Beginners Lessons taxes

Income Tax vs.Wealth Tax: Taxes Are Boring, But You Don’t Know Sh*t

This one is very simple, but generally the middle and lower income tax brackets don’t understand the difference… And the wealthy love that.

Income Tax: You pay the IRS taxes on how much money you make in the year.

Wealth Tax: You pay the IRS taxes on your NET WORTH* (in addition to your income taxes).

This seems like a small distinction, but the implications are huge. Quick example for you: Joe makes $50k a year and when you add up everything he owns (cash, house, etc) and subtract his debt his net worth is $75k. So his yearly income is 66.6% or 2/3rds of his net worth. Bill makes $8 million dollars a year and his net worth is $50 million dollars. That means his yearly income is only 16% of his net worth. A 50% difference between him and Joe. So when people talk about raising the rates on income tax to say a 70% marginal rate on the rich or wealthy, it sounds like an insanely strong way to obtain revenue for pet projects. But when the wealthy Bill only has to pay that 70% marginal rate on 16% of his wealth, it doesn’t have nearly the effect it would have on somebody like Joe.

 

income tax vs wealth tax
High Marginal Income Taxes

 

Compare that to adding a wealth tax on those that earn more than $10 million a year and the charts change to this:

 

wealth-vs-income-2
Wealth Tax + Income Tax

 

Further reading for different viewpoints on wealth taxation:

Progressives Swoon Over Elizabeth Warren’s Wealth Tax Proposal (HP)

Billionaire investor Howard Marks: America should be worried about the ‘rising tide of anti-capitalism’ (CNBC)

Sen. Warren’s plan to tax the ultrawealthy is a smart idea whose time has come (WP)

Elizabeth Warren Introduces ‘Wealth Tax’ Aimed at America’s Billionaires (BB)

Elizabeth Warren calls for ‘wealth tax’ on richest Americans (FN)

France dangles wealth tax review as ‘yellow vest’ anger persists (BI)

Sen. Warren’s Wealth Tax Is Problematic (TaxFoundation)

Democrat Elizabeth Warren Proposes Wealth Tax on Rich Households (WSJ)

Wealth taxation: An introduction to net worth taxes and how one might work in the United States (WCEG)

The U.S. Needs a Federal Wealth Tax (ITEP)

The Problem With a Wealth Tax (WSJ)

 

 

 

*Net Worth : Assets (Cash, Stocks, Real Estate, etc) – Liabilities (Debt)