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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