Challenges and Opportunities in Taxing the Super Rich
In today’s era of rapidly growing fortunes among oligarchs, imposing new taxes on billionaires’ wealth appears appealing. Many Americans are concerned about federal taxes favoring billionaires. As artificial intelligence accelerates wealth creation, policymakers face increasing pressure to tax these vast fortunes directly.
The first state to act is Washington, where voters will decide in November whether to implement a one-time 5% tax on fortunes exceeding $1 billion. Given the ease with which billionaires can avoid taxes, this direct approach seems justified.
The US government faces multiple reasons to increase revenue, including restoring one of the wealthiest nations’ fiscal health and addressing America’s expanding social safety net demands. An aging population and the rise of an AI-driven economy, which may reduce taxable human income, further necessitate exploring new revenue sources.
However, introducing a novel wealth tax—largely abandoned by industrialized countries—could jeopardize efforts to strengthen the state by diverting political capital from improving existing tax structures.
Current Tax Contributions and Potential Revenue Gains
In 2024, the richest 1% of Americans paid an average of 31.5% of their income in federal taxes and about 7.2% in state taxes. This is over eight percentage points less than the rate paid in 1979. Given that the top 1% report adjusted gross incomes exceeding $3 trillion, closing this gap could yield nearly $300 billion in additional annual tax revenue.
Technically, raising more revenue is straightforward. Instead of taxing wealth or drastically increasing income tax rates, closing numerous loopholes and preferential treatments that reduce the plutocracy’s tax liability would be more effective.
A recent study found that the effective tax rate on the top 1% varies widely—from 45% to as low as 3%—depending on income sources. Restoring fairness by addressing these disparities could significantly increase tax revenues.
Wealth Taxes in OECD Countries and Their Limitations
In 2024, only three OECD advanced economies—Norway, Spain, and Switzerland—collected revenue from recurrent wealth taxes, down from 12 countries in 1990. None collected substantial amounts; only Switzerland raised more than 1% of GDP.
Practical challenges with wealth taxes include valuing assets like privately held businesses and taxing owners lacking liquid assets to meet obligations. Wealth taxes may encourage capital flight, discourage entrepreneurship, and penalize those with safer, low-return investments.
An International Monetary Fund (IMF) analysis concluded:
“From both an efficiency and equity perspective, there are limited arguments for having a net wealth tax in addition to broad-based personal capital income taxes and well-designed inheritance and gift taxes.”
Additionally, wealth taxes face political opposition due to concerns about double taxation—taxing savings from income already taxed.
Alternative and Proven Tax Measures
More effective capital taxation methods exist, starting with the estate tax, which has been weakened by reforms over the past 25 years. In 1972, 6.5% of decedents paid estate taxes; by 2021, this share had dropped to 0.2%. Revenue from the estate tax fell from 0.4% to 0.08% of GDP despite significant growth in inheritable wealth.
The estate tax could be strengthened by restoring rates and reducing exemptions to levels seen around 2000. The US could also eliminate tax breaks on assets like life insurance and transfers to close relatives. Crucially, abolishing the step-up basis—which resets unrealized capital gains to zero upon death—would prevent dynastic wealth from growing tax-free across generations.
Transforming the estate tax into an inheritance tax levied on heirs, as practiced in most OECD countries, would address double taxation concerns and encourage dividing large estates among heirs to avoid high marginal rates.
Other reforms include raising capital gains taxes—currently capped at 20%—closer to the 37% top labor income rate, reducing incentives to reclassify wages as investment returns. The corporate tax rate should be restored toward its pre-2017 level of 35%, reversing cuts from the Tax Cuts and Jobs Act that lowered it to 21%. Large companies should be taxed as corporations rather than passing income through to reduce tax liability.
Additionally, improving tax collection could yield substantial revenue. A Treasury Department study based on IRS data estimated that eliminating the tax gap—the difference between taxes owed and collected—could generate $7.5 trillion from 2020 to 2029.
Political Realities and Broader Tax Reform
Implementing these changes faces challenges in the American political system, where one major party prioritizes tax cuts and the other, once supportive of a robust welfare state, has become skeptical of activist government redistribution.
Other initiatives, such as the Biden administration’s agreement—later abandoned by the Trump administration—to impose a minimum tax on multinational corporations regardless of their tax haven domicile, demonstrate possible paths forward.
The broader lesson is that the tax system can be adjusted efficiently and fairly without reinventing wealth taxes. Ambitious proposals to sharply raise marginal income tax rates will not generate significant revenue unless many existing exceptions and loopholes are addressed.
While targeting billionaires’ fortunes may seem satisfying, closing loopholes to broaden the tax base and reversing decades of tax breaks and exemptions could raise necessary funds and reduce the advantages the wealthy exploit to amass wealth.
