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Calls For U.S. Wealth Tax Again Grow Louder – But Are They Any More Effective?

Alicea Castellanos, CPA
Published Date:
Sep 1, 2023

After years of debate, discussion and indecision over income gaps, some states have proposed laws to tax the uber-rich even as President Biden calls for the same. Is America ready to cross this threshold of taxation? And what’s really behind the threats and the promises?

The United States may or may not eventually tax the wealthy, but some states aren’t waiting to see. Wealth tax proposals were put forward earlier this year in a concerted effort – with varying success, observers say – in California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington. Minnesota seems to have joined the debate, and Massachusetts is in the vanguard. Other states may soon follow.

Legislation includes possible “wealth taxes” on income, tougher estate taxes and taxing income from realized and unrealized capital gains. Proposals run from a general tax on net assets of more than $1 billion to a capital gains surcharge and double-digit taxes on individuals with state taxable income exceeding $1 million. New York, for instance, could be looking to produce almost a 30% tax on the capital gain income of rich New York City residents, according to the Tax Foundation. Other New York bills target wealth, capital gains, high inheritance and gift income – with one New York state senator reportedly telling The Washington Post that Albany wanted to do at the state level what isn’t being done at the federal.

Elsewhere, Connecticut proposals would hike marginal tax rates, establish a capital gains surcharge and restructure other taxes to be less favorable to residents in the top brackets. California Assemblyman Alex Lee has claimed that a wealth tax would raise almost $22 billion in revenue; he has introduced similar legislation previously that failed short of even a hearing, let alone a vote. (California, already home to the new “mansion tax” on home sales exceeding $5 million, is now toying with pinning electric bills to household income.)

Washington could raise more than $2 billion annually through a proposed 1% tax on wealth over $1 billion, proponents say, adding that it would apply to fewer than 100 families in the state and that the proposal received strong support at a Senate hearing this spring. Hawaii looks to levy a tax of 1% of net worth per year on taxpayers with assets of more than $20 million in assets in the state. Illinois is again looking at a graduated income tax as well as at a wealth tax. Maryland lawmakers hope to also go after capital gains, inheritance and the state’s 1-percenters. Minnesota Gov. Tim Walz (D) has proposed increasing the capital gains tax, claiming it would produce more than $660 million over the next biennium. (Walz often used the word “fair” concerning the idea.)

In Massachusetts late last year, lawmakers voted to amend its state constitution and authorize the “millionaires’ tax” an additional 4% tax on income exceeding $1 million beyond the 5% tax imposed on the income of all state taxpayers. One analyst said it would affect just 0.6% of Massachusetts taxpayers.

The concept on the state level isn’t flowing all in one direction, though: Texas lawmakers have introduced a bill to ban an individual net worth or wealth tax in the state.

The National Stage

From 1989 to 2019, wealth in this country began to be much less equally distributed. The share of total wealth held by families in the top 10% increased from 63% in 1989 to 72% in 2019, according to the Congressional Budget Office. The share of total wealth held by families in the top 1% increased from 27% to 34%. The share of total wealth held by families in the bottom half of the distribution was halved over that period, to 2%.

Proponents (including President Biden) say that taxing wealth could fund social programs, combat inequality and advance racial justice. They usually add that such proposals often have little chance of passing.

Pros and Cons: Thin Sheep and an Exodus

The debate over taxing the wealthy boils down to “Pay your fair share” versus “Taxing us will hurt the economy – and we’ll just move somewhere taxes are lower.” Both sides reach deep into evolving statistics and partisan emotions (usually starkly partisan) to support their stances.

Proponents say that evidence domestic and global debunks the wealthy’s argument and claim that the rich are being greedy and bullying. The Canadian essay “Taxing the Wealthy to Hilt Would Make Us All Much Better Off” cites the 20th century English social historian and economist R.H. Tawney’s analogy to five fat sheep trying to convince 95 thin sheep that the fat ones should get the best pastures.

The reasoning: the 95, by trying to take better pastures, risk losing what little they already have, and “there is nothing which frightens thin sheep like the fear of being thinner.”

Opponents claim that evidence domestic and global supports their argument and that getting rich is an intrinsic part of the American Dream that shouldn’t be punished. They also claim that the rich, especially those who own businesses, already pay a disproportionate amount of taxes beyond just income tax.

“A wealth tax is a bad policy,” writes author and Bloomberg Opinion economics columnist Allison Schrager. “Collecting it will require tremendous resources that states don’t have and it won’t produce the revenue they’re counting on. It’s notable that many states now considering it are the very ones that are losing population to tax-friendlier states.”

An argument with such language on both sides needs a list of some of the common points for and against.

Pros for a wealth tax:

  • The wealthy can best afford the higher taxes needed when governments require revenue. That revenue also often goes to infrastructure, defense, safety and other underlying public works that help keep the wealthy’s sources of income functioning.
  • Globally, there is no evidence that taxing a society’s wealthiest citizens damages an economy. The opposite is true on countries like Sweden, Canada and Australia. A recent study also found little evidence of real tax-motivated migration by the wealthy in the United States.
  • One tool to shrink income discrepancies, which eventually but frequently lead to social unrest, is a progressive tax.
  • Old arguments against taxing the wealthy in the United States no longer apply. In just the past half-century, income inequality in the nation has reached levels unseen since The Gilded Age of the 1800s, if then.

Cons against a wealth tax:

  • Such taxes have in fact resulted in an exodus of the rich in nations like Norway. Evidence is far too nascent to declare that high-tax states like New York, Illinois and California aren’t suffering the same fleeing of the wealthy.
  • Governments are wasteful spenders. More taxes will simply make them even less responsible.
  • Rising taxes hamper investment and erode the incentive to make more money. Cutting taxes stimulates spending and growth at all levels of society.
  • Despite polls showing that Americans are bothered that the rich don’t pay enough taxes, widespread wealth tax legislation is doomed due to partisanship, the growing autonomy of states and that such proposals are often nothing more than political rhetoric.

Progress Ahead? Not Likely

It’s safe to say: Wealth taxes will not be settled nationally one way or the other in our professional lifetimes.

Motivated by economics, politics or a recipe of the two, states will increasingly take the question to their own legislatures, refrains of “fair” and “exodus” louder each time. Some wealthy may relocate only to find the tax winds soon against them in their new homes. Some will relocate only to find the place they left changing in a way that makes them wish they’d stayed put. Inequality usually breeds all sorts of instability, eventually.

Our profession’s job isn’t going to get any easier. More and more, advising wealthy clients will involve assessing not only individuals’ tax situations, but tax jurisdictions’ future political attitudes.

Alicea Castellanos, CPA, is the CEO and founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high-net-worth families and their advisors. She specializes in U.S. tax planning and compliance for non-U.S. families. In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth's Powerwomen Awards in the category USA - Woman of the Year - Business Growth (Boutique).

Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.