Why do wealth taxes keep failing?

Shrehith Karkera (0:00)

Hello folks, you're tuned in to Finshots Daily. I'm Saad. If you're new, you're welcome. If you're returning, welcome back. In today's episode, we look at why wealth taxes keep falling and whether there's a version of this idea that actually could work.

Before we head to the story, here's a quick word from Team Ditto. We're hosting a free two-day insurance masterclass that helps you build real financial security by understanding health and life insurance the right way. Right from understanding how to protect your family, choosing the right cover amount, and knowing what truly matters during a claim, to how hospitals process claims, the mistakes bios usually make, and how to choose a policy that won't disappoint you when you need it the most. We will explain it all in plain language. Head to the link in the description and save your spot. Now to the story.

Imagine taxing the world's richest man at a mere 0.1% of his wealth. At the time of writing, it's Elon Musk. And Forbes puts his net worth at about $936 billion.

So, 0.1% comes up to $936 million.

That is enough to fund the Ayushman Bharat PMJ, India's flagship health insurance scheme, or the US's entire budget for global health security in 2025 So, if the amount is big enough to benefit the public purse this much, why can't governments simply collect a wealth tax? Well, this is a little bit more complicated than just taxing income. Because wealth and income are two very different things. Income tax applies to the money you earn, whether through a salary, dividend, or taxable income. But much of a billionaire's wealth exists on paper, in the form of shares, businesses, and other assets that may change dramatically without them drawing a salary. Take Elon, for instance. A large part of his fortune is tied to his stake in companies such as Tesla and SpaceX. If their valuations rise, his net worth increases even if he doesn't sell a single share. As long as he doesn't sell, he doesn't incur a tax. This creates a peculiar situation in which a billionaire can become substantially wealthier without seeing a corresponding increase in their taxable income, which begs the question, how exactly do you impose a tax on wealth when it keeps fluctuating regularly? Well, economist Gabriel Zuckman may have a solution. His proposal is to introduce a minimum tax of 2% on billionaires' wealth. The idea is to establish an effective tax rate of a minimum of 2% of their total wealth. If the taxes they pay fall short of that, they would have to pay the difference. So, even if a billionaire holds most of their fortune and shares and pays relatively little tax on their annual income, their overall tax would still have to meet the minimum 2%.

According to Zuckman's estimate, the proposal could raise 200 or 250 billion dollars annually from around 3000 billionaires worldwide. But a wealth tax is easier said than done because it comes with a few caveats. First, all major countries have to implement it together to make it work. Otherwise, billionaires could simply move their wealth to places where the taxes don't apply. In fact, several OECD countries show why wealth taxes have struggled to deliver. According to the OECD or the Organization for Economic Cooperation and Development, 12 countries levied a recurring tax on individuals' net wealth in 1990 By 2017, that number had fallen to just 4

Norway offers a useful example of this trade-off. After the country raised its top wealth tax rate from 0.85% to 1.1% in 2022, several billionaires and multimillionaires left, taking fortunes estimated at roughly 56 billion dollars with them. Yet, Norway's wealth tax collections grew by around 25% between 2022 and 2025, suggesting that the departures did not necessarily wipe out the tax's revenue potential. In other words, a wealth tax can raise revenue, but only if a government can identify, value, and tax enough wealth to make it worthwhile. And that's precisely where many countries have struggled. Another struggle in implementing a wealth tax is valuing the wealth itself. You see, income is easy to measure because it is an amount credited to your bank account regularly. Wealth is different altogether. As explained earlier, a lot of it is either in a stock or real estate portfolio, and it's tricky to measure this. A good example is when Michael Jackson passed away. His estate told the IRS his name and likeness were worth $2,105, but the IRS said it's worth $434 million.

The tax code eventually settled on a roughly $4.15 million.

Now, picture that argument repeating in every single year in every wealthy person in the country. Tax authorities would need specialized teams to value private businesses, artwork, real estate, and other assets. That would take a significant amount of resources, not just for the tax department, but also a lot of time in court, if or rather when they do decide to contest the taxman's decision. Then there's the cash flow problem. A wealth tax must ultimately be paid with money available to the taxpayer, even when most of their wealth is tied up in assets that generate little or no cash. Consider someone who owns a flat worth 10 crore rupees and earns 50 lakh rupees in rent a year. A 2% annual wealth tax on the flat would amount to 20 lakh rupees, consuming 40% of the rental income before income tax and maintenance costs. The problem becomes more acute for a startup founder whose shares are valued at 1000 crore rupees, but who receives no dividends. A 2% wealth tax would mean finding 20 crore rupees every year, potentially forcing the founder to sell shares just to pay the tax, even if the business isn't generating cash for them personally. And these issues aren't a problem Europe or US has grappled with alone. India has had its own experience in wealth taxes, and it offers an interesting lesson. The Wealth Tax Act ran for 58 years until the 2015 budget scrapped it, after it yielded just 1008 crore rupees in 2013-14. One of the reasons behind this was that the tax generated relatively little revenue compared with the administrative effort required to assess and collect it. So in its place came income surcharges, capped at 25% under the new tax regime. And it worked because income surcharge revenue increased from 9347 crore rupees in 2017-18 to 85,000 crore rupees for the budget of 2025-26.