What is a Wealth Tax?

A wealth tax is based on a person's net worth or the value of his or her assets.

How Does a Wealth Tax Work?

Let's say John Doe makes $100,000 a year. He also has $500,000 saved for retirement and a house that is paid off and worth $400,000.

An income tax applies to John's income of $100,000. Let's say it works out to 14%, which means he pays $14,000 in taxes this year.

If, however, the government applies a wealth tax, then John pays, say, 14%, on his $500,000 of savings and $400,000 of house every year. That works out to $126,000 -- far higher than income taxes.

Why Does a Wealth Tax Matter?

Some countries tax wealth, but many tax income. In the United States, taxes are generally income-based, though property taxes are one example of how governments tax the same asset over and over again. This could be considered a wealth tax.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.