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When it comes to taxing the super rich, there’s no need to reinvent the wheel
Supporters hold signs advocating for the Billionaire Tax Now coalition in Los Angeles, California, on 27 April 2026. Photograph: Bloomberg/Getty ImagesView image in fullscreenSupporters hold signs advocating for the Billionaire Tax Now coalition in Los Angeles, California, on 27 April 2026. Photograph: Bloomberg/Getty ImagesUS income inequalityAnalysisWhen it comes to taxing the super rich, there’s no need to reinvent the wheelEduardo PorterAny new tax on the rich won’t raise much money unless many of the exceptions and loopholes are dealt with
In this new era of rampaging oligarchs, nothing may seem as satisfying as slapping a tax on Elon Musk’s new trillion-dollar fortune. What most bothers Americans about federal taxes is that billionaires don’t pay their fair share. As the race to develop artificial intelligence mints more billionaires, policymakers’ temptation to directly tax their brobdingnagian wealth is becoming unbearable.
The first state out of the blocks is California, where voters in November will decide whether to impose a one-time tax of 5% on fortunes worth more than $1bn. Given the ease with which plutocrats avoid paying income taxes, the case for this sort of direct tax on their stash appears unassailable.
The US government needs money for all sorts of reasons, starting with the imperative to restore one of the rich world’s most meager social safety nets and do more to mitigate America’s mushrooming income inequality. Increasing demands on the safety net by an ageing population will require considerably more money. And the prospect of an AI-laced economy with little human income to tax argues for efforts to find other sources of revenue.
And yet deploying a newfangled wealth tax that has been largely abandoned across the world’s industrialized nations could actually put at risk the prospect of building the more capable state the US needs, draining political capital that would be best used to restore the decimated array of taxes it already uses.
Just consider that in 2024 the richest 1% of Americans paid, on average, about 31.5% of their income in federal taxes and about 7.2% in state and local taxes. That is more than eight percentage points less than what they paid at the turn of the century. Considering that the top 1% report a total adjusted gross income of over $3tn, those eight points could add up to nearly $300bn of additional tax revenue per year.
Raising more money is not particularly complicated, from a technical perspective. Rather than taxing wealth or raising income tax rates sky-high, it can be done by closing the elaborate array of holes that have been drilled into the current tax schedule by offering preferential tax treatment to specific types of income, reducing at every step the plutocracy’s tax liability.
A recent analysis from the Yale Budget lab finds that the effective tax rate on the top 1% of earners can be anywhere between 45% and a miserly 3%, depending on how they make a living. A straightforward way to increase tax revenues is to restore some fairness to a system that allows vast discrepancies in the ways different forms of income are taxed.
In 2024, only three of the advanced economies in the Organization for Economic Cooperation and Development (OECD) – those of Norway, Spain and Switzerland – collected any revenue from recurrent wealth taxes. That is down from 12 countries in 1990. And none of the four collect much. In 2024, only the Swiss raised more than 1% of GDP.
There are practical problems with wealth taxes, starting with how to value certain types of wealth, such as a privately held business, and how to tax owners who may not own liquid assets to meet obligations. Wealth taxes have been found to encourage capital flight and discourage entrepreneurship. They tend to penalize people with safer investments, which have low returns.
An OECD study concluded that “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”. Moreover, taxing wealth is politically perilous, raising the objection that it amounts to double taxation: a tax on savings from income that has already been taxed.
There are better tested ways to tax capital, though, starting with the estate tax, which has been eviscerated by multiple “reforms” over the last 25 years. In 1972, 6.5% of decedents paid estate taxes. By 2021, the share had fallen to less than 0.1%. The revenue it generated dropped from 0.4% to 0.08% of GDP, despite the massive accumulation of inheritable wealth over the period.
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