Posted by KLSM CPA Firm PLLC

What Are The Flaws of Wealth Taxes?

What Are The Flaws of Wealth Taxes?

A wealth tax, unlike income tax, is a tax paid annually on assets including property, real estate, cash in banks, investments, business interests, and whatever you have that is of value, 

Generally, the taxpayer can remove the debt like mortgages or other loans from their entire wealth, making wealth tax a tax on the net worth. Besides, wealth tax only concerns people that have financial assets above a particular level. 

For instance, assume all your assets are worth $100 million, but you have a mortgage debt of $10 million on your home, making your net worth equal $90 million. Assuming you had to pay a wealth tax of 2% on whatever you have over $50 million, your wealth tax will be $800,000.

Protagonists of wealth tax believe that it will be a good source of revenue, take care of the federal deficit, and repair America's health care system. It can also help take care of income differences since it will encourage the wealthiest to direct their wealth towards something productive rather than leaving it.

Also, it is explicitly directed at the wealthiest Americans – people with millions of dollars worth of assets and cash. While it has many similarities with the property tax, there are three significant distinctions:

  • It applies to the entire asset minus all liabilities, not restricted to real estate alone.

  • The tax is raised at the federal level, while property tax has to do with the local and state government.

  • The tax has to do with a specific class of people with wealth, which explains the name – wealth tax.

The wealth tax proposed recently during the democratic debates around late 2019 through 2020 set the threshold for wealth tax as starting from $30 million and above. With this, the number of Americans affected was around the range of 200,000 individuals. 


Flaws of Wealth Tax 

Not everyone believes in the idea of a wealth tax, as many think that it will hardly deliver on the proposed benefit and might trigger an extra problem. 

Here are some of the issues:

  1. Double Taxation 

One of the significant flaws with wealth tax is that people get taxed twice. If the rich folks of the country are taxed on their wealth, the implication is that they will pay extra fees to Uncle Sam: the costs for acquiring their income and the other for retaining some of their income. 

  1. The Wealthy could Simply Relocate 

Wealth tax comes with the risk of making the wealthy relocate to a favorable country to avoid such. For example, in France, records show that over 42,000 millionaires left before the country got rid of its wealth tax in 2018.

  1. Potential for Tax Avoidance and Evasion

Many European countries that attempted a wealth tax simply gave their citizens a boost to try to outsmart the system. In the United States, wealthy individual considered the use of an offshore account and investment to avoid the wealth tax, 

Uncle Sam, however, set up a Foreign Account Tax Compliance Program to help crackdown on Americans who try to evade tax by operating offshore accounts. 

  1. Administrative Burden 

Determining the market value for various wealth like a private company, personal and household items, and other investments might be challenging. 

Even if Uncle Sam decides to have the appraisal, who will pay for the valuation? Will Uncle Sam hire art experts, qualified jewelry experts to audit the tax return? Again, this results in a significant admin burden on the individual and tax authority. 


How Will a Wealth Tax Affect me?

You only have to worry about wealth tax if you are worth $30 million or more. It can, however, come in handy in fixing the local roads or boosting the healthcare system, which will be nice. With this, the wealth tax works the way it was intended to.

However, one will still need to pay the normal taxes as a wealth tax is not replacing the essential tax everyone pays. It was meant to supplement other taxes. 


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