In 1995, Forbes magazine counted a record 129 American billionaires. Though the super-salaries of athletes and entertainers more frequently grab the headlines, their $5-10 million deals are dwarfed by the accumulated wealth of the richest Americans: Microsoft’s Bill Gates—$12.9 billion; investor Warren Buffet—$10.7 billion; the duPont family—$10 billion; the Rockefeller family—$6 billion; Micromedia’s John Kluge—$5.9 billion; and Microsoft’s Paul Allen and Intel’s Gordon Moore—$5.3 billion each. An average American family, in contrast, is worth $52,200. So it would take a city of almost a quarter of a million such families to match the net worth of Bill Gates.

These are large inequalities, and they are growing: between 1983 and 1989, the top 20 percent of wealth holders received fully 99 percent of the total gain in national wealth; the wealthiest one percent enjoyed 62 percent of that increase. The numbers themselves are staggering, but wealth differences are not simply matters of quantity. Extraordinary fortunes produce tremendous economic and social power, which can be exercised through large contributions to political campaigns, well-financed personal candidacies (most recently, Ross Perot and Steve Forbes), or the formation of family dynasties (most famously, the Rockefellers and Kennedys).

For the average family, by contrast, wealth provides an economic safety net rather than a source of social power and political advantage—it is more cushion than fulcrum. Our savings serve as a fallback source of consumption expenditures in times of economic stress—so that we are not simply living paycheck to paycheck. Most of our assets (with the possible exception of cars and furniture) can be converted directly into cash to supplement our income and provide for immediate needs.

The current tax system in the United States leaves these vast differences in wealth and power largely untouched. Whereas a majority of advanced industrial countries—including those with high savings and growth and low levels of inequality—provide for a direct annual tax on household wealth holdings, the United States does not. It may be time to reconsider. Because wealth is so highly concentrated, a wealth tax—paid principally by wealthier Americans—would be a gain for equity; because wealth inequality is tied to unequal political power, a wealth tax could make the country more democratic; and because wealth concentration is growing, a large political coalition might be prepared to endorse it. With debate on the deficit currently dominating American politics, a wealth tax would help to close the budgetary gap without visiting the costs on those who can least afford them.

What is Wealth?

Wealth (or net worth) is not the same thing as income; it is the difference between assets and debt. There are four major types of assets: homes (technically referred to as “owner-occupied housing”); liquid assets, including cash, bank deposits, money market funds, and savings in insurance and pension plans; investment real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts. Debt, on the other hand, consists primarily of mortgage debt (usually on one’s home), and credit card debt and consumer loans.

Where do Americans put their savings? Table 1 shows the composition of household wealth for all families, calculated from the 1989 Survey of Consumer Finances. In this categorization, real estate, other than owner-occupied housing, and unincorporated business equity is the most important asset, comprising 29 percent of total assets. The gross value of owner-occupied housing is second, accounting for 28 percent. Third in importance are corporate stock, bonds and other financial securities, and trust equity, amounting to 21 percent. Finally, demand deposits, time deposits (including money market funds), and other deposits (including retirement plans like IRAs) amount to 17 percent. Indebtedness is also high, with debt as a proportion of total assets equal to 14 percent.

Table 1. Composition of Household Wealth in 1989

All families Middle income families The super-rich
Owner-occupied housing 28.5 68.6 6.6
Liquid assets
(cash, bank deposits, money market funds, cash surrender value of insurance and pension plans)
17.1 17.0 11.0
Investment real estate and unincorporated businesses 29.4 7.5 45.1
Corporate stock, financial securities, personal trusts, and other assets 25.0 7.0 37.3
Total 100.0 100.0 100.0
Total debt 14.1 59.0 4.7

Middle income families are those in the third quintile-incomes between $21,200 and $34,300 in 1989. The super rich are families in the top one percent of the wealth distribution- families with a net worth of $2.35 million or more in 1989.

This tabulation provides a picture of the average holdings of all American families. But it masks the very marked class differences in the savings behavior of middle-income and super-rich families. More than two-thirds of middle-class wealth is invested in home-ownership—a result that often leads to the misimpression that housing is the major form of family wealth in America. Another 17 per-cent goes into monetary savings of one form or another. Together housing and liquid assets account for 86 percent of middle-class wealth. Of the remaining 14 percent, about half is invested in non-home real estate and unincorporated businesses and the other half in various financial assets and corporate stock. Moreover, the ratio of debt to assets is very high: 59 percent. That’s partly because people have mortgages. But even if we exclude home mortgages, the debt-to-asset ratio is still 30 percent.

