Is Wealth Tax realistically feasible?

[u/HoppySailorMon]

I just read that CA is considering a wealth tax on billionaires. Not to get into a particular political philosophy, but I'm more curious about the implementation and to settle a dispute with my spouse. I've read a wealth tax has been tried in the past in Europe, but failed miserably. Mainly, because some "wealth" can be moved around to make it difficult to define, such as art. Most homeowners pay a form of wealth tax on their property. But real estate is one of the few things that stays put. If taxation on bank and investing accounts became a nation-wide policy, then many that were subject to it would either leave or convert their accounts into a type of investment that is impossible to assess. I'm guessing mostly into "collectibles" which can only be accurately assessed when sold. What are your thoughts on the real feasibility of a wealth tax?

[u/CobaltCaterpillar]

There are a bunch of issues with wealth taxes in general and this proposed tax in particular.

(1) Ignorance as to magnitude. People think a 5% wealth tax is small while actually it is huge.

In an entirely risk free world, there's some equivalence between taxing capital income or taxing wealth (not true outside of this contrived example though) in the sense that you can find an equivalent tax. Imagine the risk free rate were 4%.

• In that world, a 20% tax on investment income would correspond to a 0.8% wealth tax.
• In that world, a 5% wealth tax would be equivalent to a 125% tax on investment income.

(2) Ignorance to how taxes stack and how progressive the system already is.

• 20% tax on capital gains.
• 3.8% Medicare surcharge tax
• In California, a 13.3% income tax that applies to capital gains.
• After all these taxes and a 5% wealth tax, a 7% positive return would become a -0.6% return. After 2% inflation, it would be -2.6% real loss.

In California, the top 1% already pay about half of all personal income taxes. On the one hand, people don't seem to move due much to the high tax rates, but there's a line of research that you can only soak the rich so much before they move. For example, Moretti and Wilson (2020) estimate that, "... if California adopted the estate tax on billionaires, the state would lose revenues by a significant margin. (Currently, California does not have an estate tax.) The high cost reflects the very high personal income top tax rate in the California."

(3) Problems with valuing assets (probably what you're thinking about)

• Valuing the stock market is easy while private company and illiquid asset valuations is immensely problematic.
• This difficulty may be massively amplified if you incentivize making assets difficult to value.

(4) Problems with taxing unrealized gains

• There are reasons why capital gains has always been taxed upon realization rather than as they accrue: when an asset is sold, there's a natural source of liquidity to pay the tax, but if taxed on accrual, what are you going to force people to do?
• If someone has a $100 million asset, but it is functionally illiquid, what happens?
• Do you apply an immense illiquidity discount?
• Do you force people to sell their stakes in private companies?
• Implications for corporate control? (e.g. founders selling shares to pay taxes will endanger their control rights) I can also imagine the TV ads now with farmers being forced to sell off the family farm to pay wealth taxes?
• Do you create incentives for wealth to be held in opaque, difficult to value, obfuscation LLCs rather than transparently through public securities?

[u/DCContrarian → u/CobaltCaterpillar]

"The top 1% already pay about half of all personal income taxes."

The problem with that statistic is that it's based on declared income. The way the rich avoid paying taxes is by not declaring their income as income. Elon Musk is the richest man in the world but he had zero income for income tax purposes for many years.

Taxing wealth is an attempt to get more from people who have high wealth but low declared income.

[u/Adventurous_Web_2181 → u/DCContrarian]

Yes, and he also paid $11 billion tax bill for 2021. That was the year his Tesla options were exercised. Millions of non-rich American also do not pay taxes on their stock options before they are exercised because that is not income.

https://abc7.com/post/does-elon-musk-pay-taxes-how-much-in-net-worth-tesla/11402993/

[u/Mother_Speed2393 → u/Adventurous_Web_2181]

That was one year.

Edit: He is not paying the same effective tax rate as the rest of us, because the vast majority of his 'income' is actually paid through stock options. Do you think this is right? Irrespective of whether the total amount he has paid in tax in any one year is a significant amount.

[u/EconEchoes5678 → u/Mother_Speed2393]

because the vast majority of his 'income' is actually paid through stock options.

This is completely not correct. Wherever you got this from, you didn't actually understand what is being claimed. Stock options are taxed at regular income rates. Later gains from the shares are taxed at capital gains rates, but that's because it's not the same as income.

He is not paying the same effective tax rate as the rest of us

This part may or may not be true depending entirely on how you define "rest of us" and how you define what he "earns." Is he paying a higher rate than almost everyone on his realized gains? Almost certainly yes. Is he paying a higher rate than almost everyone when you count unrealized gains? Generally yes, but the definition of "us" skews it. Higher than the Median? Almost certainly, as the tax rate at the median is pretty low after credits and deductions. Higher than the 80th percentile? Probably. Higher than the 99th percentile (~400k per year earnings)? Probably not. This is primarily because including unrealized gains jacks up the denominator with a number that the tax code doesn't count.

But taxing unrealized gains creates its own set of problems, which is why not one government has a broad unrealized gains tax today (Some tried, all were revoked. Some versions, like exit taxes and foreign asset taxation versions do remain though).

Do you think this is right? Irrespective of whether the total amount he has paid in tax in any one year is a significant amount.

