How to Measure and Value Wealth for a Federal Wealth Tax Reform

Over the last several decades, wealth inequality has exploded, warping economic outcomes and limiting opportunity—for individuals and for the US at large. Sky-high income inequality and runaway income gains for the nation’s highest earners compound that wealth inequality and are insufficiently taxed under the current tax regime. Further, wealth in the US has always been heavily skewed by race. Since the country’s founding, US laws and customs have prevented Black and brown people from receiving fair wages and accruing assets, thereby creating and perpetuating today’s massive racial wealth gap. While our existing tax systems are ill-equipped to tackle these challenges, a well designed, high-end wealth tax could both help level the playing field and promote shared economic prosperity. The existing US income tax regime is cash realization–based and thus mostly takes a deferral-based approach to valuation of the economic income derived from wealth accumulations—an approach to valuation that can be politically fragile and extremely vulnerable to gaming. To achieve meaningful progressive taxation of the very wealthy, we should instead value and tax income and wealth in real time. Encouragingly, this strikes many as an obvious solution, and governments around the world are now considering wealth tax proposals. In the US, the 2020 presidential campaigns of Senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) brought the idea to the national stage. Their proposals to tax the wealth of multimillionaires and billionaires generated broad public support—even among many Republicans—and broadened the conversation over the future of progressive tax reform. Fundamental to the design of a wealth tax is how to measure and value taxpayers’ wealth. This report outlines a practical approach to doing so that can form the basis of federal wealth tax legislation. In general, the proposed wealth tax would value assets at their fair market value, the notional price at which the asset would voluntarily change hands between an informed buyer and seller, both operating at arm’s length. Beyond this general rule, assets and liabilities that are hard to value would be subject to additional rules for measuring fair market value. As this report will explain, although there are many difficulties involved in designing a valuation and measurement system, these difficulties are not inherently more challenging when it comes to designing and implementing a wealth tax than they are for designing and implementing an income tax. For either an income tax or a wealth tax, there is no perfect valuation or measurement system, and trade-offs must be made amongst potentially conflicting goals. Measuring wealth can sometimes be complicated and will require additional funding and capacity for the Internal Revenue Service (IRS) or other additional enforcement mechanisms, along with sometimes complex-seeming rules—but these administrative costs are low compared to the revenue at stake if valuation and enforcement are not taken seriously. Additionally, so long as a wealth tax is designed with a high exclusion threshold, only the wealthiest taxpayers—those with complicated wealth holdings and excellent legal and accounting help— would face any thorny valuation issues or compliance obligations. This report will explain the best approaches for valuing the most important categories of taxpayers’ wealth, both for forms of wealth that are relatively easy to value and for forms of wealth that are more difficult to value