In 1989, the bottom 90 percent of familes were responsible for 70 percent of the indebtedness of American households.

The super-rich—the wealthiest one percent of the population—are different. They put more than 80 percent of their savings in investment real estate, unincorporated businesses, corporate stock, and financial securities: assets that bring higher rates of return. Housing accounts for only 7 percent of their wealth, and monetary savings another 11 percent. And their ratio of debt to assets is under five percent.

Another way to portray class differences is to compute the share of total assets of different types held by each group (see Table 2). The super-rich hold 46 percent of all outstanding stock, more than 50 percent of financial securities, trusts, and unincorporated businesses, and 40 percent of investment real estate. The top ten percent of families as a group accounted for about 90 percent of stock shares, bonds, trusts, and business equity, and 80 percent of non-home real estate.

Table 2: Percent of Total Assets Held by the Super-Rich, the Rich, and All Others, 1989

(Top 1%)
(Next 9%)
(Bottom 90%)
Assets held primarily by the wealthy
Stocks 46.2 43.1 10.7 100.0
Bonds 54.2 34.3 11.5 100.0
Trusts 53.6 35.4 11.0 100.0
Business equity 56.3 33.7 10.0 100.0
Non-home real estate 40.3 39.6 20.0 100.0
Assets and liabilities held primarily by the non-wealthy
Principal residence 7.4 26.3 66.3 100.0
Life insurance 16.8 27.7 55.4 100.0
Deposits 21.0 37.8 41.2 100.0
Total debt 10.1 19.9 70.0 100.0

Families are classified into wealth class on the basis of their net worth. The top one percent of the wealth distribution are families with a net worth of $2.35 million or more in 1989; the next 9 percent are families with a net worth of greater than or equal to $346,400 but less than $2.35 million; the bottom 90 percent are families with a net worth of less than $346,000.

Note that Deposits include cash, currency, demand deposits, savings and time deposits, money market funds, certificates of deposit, and IRA and Keogh accounts.

Owner-occupied housing, life insurance, and deposits were more evenly distributed among households. The bottom 90 percent of families accounted for almost two-thirds of the value of owner-occupied housing, over half of life insurance cash value, and over 40 percent of deposits. But our greatest equality is as debtors. The bottom 90 percent were responsible for 70 percent of the indebtedness of American households.

Wealth, then, takes very different forms for the middle-class and the super-rich. These differences are particularly important when we consider how taxes on wealth will affect different economic classes.

Recent Trends in Wealth Inequality

Though the recent run up in income inequality has received most of the attention, the period between 1983 and 1992 also witnessed a disturbing increase in wealth concentration—in many ways, even more dramatic than the striking changes in income disparities over the decade.

The calculations shown in Table 3 indicate an extreme concentration of wealth in 1989. The top one percent of families (as ranked by marketable wealth) owned 39 percent of total household wealth, and the top 20 percent of households held almost 85 percent. In contrast, the top one percent of families (as ranked by income) earned 16 percent of total household income and the top 20 percent accounted for 56 percent—large figures but still considerably lower than the corresponding wealth shares.

Table 3: Concentration of Wealth in 1983, 1989, and 1992

Top 1% Top 20% Bottom 80%
Share of wealth held by each group in:
1983 33.7 81.3 18.7
1989 38.9 84.6 15.4
1992 42.0 N/A N/A
Percentage of wealth increase accruing to each group from:
1983 to 1989 61.6 98.8 1.2

Source: Author’s computations from the 1983 and 1989 Survey of Consumer Finances; Kennickell and Starr-McCluer, “Changes in Family Finances.”

The figures also confirm a dramatic increase in the level of wealth inequality between 1983 and 1992. From 1983 to 1989, the share of wealth held by the top one percent increased by five percentage points, from 34 to 39 percent, and the share of the top 20 percent rose by three percentage points, from 81.3 to 84.6 percent. By contrast, the share of wealth held by the bottom 80 percent fell sharply, from 19 to 15 percent. Then, between 1989 and 1992, the share of the top one percent of families increased sharply again, from 39 percent in 1989 to 42 percent in 1992. The increase in wealth inequality recorded over the 1983-92 period is unprecedented except for the 1920s, when rising concentration was largely attributable to the stock market boom.