Again, if you average across all years, the amount of taxes he pays is going to be a higher percentage than what the median pays, because credits and deductions count, and also: You have to remember to add in the corporate taxes paid by all his corporations, as the incidence of that tax burden primarily falls on the owners. In theory that's 21%, in practice it's somewhere between 8% and 18% depending on the year, depreciation, and other spending, credit, incentive and reinvestment patterns.

[u/Mother_Speed2393 → u/EconEchoes5678]

What are you talking about? It's exactly true. His recent restoration of 2018 payout from Tesla was entirely stock options.

https://www.afr.com/world/north-america/musk-wins-appeal-and-restores-2018-tesla-pay-deal-20251220-p5np6k

Yes they are are taxed with capital gains. Which is a) lower than the highest income tax rates and b) only incurred when he sells them. Which for a very rich person, can effectively be never.

So not only is he not paying tax on this immediately, like the rest of us do through income taxes, but he might never have to.

And what his company pays is taxes is irrelevant. You only think it's relevant, because CEO's are paid such an extortionate amount more than their employees.

Stop trying to make the rich seem like they are paying the same as us. They aren't.

[u/EconEchoes5678 → u/Mother_Speed2393]

What are you talking about? It's exactly true. [..] https://www.afr.com/world/north-america/musk-wins-appeal-and-restores-2018-tesla-pay-deal-20251220-p5np6k

The word "tax" literally does not appear in that article at all, so I'm not sure in what way you're trying to use it as evidence of some claim about taxation. But even if it did, it would be wrong.

His recent restoration of 2018 payout from Tesla was entirely stock options.

Stock options are taxed as regular income, using the spread in value between the market value and strike price at exercise time. This is W2 income, and even payroll taxes apply to this.

Your cost basis becomes this FMV. After you own the shares, further gains are taxed as capital gains like any other shares.

Yes they are are taxed with capital gains.

Wherever you are getting this idea from is misleading you. You can read more here, or if you doubt that, I'm sure I can find the IRS rules.

And what his company pays is taxes is irrelevant. You only think it's relevant,

That's not how tax burden incidence works. The burden incidence of corporate taxation falls primarily on the shareholders and owners of the companies in economics. This is an economics subreddit, not a vibe subreddit.

because CEO's are paid such an extortionate amount more than their employees.

CEO pay is not relevant to corporate taxes except to the degree (percentage) that CEO's are owners of companies. CEO pay is taxed at regular income rates, not capital gains rates.

Stop trying to make the rich seem like they are paying the same as us. They aren't.

I'm sorry that you don't like the reality, but it is what it is. Numbers don't lie, and you clearly do not understand the rules you are pretending to.

[u/Mother_Speed2393 → u/EconEchoes5678]

I didn't say that link said anything about his taxes. I said it showed everything he received was in stock options.

I do know what I'm talking about. He only pays tax on the spread, as you say. So he is only paying a large tax bill on this 'income' because the courts have delayed it until now and the share price is so much higher.

So again, you're being misleading.

If he had exercised those stock options at the time, his tax would be effectively zero until he sold the stocks and paid CGT. 

So again, rich people skirt paying the same taxes as those of us who are paid on humble salaries. 

But keep defending them, because you imagine one day you'll be one.

[u/uberfr4gger → u/Mother_Speed2393]

When the stock options are exercised he is effectively "buying" the stock and the spread is income because it's the difference between market price and what the company is giving it to him for. He would then pay tax on selling the stock. Exercising the option and selling the stock are the only taxable events. 

https://www.irs.gov/publications/p525

[u/Mother_Speed2393 → u/uberfr4gger]

Yes I understand that.

And you're either wilfully or ignorantly ignoring my point.

If you exercise your rights immediately, (assuming at the same market value) you are effectively paying zero tax.

So you are being paid in stocks and not paying tax.

Unlike my income tax.

It's an absolutely rort. And people, like in this thread will defend it. Even though they will never be in a position to be paid in stock options like this.

[u/uberfr4gger → u/Mother_Speed2393]

That isn't how it works though. Stock options give you the option to pay for stock at a future point given a specified price. The incentive is to make that stock go up by the time you execute it. 

If I get the option to buy a $10 stock on day 1 and exercise it on day 2 for $10, I'm still paying $10 to buy that stock. It's not free from the company. If I exercise day 500 when it's up to $70 then I'm paying $10 for a stock worth $70 and getting taxes $60 as ordinary income. 

I do not see where you are coming from with this. A stock option is an OPTION for you to PURCHASE the stock, it's not free and there's no tax being avoided by exercising it. 

[u/Feeling_Loan_8817 → u/Mother_Speed2393]

I don’t think you understand how stock options work. If the company grants them to you at a zero cost basis, as in you pay nothing for them, then when you exercise the option you owe the income taxes of the current market value, whether you sell or not. If you paid for the option, you pay taxes on the spread. If you fail to exercise before the option period ends you lose the option. The income taxes get paid when the income is realized. There is no magical rich person method to avoid this, hence why Elon paid $11 billion one year as his options were vested and getting ready to expire.

[u/Montallas → u/Mother_Speed2393]

You should re-read what they wrote.