States Should Avoid Using ‘Wealth Tax’ Rhetoric for Income Taxes

States are discovering the political usefulness of the phrase “wealth tax.” But as California, Minnesota, Oregon, Illinois, Washington, Maine, and others introduce or flirt with new taxes levied on the rich, many are really pursuing high-income surtaxes while squandering political capital in the process.

State lawmakers who want a real wealth tax need to do the hard work first. They should create frameworks for asset valuation, draft third-party reporting guidance, design anti-avoidance provisions, residency standards and thresholds, and include liquidity protections for taxpayers whose wealth is real but not easily converted into cash.

Even when the policy under discussion often proposes something mundane, such as another high-end income tax bracket, the recognizability and vagueness of the term “wealth tax” are helpful. They allow the broader political conversation to conjure images of billionaires, massively appreciated stock portfolios, impenetrable trust structures, whale crypto wallets, and the broader economy of accumulated capital.

But the distinction between taxing income and taxing wealth is important. Income is a flow, while wealth is a stock. A new top income-tax bracket or surtax can raise revenue, make a state’s tax code more progressive, and force high earners to pay more when they realize income—but it will never reach accumulated fortunes that compound outside the annual income tax base.

A true wealth tax requires states to ask hard questions before the first dollar is collected.

Photographer: Mario Tama/Getty Images

The confusion likely stems from the phrase itself, at least in part, but policymakers should be clear about the difference. “Wealth tax” may have become, in the minds of the public, something like a political umbrella—covering everything from annual levies on net worth to surcharges on taxable income above $1 million. Both are taxes levied on the wealthy, but only the former is a wealth tax.

States may have good reasons to pursue either policy, but lawmakers who want more levies on income shouldn’t allow the discourse to suggest they have solved the problem that made a wealth tax attractive in the first place.

A true wealth tax begins with a balance sheet. To apply a levy to wealth, the tax authority must know what taxpayers own—stock, business interests, real estate, cryptocurrency, and other assets all become relevant for valuation. In a true wealth tax, net worth is the base and valuation is the fight.

An income tax looks to what the taxpayer actually realized during the year—wages, bonuses, business income, dividends, interest, or capital gains. An income tax or surtax may reach people who are becoming rich, but it doesn’t tax wealth as such. It taxes the flow of money on its way to a destination we might broadly call wealth.

That’s the essence of the stock-versus-flow problem. Wealth is a reservoir, and income is a stream. Taxing the stream may be reasonable, especially if the stream is more like a river, but it tells us nothing about the size of the reservoir and draws nothing from it.

Some people have enormous economic power that may barely appear in the income tax system at all. Take the familiar “buy, borrow, die” critique. A taxpayer can hold assets; allow them to appreciate; borrow against them for liquidity; and avoid selling long enough to defer, reduce, or even escape income-tax recognition entirely.

But if the tax system supposedly allows too many opportunities for wealthy taxpayers to avoid realization, then adding a few points to the rate after realization isn’t a tax revolution; it’s just a slightly higher toll at the same toll booth.

Millionaire surtaxes aren’t bad policy, and they’re important to help ameliorate economic disparity. States need revenue, and progressive income taxation is one of the more defensible and fair tools at their disposal. A state that wants high earners to contribute more can make that case clearly and without apology.

It also makes sense that states seem to find such proposals attractive as populist responses to calls for a wealth tax. Income tax systems already exist, from forms and withholding rules to estimated payments, audit processes, and enforcement procedures—the structures are already built and tested. Adding a top bracket is about as easy as it gets in matters of tax administration.

By contrast, a true wealth tax requires states to ask hard questions before the first dollar is collected. Wealth must be defined and valued, illiquid assets need to be contended with, and policy considerations must be crafted to head off common avoidance tactics. Those aren’t minor implementation details.

There are political-capital concerns inherent to leaning on the language of wealth taxation without actually pursuing it. Wealth taxes provoke a specific kind of fight. They invite warnings about billionaire flight, capital mobility, constitutional limits, and the like.

Spending that capital on a half-measure makes little sense. The middle ground gives lawmakers the branding benefit of a wealth tax, but it gives taxpayers the burden of a higher income tax without attendant and proportionate benefits. It also sets the stage for taxpayers to feel as though wealth taxation offers them nothing.

The better approach isn’t particularly clever or novel. States should stop laundering high-income tax brackets (or surtaxes) through the rhetoric of wealth taxation. If lawmakers want an income-tax increase, they should design one honestly. Broaden the base, add a top bracket if necessary, and earmark or explain the revenue use without pretending the problem of accumulated capital is now solved.

That case can stand on its own merits. A more progressive income tax can raise revenue, offset regressive features found elsewhere in the tax code, and ensure high earners contribute more toward public services—all without borrowing the language of wealth taxation.

Such an approach requires being more precise at the metaphorical policy point of sale. The public should know whether lawmakers are asking high earners to pay more on annual income or whether the state is undertaking something more ambitious.

Clarity would make the politics cleaner. Supporters would have to defend the actual tradeoff they are choosing, and opponents would be tasked with attacking the policy on the table rather than a more revolutionary cousin of it. The result would be a less theatrical debate, so perhaps that’s why neither side is rushing to try it.

But half measures that cost full price in political capital aren’t helping anyone.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social.

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