Another indicator of rising wealth concentration is the relative share of the total gain in wealth that accrues to different parts of the wealth distribution. This is calculated by dividing the increase in total wealth of each group by the total increase in household wealth (while holding constant the number of families in the group). If a group’s wealth share remains constant over time, then the proportion of total wealth growth received by that group will equal its share of total wealth—say the share remains at 20 percent, it will also have received 20 percent of the wealth increase. If a group’s share of total wealth increases (decreases) over time, then it will receive a percentage of the total wealth gain greater (less) than its share in either year. However, it should be noted that in these calculations, the households found in each group (say the top one percent) may be different in the two years.

While the US personal income tax produced revenues of $446 billion in 1989, a Swiss-style wealth tax would have produced considerably more.

The results, reported earlier, are stunning (see Table 3): the top 20 percent of wealth holders received 99 percent of the total gain in wealth over the period from 1983 to 1989, while the bottom 80 percent accounted for only one percent. Further, the top one percent alone enjoyed 62 percent of wealth growth.

What about the early 1990s, a period of anemic economic growth? My preliminary estimates indicate that between 1989 and 1992, 68 percent of the increase in total household wealth went to the top one percent of wealth holders—an even larger share of the wealth gain than between 1983 and 1989. If anything, then, the super-rich are moving away from the rest of the population at an even faster pace in the 1990s!

These results indicate rather dramatically that the benefits of economic growth since the early 1980s have been concentrated in a surprisingly small part of the population. This is particularly so for wealth, with the top quintile accounting for virtually all of the wealth gain, and the rest of the population receiving almost nothing. The starkness of this contrast suggests a growing bifurcation within our society.

How Would a Wealth Tax Work?

Given the excessive degree of wealth inequality in the United States, its phenomenal increase in recent years, and the importance of wealth as a source of social and political power, it seems incumbent upon us to consider the possibility of extending the tax base to include personal wealth holdings. Such an extension may not only promote greater equity in our society—particularly, by taxing those more able to pay taxes—but may also benefit the economy by providing households with an incentive for switching from less productive to more productive forms of assets.

Status Quo

Though the federal government currently imposes no direct wealth taxes, household wealth is subject to two forms of federal taxation: there are estate taxes and taxes on capital gains (property taxes, another form of wealth taxation, are levied by local governments). Federal estate taxes were first introduced in 1916, with major revisions in 1976 and 1981. Capital gains were included in the original personal income tax system, introduced into the country in 1913. Their provisions have been regularly modified over time.

The estate tax is levied on the value of an estate at time of death. The estate tax system is integrated with the gift tax, which falls on the (inter-vivos) voluntary transfer of assets from one individual to another. In principle, gifts are aggregated over the lifetime of an individual, and the lifetime aggregate of gifts is combined with the value of an estate at death. The estate tax applies to the full value of gifts and estates.

Currently, each individual is exempted from estate taxes on net worth up to $600,000 (or a unified tax credit of $192,800). Wealth above that amount is levied at marginal tax rates, which begin at 37 percent and reach as high as 55 percent (for estates over $2,500,000). For gifts, the first $10,000 per donee ($20,000 per donee in the case of a married couple) are exempt from the combined gift-estate tax. And transfers (both gifts and estates) between spouses are fully exempt. All forms of wealth are included in the tax base for calculating the gift-estate tax except pension annuities and life insurance. Several states also levy estate taxes, which are generally based on federal rules.

Capital gains refer to the difference between the selling price and purchase price of an asset. Some adjustments are made for the value of capital improvements in the case of real property (such as a home). These are included in the cost basis when computing capital gains. In the United States, capital gains are taxed as part of the federal income tax system (and state income tax systems). Only realized capital gains—that is, capital gains on actual sales of assets—are included.

