As of November 2019, Senator Elizabeth Warren of Massachusetts is one of the front runners in the Democratic primary contest to determine the party’s 2020 presidential nominee. She has released detailed proposals for programs she would support as president. One initiative that has caught the attention of our California tax advisors involves proposed changes to the Internal Revenue Code (IRC) that would provide additional revenue to the federal government. Rather than expand the longstanding trend of taxing individual and business income, Senator Warren’s proposals would tax wealth and eliminate a major loophole with regard to the taxable value of inherited property.
What Is a Wealth Tax?
The Sixteenth Amendment to the U.S. Constitution, ratified in 1913, authorized Congress to impose an income tax at the federal level. This has been the primary source of tax revenue for the federal government ever since. The idea, for many, is that people with greater income would pay larger amounts of tax in order to benefit society as a whole. The IRS collects taxes on income, and on capital gains from the sale of assets.
Unlike income tax, which looks at how much a person earns in a particular year, a wealth tax would look at how much wealth a person has accumulated. A high net worth does not necessarily mean that a person has a high income, and vice versa. The New York Times notes that one of the richest people in the United States (and the world) has a net worth of about $84 billion, but an annual salary of only $100,000, plus capital gains on assets he actually sells. Under current tax law, he only pays tax on that income.