Hoover Institution (Stanford, CA) — Even at low rates, proposed “billionaire wealth taxes” would function as massive tax increases on capital income, raising effective rates so high that the returns an investor needs to break even exceed most commonly achievable market returns, according to new research and a wealth tax calculator from a Hoover scholar.

Research Fellow Benjamin Jaros and William Dougan of Clemson University have developed a framework that translates any proposed wealth tax rate into its equivalent tax on capital income, given the prevailing risk-free rate of return. The framework can be applied to proposals at both the federal and the state level. In the paper, they illustrate the framework using wealth tax rates of 1, 2, 5, and 8 percent.

Using the 5 percent wealth tax rate proposed by Sen. Bernie Sanders and Rep. Ro Khanna, Jaros and Dougan find that such a tax is equivalent to a 52.5 percent tax on capital income.

The federal long-term capital gains rate is currently about 24 percent (the 20 percent top statutory rate plus the 3.8 percent Net Investment Income Tax). When combined with the wealth tax equivalent, the total effective tax rate on capital income rises to more than 76 percent.

The gap between what wealth taxes appear to cost and what they actually cost is at the heart of the research.

“Most Americans intuit that a 5 percent wealth tax would be a larger burden than a 5 percent income tax, but how much larger? This framework translates wealth taxes into something citizens and policymakers can actually evaluate, and the results are striking. Because that 5 percent is closer to a 50-percentage-point increase in a comparable income tax rate,” Jaros said.

While an income tax takes only a share of new gains, a wealth tax applies to everything an investor owns, every year, regardless of whether a single dollar of profit was generated. That structural difference is what causes a seemingly small wealth tax rate to translate into a dramatically higher equivalent burden on capital income. These recurring annual wealth taxes effectively consume and slowly shrink the taxpayer's principal over time.

The framework also calculates the pretax return an investor would need to break even under any given wealth tax. Under the Sanders-Khanna proposal, that threshold is 21.1 percent, about four times the risk-free rate and nearly triple the average total market return on invested capital.

To put that in context, only about half of publicly traded industry sectors currently generate returns high enough to clear that threshold, and the total market return on invested capital is roughly a third of what would be required. Those numbers illustrate the kind of barrier a federal wealth tax would impose on capital investment.

To help the public understand the impact of such taxes, Jaros has built the Hoover Wealth Tax Calculator, which allows users to input any wealth tax rate and see the comparable combined tax on capital income for their jurisdiction.

“A wealth tax rate on a ballot doesn't tell voters very much on its own. What the calculator shows is that a wealth tax works through two channels simultaneously: it reduces the value of what an investor already owns, and it raises the return needed to justify holding it. Those forces compound, and the calculator lets you see exactly how much for any rate, in any jurisdiction.”

Jaros and Dougan also document the international decline of wealth taxes. In 1990, twelve Organisation for Economic Co-operation and Development (OECD) countries, including Germany, Austria, Denmark, France, and Sweden, levied wealth taxes. By 2025, only four OECD countries still did: Colombia, Norway, Spain, and Switzerland.

Jaros and other Hoover scholars previously evaluated the proposed California billionaire tax. It is not included in this analysis because it is a one-time, nonrecurring measure.

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For coverage opportunities, contact Jeffrey Marschner, 202-760-3187, jmarsch@stanford.edu.