Currently (in 1989), capital gains are subject to a maximum tax rate of 28 percent on both short-term and long-term capital gains, thanks to the Tax Reform Act of 1986, signed by Ronald Reagan. In the case of primary residence owner-occupied housing, there is no tax levied on capital gains in the case when a new primary residence is purchased whose price exceeds the selling price of the old home. Moreover, in the case of individuals over the age of 55, there is a one-time exclusion of $125,000 in capital gains. Liability on capital gains on gifts is deferred until the asset is sold by the donee. Capital gains on assets that enter an estate at time of death are exempt from taxation.


Taxes are currently levied on wealth in Austria, Denmark, Finland, Germany, Luxembourg, the Netherlands, Norway, Spain, Sweden, and Switzerland. In addition, France had a wealth tax system in place from 1982 to 1987 and Ireland from 1975 to 1977. (Japan also had a direct wealth tax for a short period after World War II.) Also, with the exception of Spain, most of these systems have been in place for at least 60 years. In all 11 countries, the wealth tax is administered in conjunction with the personal income tax. In all cases, except Germany, a joint tax return is filed for both income and wealth. Almost all these countries also tax estates (or inheritances), capital gains, and real property.

I propose that the United States adopt a wealth tax along the lines of the Swiss system. The system would work as follows: all household effects, pensions, and annuities would be excluded from the tax base. In addition, a $10,000 exemption would be provided on automobiles (that is, only more expensive cars would be subject to the tax).

The basic exclusion would begin at $100,000—only families with a net worth above $100,000 would be subject to the tax. The marginal tax structure would look as follows:

• $100,000 to $199,999: 0.05 percent

• $200,000 to $349,999: 0.10 percent

• $350,000 to $499,999: 0.15 percent

• $500,000 to $749,999: 0.20 percent

• $750,000 to $999,999: 0.25 percent

• $1,000,000 and above: 0.30 percent

Table 4: Who Will Pay the Wealth Tax?

Percentage of Families Average Income Tax Average Wealth Tax
All families 100.0 4,790 347
Wealth class
Under $100,000 67.7 2,081 0
$100,000 to $249,999 18.2 4,978 176
$250,000 to $499,999 7.6 8,332 279
$500,000 to $999,999 3.6 12,421 848
$1,000,000 and over 3.0 47,081 8,865
Income class
Under $5,000 6.1 0 17
$5,000 to $9,999 11.1 82 21
$10,000 to $14,999 12.1 388 57
$15,000 to $24,999 16.7 1,038 130
$25,000 to $49,999 30.1 2,875 154
$50,000 to $74,999 13.7 6,776 231
$75,000 to $99,999 4.6 11,478 614
$100,000 and over 5.6 39,904 3,728
Age class
Under 35 26.5 2,784 75
35 to 54 37.6 6,870 335
55 to 69 21.5 4,848 600
70 and over 14.4 2,945 503
Household type
Married couple 54.9 6,681 522
Males, unmarried 16.5 3,883 197
Females, unmarried 28.5 1,699 100
White 85.9 5,254 389
Non-White 14.1 1,971 101
Total revenue (billions) 445.9 32.3

Source: Author’s calculations from the 1989 Survey of Consumer Finances. The figures are in 1989 dollars and based on the US population in 1989.

While the US personal income tax produced revenues of $446 billion in 1989, or 11.7 percent of total family income, a Swiss-style wealth tax would have produced additional revenues of $32 billion in 1989, or 0.8 percent of total income—considerably more than the collections of $8.7 billion from the estate and gift taxes in 1989. For 1995, federal tax proceeds from the personal income tax are projected at $589 billion, and my proposed wealth tax would add an additional estimated $43 billion.

As is to be expected, the wealth tax is very progressive with respect to household wealth. Less than four percent of households—those with net worth of $780,000 or more—will pay greater than $1,000 in wealth taxes. The wealth tax is also highly progressive with respect to income. Only the top income class ($100,000 or more of income) will see their tax bills rise by more than $1,000. Older families (age 55 and over) will pay more wealth tax than younger ones. This is because older people have accumulated more wealth over time than younger ones. Married couples will pay more than twice as much as male householders and more than five times as much as female householders. And white families will pay almost four times as much as non-whites (they now pay about 2 1/2 times as much in income taxes).

