Plans to directly target billionaire fortunes through novel wealth taxes face significant practical and political hurdles, according to a report from The Guardian.
Policymakers are under growing pressure to tax immense wealth as the artificial intelligence boom creates more billionaires amid rising income inequality.
California represents the first state to attempt this, with voters deciding on a one-time 5% tax on fortunes exceeding $1 billion.
However, implementing a new wealth tax could exhaust political capital better spent on restoring existing tax mechanisms.
In 2024, the wealthiest 1% of Americans paid an average of about 31.5% in federal taxes and roughly 7.2% in state and local taxes.
This overall rate marks a decline of more than eight percentage points since the turn of the century.
With the top 1% reporting a total adjusted gross income over $3 trillion, restoring those eight points could generate nearly $300 billion annually.
Securing additional revenue can be achieved by closing the complex network of loopholes in the current tax schedule.
Loopholes and Their Impact
These loopholes offer preferential treatment to specific income types, reducing the overall tax liability of billionaires.
An analysis from the Yale Budget Lab shows the effective tax rate for top earners fluctuates between 45% and 3% based on income sources.
Data from 2024 shows only three advanced economies in the OECD collected revenue from recurrent wealth taxes: Norway, Spain, and Switzerland.
This is a sharp decline from 12 countries in 1990, and none of the remaining nations collect significant sums.
Only Switzerland raised more than 1% of its GDP from wealth taxes in 2024.
Wealth taxes create practical difficulties, including valuation challenges for private businesses and liquidity issues for asset owners.
These measures also tend to encourage capital flight, discourage entrepreneurship, and penalize safer, low-return investments.
An OECD study noted limited arguments for net wealth taxes when broad personal capital income and inheritance taxes are well-designed.
Opponents argue that wealth taxes represent double taxation on savings already taxed as income.
The estate tax offers a tested alternative, though it has been eviscerated by multiple reforms over the past 25 years.
In 1972, 6.5% of decedents paid estate taxes, but that share dropped to less than 0.1% by 2021.
The revenue generated fell from 0.4% to 0.08% of GDP despite massive accumulations of inheritable wealth.
Reversing these declines requires restoring tax rates and reducing exemptions to turn-of-the-century levels.
The US could cut breaks on assets like life insurance and end the step-up basis that zeroes out unrealized capital gains at death.
Transforming the system into an inheritance tax levied directly on heirs would address double taxation concerns and encourage estate division.
Capital gains taxes, which max out at 20%, should be raised closer to the 37% top rate applied to labor income.
This adjustment reduces incentives for high earners to reclassify standard wages as investment returns.
Corporate tax rates should move closer to the 35% level held before the Tax Cuts and Jobs Act reduced it to 21%.
Large companies must also be taxed strictly as corporations to prevent them from altering their status to reduce tax liabilities.
Eliminating the uncollected tax gap entirely would yield an estimated $7.5 trillion in the decade spanning 2020 to 2029.
Achieving these changes remains difficult because one major political party prioritizes tax cuts while the other has lost faith in redistribution.
Additional measures include international agreements ensuring multinational corporations pay a minimum tax regardless of their selected domicile.
Ambitious proposals to sharply raise marginal income tax rates will fail to raise significant money unless loopholes are thoroughly addressed.
Modifying existing tax frameworks and closing active loopholes for the wealthy offers a more reliable revenue stream for the US than introducing new wealth taxes.
