Might the United States, home to the world’s wealthiest people, sometime soon sport a tax on wealth? Media outlets the nation over have begun speculating on just that question. But many of these reflections are missing the point: The United States already has a wealth tax.
We call this already existing levy the “property tax,” and almost all Americans feel its pinch — with one exception. The rich. America’s current “wealth tax” only taxes the category of wealth that makes up the bulk of the net worth of average Americans. The financial assets that make up the bulk of wealthy people’s net worth — stocks and bonds, for instance — face no wealth tax.
Wealthy people, of course, like things this way. The rest of us should be aghast. How aghast? Let’s compare how our existing “wealth tax” treats the exceedingly rich and everybody else.
Exceedingly rich and average Americans both, of course, own property subject to property taxes. But the real estate holdings of our richest — our top 1 percenters — make up only a small share of their net worth, just 12.1 percent according to the latest Federal Reserve figures.
The richer the rich person, the smaller the share of net worth that comes from owning real estate. Case in point: Larry Ellison, the high-tech billionaire the Wall Street Journal has tagged the “nation’s most avid trophy-home buyer.”
Ellison owns one 23-acre estate in California that he spent $12 million to buy and another $200 million remodeling into a 16th-century Japanese imperial palace. He spent another $200 million-plus picking up properties in Malibu. He owns other homes in Lake Tahoe, Silicon Valley, and Rhode Island. Ellison’s biggest property grab? He’s bought up 98 percent of the Hawaiian island of Lanai, paying a reported $300 million in the process.
But even Ellison, the ultimate billionaire real estate junkie, faces property tax on only a small share of his overall fortune. Researchers at Bloomberg estimate the total Ellison fortune at just under $81 billion, with the vast bulk of that coming from his shareholdings in Oracle and Tesla. If we put the current value of his real estate holdings at a generous $6 billion — Ellison’s empire hasn’t released any exact figures — less than 8 percent of Ellison’s overall wealth would face an annual wealth tax.
For more typical billionaires, deep pockets who only own a half-dozen or so luxury getaways, the property-taxed share of their fortunes will be considerably less.
Now let’s shift to the other end of the American wealth spectrum, to the poorest 50 percent of Americans. Taken as a group, the Federal Reserve calculates, these Americans own less real estate than America’s richest 1 percent, $3.85 trillion of taxable property compared to the $4.48 trillion-worth that the ultra-rich hold. But this $3.85 trillion in taxable property makes up most of the assets — 52 percent — that America’s poorer half holds.
So we have a situation where America’s bottom half pays an annual wealth tax on over half its wealth and America’s top 1 percent pays no annual tax on almost 90 percent of its wealth.
The contrast, on closer inspection, turns out to be even starker. Many households in the bottom 50 percent don’t own their own homers. They rent. But these households feel the property tax pinch anyway, indirectly, because their landlords factor property taxes into their computations that set rent levels. Property-less poorer Americans are, in effect, paying annual wealth tax on property other people hold the title on.
What about Americans between the lofty top 1 percent and the struggling bottom 50 percent? These Americans also face much more tax on their wealth than America’s rich. Real estate makes up over 33 percent of the wealth of households between the top 10 percent and the bottom 50.
Households in this middle class sweet spot between the top 10 percent and the bottom 50 percent, in other words, are currently paying a “wealth” tax — the property tax — on three times more of their wealth than households in the top 1 percent.
None of this makes sense. In a just world, our tax system would “pinch” all people equally. We would recognize, as truly progressive tax systems do, that people of means should pay a greater share of their income and wealth in tax than people of lesser means.
At the federal level, our income tax system currently pays lip service to this progressive tax notion. Tax rates on income in the highest income brackets run higher than tax rates on income in the lower income brackets. In practice, all sorts of loopholes make for an income tax system not nearly as progressive as it ought to be.
Our existing annual “wealth tax,” by contrast, operates in an abjectly regressive fashion. Our property taxes totally exempt the vast bulk of the wealth of the wealthy from any annual wealth tax. Our property taxes only burden low- and middle-income households.
But we do, finally, have some cause for wealth tax cheer. We’re now experiencing an explosion in advocacy—at both the state and federal level — for an annual wealth tax that takes into account all the categories of wealth that make the wealthy truly wealthy. Serious wealth tax proposals are now pending in states like Washington, and champions for wealth tax legislation also abound in Congress.
Voters, for their part, appear perfectly comfortable with the wealth tax notion. Polling last year found 61 percent of the voting public in 11 battleground states “more likely to vote for a candidate who supports a wealth tax”—specifically, a 2 percent levy on wealth over $50 million. Only 19 percent of voters in these states would be less likely.
Numbers like these are most likely subjecting America’s exceedingly rich to no small discomfort. Good.