The United States has never imposed a federal annual tax on individual net wealth. Nevertheless, the concept has periodically entered the political debate, and in 2021 it was returning with renewed force.

On March 1, Senator Elizabeth Warren, together with Representatives Pramila Jayapal and Brendan Boyle, introduced the Ultra-Millionaire Tax Act of 2021, a proposal to impose an annual tax on household and trust net worth above specified thresholds. The Senate version, S.510, was formally introduced on March 1, 2021.

The proposal would impose a 2% annual tax on net worth between $50 million and $1 billion, together with an additional 1% surtax above $1 billion, producing an overall 3% annual rate on wealth above that threshold.

The proposed tax would apply to an exceptionally narrow segment of American households. According to the sponsors, approximately 100,000 households—or roughly the top 0.05%—would be affected.

The proposal was therefore not simply another increase in income taxation. It represented a fundamentally different approach: taxing the stock of accumulated wealth itself, regardless of whether that wealth had generated taxable income during the year.

That distinction is economically important.

Europe Provides a Warning

The United States would not be entering entirely uncharted territory.

A number of European countries historically imposed recurrent taxes on individual net wealth. The OECD has documented that the number of OECD countries imposing such taxes declined from 12 in 1990 to only four by 2017. Austria, Denmark, Germany, Finland, Iceland, Luxembourg, the Netherlands and Sweden were among the countries that had abolished their recurrent wealth taxes.

The reasons for repeal varied, but the OECD identified several recurring concerns: efficiency costs, administrative and compliance burdens, tax avoidance and evasion, limited revenues and the possibility of capital flight or fiscal expatriation.

This history deserves attention.

The question is not whether a wealth tax can be designed. Clearly it can. The more difficult question is whether the additional revenue ultimately justifies the distortions, administrative complexity and behavioural responses that such a tax can generate.

A Tax on Wealth Rather Than Income

The central economic difference is straightforward.

An income tax is imposed on the return generated by an asset. A wealth tax is imposed on the asset itself.

Consider a taxpayer holding $100 million of relatively conservative fixed-income investments. A 2% wealth tax would require $2 million annually before considering any income tax or other taxes.

If those investments generated a 5% annual return, or $5 million, the wealth tax alone would consume 40% of the gross return.

At the 3% rate applicable above the proposed $1 billion threshold, the same arithmetic would imply a 60% tax on a 5% gross return.

This is the concern behind the apparently modest percentage rates.

A tax rate of 2% or 3% may appear low when compared with an income-tax rate. But it is applied to the principal rather than the income generated by the principal.

The economic burden can therefore become substantial, particularly for assets producing relatively modest returns.

The Interaction With Other Taxes

The wealth tax would also not exist in isolation.

worth Americans already face federal income taxation, state and local taxes, capital-gains taxation and estate and gift taxes, depending on the structure and location of their assets.

A recurrent tax on net worth would therefore sit on top of an existing tax system rather than replacing it.

The result could be particularly significant for individuals whose wealth is concentrated in businesses, real estate or other assets that may appreciate substantially over time without producing corresponding annual cash income.

This creates an important distinction between wealth and liquidity.

A person can be extremely wealthy on paper while having relatively little annual cash flow available to satisfy a recurring tax liability. That can create pressure to sell assets, distribute capital or alter investment strategies simply to meet the tax obligation.

Investment and Savings Incentives

A recurring wealth tax can also change the incentives surrounding saving and investment.

If part of an individual’s accumulated capital is taxed every year simply because it exists, the after-tax return from holding that capital falls.

That may influence the decision to save rather than consume, invest rather than hold, or retain assets in one jurisdiction rather than another.

The OECD’s work on net wealth taxation specifically identifies the possibility of distortion and fiscal expatriation. It notes that wealthy individuals may change tax residence when faced with a high wealth-tax burden, particularly where neighbouring jurisdictions offer more favourable tax conditions.

This is where taxation becomes intertwined with wealth migration.

Capital does not exist in a vacuum. It is controlled by people, and wealthy people have a greater ability than most taxpayers to alter the jurisdiction in which they live, invest and structure their affairs.

Capital Flight and International Competition

Another concern is the effect on internationally mobile capital.

A wealth tax based on worldwide net assets creates an incentive to consider not only where assets are located, but also where the owner is tax resident.

The OECD has recognised this distinction, noting that residence-based wealth taxation can create incentives for wealthy taxpayers to relocate to lower-tax jurisdictions. It also identifies capital flight and the difficulty of valuing offshore and hard-to-value assets as important considerations in wealth-tax design.

For a taxpayer with $500 million or $1 billion in assets, geographic mobility is not theoretical.

