Annual Wealth Tax: What Is It & How Would It Work?

This article is an excerpt from the Shortform book guide to "Capital in the Twenty-First Century" by Thomas Piketty. Shortform has the world's best summaries and analyses of books you should be reading.

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What is an annual wealth tax? How can it help increase wealth equality?

A wealth tax is an annual tax on a person’s net worth, which includes personal assets and ownerships. In the book Capital in the Twenty-First Century, Thomas Piketty says that a global wealth tax has many benefits, including the even distribution of economic resources.

Continue reading for an overview of the proposed wealth tax.

The Annual Wealth Tax

Piketty argues that since the 1980s, wealth inequality has made a troubling comeback that demands a response. His proposed solution is an annual wealth tax.

Such a tax would be progressive, with higher fortunes taxed at a higher marginal rate than smaller fortunes. The tax would be relatively low (perhaps 1-2% of net worth per year) and would be assessed annually on the combined net worth of market assets of all asset classes.

Piketty argues that the purpose of the tax would not be to raise revenue. Instead, its purpose would be to stop the unchecked accumulation of wealth by the global hyper-wealthy, end the financial opacity that allows so much of the world’s wealth to exist in the shadows, and bring some much-needed redistribution of economic resources.

Bringing Transparency to the Global Financial System

Piketty further argues that even the assessment of such a tax would bring great clarity to the global financial system, as it would show precisely who owns what assets, how unequally wealth is distributed, and what policies might be best suited to address it.

The assessment of the global wealth tax would require significant (and unprecedented) sharing of banking data between countries and cooperation between tax authorities. But this degree of transparency would enable countries to accurately calculate the net worth of each of their citizens—regardless of where those citizens choose to hold their assets—and significantly cut down on tax evasion.

The Necessity of Progressive Taxation

Piketty argues that progressivity—in which the tax burden falls most heavily on society’s wealthiest—is necessary for the tax system to function fairly. He writes that if the system were not set up this way and instead taxed the wealthy at lower rates and the poor at higher rates, middle and working-class people (who vastly outnumber the rich) would rightly begin to question why they should pay a higher share than the rich.

He warns that this could lead to the mass rejection of the very idea of a social state and a democratic society that has certain basic obligations to all its citizens.

Piketty notes that progressivity encompasses more than just the taxation rates applied to income. Progressivity also comes from the kind of income being taxed. In particular, taxes on wealth and inherited wealth (both of which are forms of capital income) especially could be powerful tools for scaling back the wealth inequality that has defined most developed countries for the past 40 years.

Annual Wealth Tax: What Is It & How Would It Work?

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Like what you just read? Read the rest of the world's best book summary and analysis of Thomas Piketty's "Capital in the Twenty-First Century" at Shortform .

Here's what you'll find in our full Capital in the Twenty-First Century summary :

  • An analysis of incomes, tax returns, and estate tax returns across different countries
  • How capitalism, by its nature, generates economic inequality
  • How inherited wealth will soon account for more than earned income

Katie Doll

Somehow, Katie was able to pull off her childhood dream of creating a career around books after graduating with a degree in English and a concentration in Creative Writing. Her preferred genre of books has changed drastically over the years, from fantasy/dystopian young-adult to moving novels and non-fiction books on the human experience. Katie especially enjoys reading and writing about all things television, good and bad.

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