California might feel some tax relief where federal taxes are concerned, though, likely not nearly enough to make up for the state tax hike. The 2024 federal tax brackets have been inflation-adjusted by the IRS. 

While the top federal tax bracket remains at 37% this year, that rate only applies to taxable income over $731,200 (if filing jointly) for 2024. For comparison, the 37% federal income tax rate applied to taxable income over $693,750 last year.

What Country Taxes the Rich the Most?

There are numerous low-tax countries with cities that rate well on indices of quality of life and citizen happiness, as well as over 160 countries outside of the Western world, many of which are highly developed, such as Georgia, Costa Rica, Panama, and Singapore.

High-tax Western countries do not have a monopoly on development, quality of life, or happiness. In fact, they can occasionally bring the reverse.

Low-tax countries are sometimes referred to as ‘tax havens’, so we have taken the liberty of referring to those with the highest tax rates as ‘tax risks’. You may live and work in such ‘tax dangers’ or intend to relocate there, so we’re here to guide you in the opposite direction.

Let’s look at the 10 countries with the highest income tax rates.

1. Ivory Coast

The long-troubled West African country, Ivory Coast, has the highest income tax rate in the world. People living there are giving away a whopping 60% of their income to the government.

That doesn’t have to be the case. Certainly, it’s a frontier market with a unique profile, but with such a low quality of life, we can’t find a reason why someone would settle for paying their government most of their income.

2. Finland

Finland has the highest taxes in Europe and the second highest taxes in the world. The rates are so high that this small nation of just 5.5 million people earns a place near the top of this list of highest tax countries, courtesy of its top income rate of 44%.

However, Finland also adds additional taxes, including local municipal taxes of up to 10.8% and a church tax of up to 2.25%. Finland also has one of the highest capital gains taxes.

An interesting fact is that anyone who has arrived in Finland and stayed longer than six months will become, from the Tax Administrator’s point of view, a resident and any resident’s worldwide income is subject to Finnish tax with no distinction between the source country.

3. Japan

Japan is the third-largest national economy in the world, after the United States and China, in terms of nominal GDP. In terms of purchasing power parity, it is the fourth-largest national economy in the world after the United States, China and India.

This is all quite astonishing for a country that only has the 11th largest population in the world. Many attribute Japan’s success to their legendary work ethic. With its capital being home to more millionaires than any other city on the globe, Japan is the only Asian country amongst high-tax countries with a top marginal tax rate of 45%.

The supremacy of Japanese corporations in Asia in producing a variety of sophisticated technology and automobiles means the government has plenty of income to tax. It is also one of only a few countries with a culture that can be compared with Western counterparts in terms of popularity around the world.

4. Denmark

Denmark has a developed economy that ranks 9th in the world in terms of GDP per capita and 6th in nominal GDP per capita. As it has a very small population, the Danish government imposed a total personal income tax rate of up to 53% in total taxes for the top earners in order to meet the needs of its people.

Among those needs is the Danish welfare state which, among other things, is based on the concept that citizens should have equal access to the different services paid for by taxes. Many see this as a justification for its high tax rates, which also allow for increased accessibility to social programs for the Danish people.

This may explain why Danes are considered among the happiest people globally, possibly due to their embrace of Hygge – a concept that celebrates moments as cozy, charming, or special, whether alone or with friends, at home or out.

We’ll always lean towards mindset and not taxation as the explanation for a country’s happiness level.

5. Austria

There aren’t many German-speaking countries in the world but just about all of them are highly developed and Austria is no exception. It also demands that its people pay for that privilege, as the top marginal tax rates stand at 55% for anyone earning over €1 million.

Aside from the high-income tax rate, it also has a social security rate of 18%, bonus payments are charged at a rate of 6% and capital gains tax is 27.5%.

Austria is the 15th richest country in the world in terms of GDP per capita, has a well-developed social market economy and a high standard of living. But you have to ask yourself, ‘At what cost?’

Much of what you can find in Austria in terms of quality of life can be found in other countries with much lower tax rates. So, while it might be nice to visit Austria, don’t plan on making it your tax home.

6. Sweden

Sweden is the 23rd largest economy in the in the world. Its standard of living and life expectancy rankings are among the highest in the world and the country has very low-income inequality.

Sweden has a developed post-industrial society with an advanced welfare state but the price of that is one of the world’s highest rates of personal income tax, with as much as 52.3% deducted from annual income. Still, that’s better than the 1996 rate of 61%.

Sweden has a taxation system for work income that combines an income tax (paid by the employee) with social security contributions (employer contributions that the employer pays). Though Swedes may be taxed heavily, sales of residential properties are exempt from taxation there.