Wealth Tax: What It Is and How It Works
Broadly defined, a wealth tax is a tax on the difference between a person's assets and liabilities.
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Editor & Content Strategist What is a wealth tax?
A wealth tax is a tax on net worth, which is generally the difference between someone's assets and liabilities.
The U.S. does not levy a general wealth tax. Revenue is instead collected through other forms of taxation such as income tax, property tax, and payroll tax.
How is a wealth tax calculated?
A wealth tax is typically a tax on net worth. To calculate net worth, you'll subtract a person's liabilities from their assets, which you can broadly think of as negatives and positives in a ledger. So, for example, if somebody has $500,000 of assets and $300,000 of debt, that person’s net worth (or wealth) is $200,000. A 2% wealth tax would generate a $4,000 tax bill.
$500,000 (assets) - $300,000 (debts) = $200,000 (net worth).
$200,000 (net worth) x 2% (wealth tax) = $4,000 (taxes owed).
A few other notes:
- Wealth taxes are complex and how they're calculated can vary from country to country.
- A taxing authority might also exempt certain assets or liabilities from the wealth tax, and it might apply different tax rates to different levels of wealth.
- Determining the value of a person’s assets can be tricky because assets can include things like houses, businesses, jewelry and other items.
Does the U.S. have a wealth tax?
The U.S. does not have a general wealth tax, but certain types of wealth can be subject to other forms of taxation. Estate taxes, gift taxes and inheritance taxes are examples of taxes on wealth that are typically assessed once or infrequently. The U.S. primarily generates revenue through taxing earned income.
The difference between wealth and income
Wealth is the value of somebody's assets (cash; savings and investments; houses, cars and other property; insurance and pension plans, for example) minus the value of that person’s liabilities (mortgages, credit card debt or outstanding loans, for example). In other words, it’s what’s left over if you sold everything you owned and used the money to pay off every debt you have.
Income, on the other hand, is money received over a period of time, typically in return for a person’s time and expertise through work, or as interest or dividends. Paychecks are income. Money from renting out a property or dividend payments from a stock you own are other examples of income.
What is the difference between income tax and wealth tax?
Conceptually, an income tax is not the same thing as a wealth tax. Income taxes are taxes on money received over a period of time, typically in return for a person’s time and expertise (through work) or as interest or dividends.
- The United States has a progressive income tax system, meaning people with higher taxable incomes pay higher federal income tax rates.
- There are seven federal income tax brackets, and the bracket taxpayers are in depends on their taxable income and filing status.
- Income taxes are due when the income is earned, and most taxpayers must file an income tax return every year.
- Governments may decide to assess both a wealth tax and an income tax.
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- 1. Tax Foundation. Wealth Tax. Accessed May 25, 2022.
- 2. Tax Foundation. Sources of U.S. Tax Revenue by Tax Type. Accessed Jun 9, 2022.
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