Alan Viard and Erin Melly of the American Enterprise Institute try to help people translate wealth tax proposals into more familiar terms.
Although the wealth taxes proposed by two prominent Democratic presidential candidates have drawn wide attention, the discussion has not always made clear that wealth tax rates and income tax rates are fundamentally different.
Without taking a position on the merits of wealth taxation, we provide a framework for properly interpreting wealth tax rates and their relationship to income tax rates.
Because wealth taxes impose a flow of taxes on a stock of wealth, they cannot be properly stated without specifying a time unit. For example, the top tax rate in the wealth tax proposal by Sen. Elizabeth Warren, D-Mass., is not 6 percent but is instead 6 percent per year. No time units are required for income tax rates, for which a flow of taxes is imposed on a flow of income.
We discuss how to translate wealth tax rates into equivalent income tax rates for both safe and risky assets. We show that apparently low wealth tax rates are equivalent to apparently high income tax rates and vice versa.
We critically assess the public and political discussion of wealth tax rates. We find that the media and the candidates have a mixed record regarding the clarity and accuracy of their descriptions of wealth tax rates.