Rationale for a Wealth Tax

Why should the United States consider a direct tax on wealth at this point? The most compelling reason is equity. Taxes should be levied on the basis of the ability to pay. Income alone is not a sufficient gauge of well-being or of taxable capacity. The possession of wealth adds to this capacity, over and above the income it yields. Two families with identical incomes but different levels of wealth are not equivalent in terms of their well-being, since a wealthier family will have more independence, greater security in times of economic stress, and additional liquidity for advantageous purchases. Wealth gives a family greater ability to pay taxes, and in the interests of equity, it is justifiable to tax current wealth in addition to income.

A second argument is that an annual wealth tax may induce individuals to transfer their assets from less to more productive uses. A tax on wealth may provide an incentive to switch from low-yielding investments to high-yielding ones, in order to offset the additional taxes. For example, a wealth tax on automobiles may induce individuals to invest in income-yielding assets rather than cars, which yield no (money) income. Likewise, a tax on land, irrespective of the income it yields, may encourage an investor to turn idle land into productive, income-yielding uses. A direct wealth tax also has the added feature that it may inhibit the avoidance of income taxes by encouraging investors to switch assets into income-yielding forms.

A third reason is that wealth is so concentrated in the United States—42 percent of total household wealth owned by the top one percent in 1992—that a tax on wealth would affect only a very small part of the population. Admittedly, this is a powerful group, both financially and politically. However, it is also a group that is so small in number that a populist political movement, concerned with the undemocratic effects of extreme wealth inequality, might overcome its resistance.

The wealth tax is progressive with respect to wealth; it would fall more heavily on older households than younger ones, and on white individuals than non-whites.

Why not reform the estate tax instead? The estate tax has historically been and remains an extremely porous tax—so much so that some describe it as a “voluntary” tax. The thresholds have been raised over time (from $50,000 in 1916, when the estate tax was first instituted, to $60,000 in 1942, then to $175,000 in 1981 and $600,000 in 1987) so that only a very small percentage of estates (typically on the order of one percent) have been subject to estate tax. Estate taxes on assets can be avoided altogether by setting up a trust fund with children or other heirs as beneficiaries (though provisions for such trusts were tightened up in the 1993 federal tax legislation). Moreover, gift exclusions allow a considerable amount of wealth to be passed on before death, which is exempt from taxation. In addition, there are the usual problems of underreporting, valuation of assets, and compliance with such a tax.

The estate tax system also has the provision that capital gains on assets are excluded from the tax basis. Realized capital gains (when an asset is sold) are counted as part of the income base in computing income taxes. However, if an asset is not sold and winds up in an estate, the capital gains are forgiven by the tax authorities. This loophole by itself more than compensates for the total revenue collected by the estate tax system. Given the history of the estate tax system in this country and the vested interest of the wealthy in maintaining the current system (not to speak of the estate planners and lawyers who profit from the system), it may be politically easier to institute a new wealth tax than to try to revamp the existing estate tax system.

Implementation of the Wealth Tax

A standard objection to new tax instruments is that they impose costly administrative complexities. The wealth tax seems immune from this concern. It would be fully integrated with the personal income tax: indeed, the same tax form could be used for both. The family would be required to list the value of all assets and debts on a new form (say, “Form W”). Verification of most of the assets and debts would be administratively easy to implement. Financial institutions now provide Form 1099 to the Internal Revenue Service (IRS) which lists interest payments. This could be modified to include the value of the accounts as of a certain date. A similar procedure could be applied to dividend forms. Moreover, financial institutions, which now provide the IRS with information on mortgage payments, could add the value of the outstanding mortgage. Other types of loans (and loan payments) could be similarly recorded by these institutions. Insurance companies could provide the IRS with statements on the value of life insurance equity (they already send these to individuals).

The two main stumbling blocks are the current market value of owner-occupied housing (and other real estate) and the valuation of unincorporated businesses. To address the former, families could, for example, be asked to estimate the current market value (as is now done in household surveys), or to list the original purchase price and date of purchase of their homes, while the IRS could use a regional (or locale-specific) price index based on housing survey data to update the value. For the small business problem, the simplest technique is to accumulate the value of individual assets invested in the business over time (these figures are already provided in Form C of the personal tax return). Another possibility is to capitalize the net profit figures (also provided on Form C), as the Swiss currently do.

