How to convert between wealth and income tax
4 hours ago
- #wealth tax
- #tax equivalence
- #income tax
- A wealth tax of 1% is equivalent to an income tax of about 20%, based on a conversion factor of 20 derived from a 5% risk-free rate of return.
- Politicians often underestimate the impact of a 'mere 1%' wealth tax, not realizing it equates to a significant income tax increase that could lead to among the highest tax rates globally.
- The conversion uses the risk-free rate because a wealth tax is a guaranteed liability, unlike investments that carry risk; this principle also applies to capital gains taxes.
- Adding a 1% wealth tax in a U.S. state could push combined marginal tax rates (federal + state + wealth tax equivalent) to over 60%, rivaling high-tax countries like Denmark.
- Educating politicians on this conversion is crucial, as the math is straightforward once the question of equivalence is acknowledged.