California voters will soon decide whether to impose a one-time 5% tax on fortunes exceeding $1 billion, marking a fresh push to make billionaires pay their fair share. The appeal is obvious: as wealth concentrates and artificial intelligence creates new fortunes, the temptation to directly tax the ultra-rich grows stronger. But focusing on novel wealth taxes may actually backfire, diverting political energy from proven methods that could extract far more revenue from the existing system.
The numbers tell a striking story. The richest 1% of Americans paid roughly 31.5% of their income in federal taxes in 2024, down sharply from the turn of the century when they paid about 8 percentage points more. With the top 1% reporting over $3 trillion in adjusted gross income, those eight points represent nearly $300 billion in annual tax revenue that simply vanished. Yet the focus keeps drifting toward untested wealth taxes rather than restoring what was lost.
History offers a clear warning. Only three OECD nations still collect revenue from wealth taxes: Norway, Spain, and Switzerland. In 1990, twelve countries had them. The reason these taxes vanished? They generate minimal revenue, encourage capital flight, discourage entrepreneurship, and create nightmarish valuation problems for assets like privately held businesses. An OECD study concluded that wealth taxes make little sense when better alternatives exist.
The tax gap offers one glaring opportunity. A single IRS-based study estimated that collecting all taxes legally owed would yield $7.5 trillion over the decade from 2020 to 2029. That dwarfs any wealth tax projection. Yet enforcement remains perpetually underfunded while policymakers chase shinier policy targets.
Estate taxes present another avenue with proven track record. In 1972, 6.5% of the deceased paid estate taxes. By 2021, that share had collapsed to less than 0.1%. Revenue dropped from 0.4% to 0.08% of GDP even as inheritable wealth exploded. Restoring rates and reducing exemptions to early 2000s levels, eliminating the step-up basis loophole that zeroes out capital gains at death, and transforming the system into an inheritance tax levied on heirs would solve the double taxation complaint while raising substantial money.
Capital gains taxes sit far below income taxes. Currently topping out at 20% versus the 37% marginal rate on wages, they create a powerful incentive for high earners to repackage compensation as investment returns. Raising capital gains rates closer to income tax levels would address this distortion without inventing new mechanisms.
The corporate tax rate collapsed from 35% to 21% under the 2017 Tax Cuts and Jobs Act. Partially restoring it, combined with closing loopholes that allow companies to manipulate their legal status, would capture revenue that evaporated during recent "reforms." A proposal from the Biden administration to ensure multinational corporations pay a global minimum tax, before being abandoned by Trump, showed what coordinated action could accomplish.
The tax code bristles with exceptions, deductions, and preferences that collectively cost the government far more than any wealth tax could raise. Reducing these carve-outs broadens the tax base without raising statutory rates. A Yale Budget lab analysis found effective tax rates on the top 1% range between 45% and as low as 3% depending on income source. That variance itself is the problem.
None of this is technically complicated. The obstacles are political. One major party has defined itself around tax cuts while the other has lost conviction in aggressive redistribution. Building momentum for wealth taxes might actually drain the political capital needed to restore and repair existing levies that demonstrably work.
Author James Rodriguez: "Chasing billionaires with untested wealth taxes while ignoring $300 billion in lost annual revenue from neglected income taxes is policy theater, not serious governance."
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