The taxpayer may have access to multiple residences, international investment structures, family offices and professional advisers capable of evaluating alternative jurisdictions.

The result is that the tax base itself becomes more mobile.

Enforcement Would Be Central

The sponsors of the Ultra-Millionaire Tax Act clearly recognised this problem.

The proposal included substantial anti-evasion and enforcement provisions, including increased IRS resources, a minimum 30% audit rate for taxpayers subject to the wealth tax, new mechanisms for valuing hard-to-value assets and systematic third-party reporting.

The proposal also included a 40% exit tax on the portion of net worth above $50 million for U.S. citizens who renounced their citizenship in order to escape the tax.

That provision is particularly revealing.

It demonstrates that the architects of the proposal understood that wealth taxation creates a jurisdictional problem. If taxpayers can simply leave the tax base by moving abroad, the effectiveness of the tax is diminished.

The proposed response was therefore not merely to impose the tax, but to construct a much more comprehensive enforcement and reporting framework around it.

Wealth Tax and Financial Transparency

This proposal also fits within a broader movement toward greater transparency concerning internationally held wealth.

As I discussed in US Ends UBO Privacy, the United States had already been moving toward greater transparency concerning beneficial ownership and the structures through which financial assets are held.

The Ultra-Millionaire Tax Act contemplated building on information-exchange arrangements developed in the years following FATCA, including systematic third-party reporting.

This is an important development for international wealth management.

Tax policy, reporting obligations, beneficial ownership rules and cross-border information exchange are increasingly becoming part of the same regulatory ecosystem.

For internationally mobile individuals, the relevant question is no longer simply what the tax rate is in a particular country. It is also how that jurisdiction defines tax residence, what assets it taxes, how it values those assets, what information it receives from foreign institutions and what happens if the taxpayer decides to leave.

Wealth Migration as a Strategic Issue

The implications extend beyond taxation.

As discussed in US Taxes Set to Rise, the direction of U.S. tax policy was already becoming an important consideration for wealthy Americans.

Similarly, Rich Indians are Set to Leave examined how changes in taxation and regulation can contribute to decisions by wealthy individuals to consider alternative jurisdictions.

And in Options for Wealthy Nigerians, the importance of jurisdictional diversification for internationally mobile wealth was already apparent.

The underlying principle is the same.

When the tax burden changes materially, the optimal location for wealth may change with it.

The Broader Policy Question

There is a legitimate policy argument for addressing wealth inequality through taxation. The OECD itself has recognised that wealth inequality can justify consideration of additional taxation and that the design of a country’s overall tax system matters.

But there is an equally important question concerning how such taxation affects investment, savings, administration and international competitiveness.

The OECD’s analysis concluded that there are limited arguments for a net wealth tax where broad-based capital-income taxation and well-designed inheritance and gift taxes already exist, while also recognising that the appropriate policy depends on the structure of the overall tax system.

This suggests that the debate should not be reduced to whether wealthy people should “pay their fair share.”

The more difficult question is how much taxation can be imposed on mobile capital before the economic behaviour of the taxpayer changes.

That is the question policymakers ultimately cannot avoid.

Wealthy Americans Should Be Paying Attention

At the time this article was written, the Ultra-Millionaire Tax Act was a proposal, not law. It had been introduced in Congress on March 1, 2021 and referred to committee.

There was therefore no reason to assume that the proposal would become law in its proposed form.

But wealthy Americans should nevertheless pay attention to the direction of travel.

Tax legislation rarely develops in isolation. Once a principle becomes politically acceptable, subsequent proposals can build upon it. A wealth tax that begins at 2% may establish a precedent for broader taxation of accumulated capital, while the accompanying reporting and enforcement mechanisms can create infrastructure that remains useful for future tax measures.

For individuals with substantial international assets, waiting until legislation is enacted may also be the wrong time to begin thinking about alternatives.

Residence, citizenship, asset location, investment structures and succession planning are all matters that can require substantial time to evaluate.

Conclusion

The proposed Ultra-Millionaire Tax represented more than another tax increase on high-income Americans.

It represented a potential shift from taxing income generated by wealth toward taxing wealth itself.

That distinction matters.

A recurring charge against accumulated capital can affect investment decisions, liquidity, savings behaviour and the geographic location of both people and capital. The European experience demonstrates that wealth taxes have previously been introduced, modified and repealed for a variety of economic and administrative reasons.

Whether the United States ultimately adopts such a tax remains a political question.

For wealthy Americans, however, the strategic question is different.

What happens if the jurisdiction in which your wealth is located becomes progressively more expensive?

That is a question worth considering before—not after—the rules change.