Incentive Effects

Perhaps the strongest argument against direct wealth taxation is that it will inhibit savings and reduce capital investment. One direct implication of wealth taxation is that the (after-tax) return to capital will be lowered. Facing lower rates of return, potential investors may shift resources from savings to consumption. Moreover, by lowering the after-tax rate of return on financial assets, a wealth tax may encourage families to invest in non-financial assets—certain forms of real estate, artwork, luxury boats, and the like. This may result in shifts of household portfolios to unproductive uses.

Yet, as suggested above, one can reasonably argue the opposite case: that a tax on both income-yielding and non-income-yielding forms of wealth may induce households to shift to higher-yielding assets. In addition, some families may have a pre-determined savings goal, a specified amount of wealth they wish to accumulate over time. The imposition of wealth taxes may therefore increase their savings in order to meet that (after-tax) wealth objective.

One way to evaluate the relative importance of these conflicting effects is to compare the average savings rates of countries with direct wealth taxes with those without such taxes. Using OECD national accounts data, I calculated average savings rates of households over the period 1980-1990. Among both sets of countries, there is large variation in household savings rates. Among those with a wealth tax, savings rates range from 4.0 percent for Spain to 10.5 percent for Switzerland. Among those without a wealth tax, figures range from 3.6 percent for the UK and 5.7 percent for the United States to 11.6 percent for Japan. The average savings rates among countries with a wealth tax is 8.0 percent, and that for countries without a wealth tax is 9.8 percent—an insubstantial difference in savings rates. At least on the surface, then, there appears to be no compelling evidence that wealth taxation would strongly inhibit savings.

Concluding Remarks

Is this an opportune time to introduce a personal tax on wealth holdings? The facts point to an enormous level of inequality in household wealth in this country today. The 1980s have also witnessed falling marginal tax rates on income, particularly for the rich and very rich. Though the 1993 tax law did raise the marginal income tax rates on the very rich, those rates are still considerably lower than at the beginning of the 1980s (and much lower than in the 1960s). Considerations of equity argue for basing taxation on ability to pay, and I have argued that the combination of annual income and the current stock of wealth provides a better gauge of the ability to pay taxes than income alone. Moreover, there is no evidence from other advanced economies that the imposition of a modest direct tax on household wealth has had any deleterious effect on personal savings or overall economic growth. Indeed, there are arguments to the contrary that such a tax may induce a more efficient allocation of household wealth, away from unproductive toward more productive uses. Finally, the possibility that such a levy might promote capital flight is not borne out by the facts—consider Switzerland, a net importer of capital (at least since 1970).

My calculations show that such a tax structure would yield an average tax rate on household wealth (as of 1989) of 0.2 percent—less than the loading fee on most mutual funds. Previous work indicates that the real rate of return on household wealth over the period from 1962 to 1989 averaged 3.36 percent per year. Thus, such a tax structure would reduce the average yield on household wealth holdings by only six percent. Even the top marginal tax rate of 0.30 percent would reduce the average yield on personal wealth by only nine percent. These figures suggest that disincentive effects on personal savings would be very modest indeed. Moreover, as suggested above, there are arguments that personal savings might actually rise as a result of the imposition of a wealth tax.

A simulation of a Swiss-style scheme for wealth taxation also suggests that a combined income-wealth taxation system may, indeed, be more equitable than our current income tax system. As I indicated earlier, the wealth tax is progressive with respect to wealth; its incidence would also fall more heavily on older households than younger ones (older households are wealthier), on married couples than singles (the former are also richer, on average), and on white individuals than non-whites (white families are much wealthier than non-white ones).

Would such a tax be popular? No additional taxes are likely to be cheered by the American populace. But the wealth tax proposed here would significantly affect only a very small percentage of the population. Only three percent of American families would see their overall personal tax bill (from a combined income and wealth tax system) rise by more than ten percent. Fully 78 percent would see their tax bill rise by no more than one percent. Such a tax might, as a result, elicit widespread political support.

I estimate that such a tax would generate roughly $43 billion in new revenue in 1995. This is not a large amount, representing some three percent of total federal tax receipts. This additional revenue could, however, be critical. In the current political environment, an extra 40 billion dollars per year could provide the fiscal latitude to enact important legislative initiatives, or help preserve programs that are now threatened. To relieve current budgetary pressures, and make equity improvements, this would be a very large advance.