A 5 percent annual tax on wealth above $1 billion would generate roughly $1.5 trillion over ten years but shrink the nation's economy, according to a new analysis from the Tax Foundation. The study, which models a proposal never implemented in the United States, finds that such a levy would reduce gross national product by 0.1 percent in the long run while triggering substantial evasion and dramatically altering investment flows. The tax would hit only the wealthiest 0.1 percent of filers, but its effects would ripple across the broader economy.
On a conventional basis, the policy would decrease the primary deficit by $1,506.9 billion over the budget window, the report states. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would fall below baseline projections, reaching 167.1 percent by 2056. Domestic saving would decline as wealthy households shift toward consumption, but foreign investment into the US would rise, preventing output from falling even as more returns flow to investors abroad. The tax would concentrate its burden on the top 0.1 percent of filers, slashing their after-tax income by nearly 10 percent over the long term.
The report emphasizes that a wealth tax rate this high would invite substantial avoidance behavior, with an estimated evasion rate of approximately 33 percent significantly reducing the revenue potential of the levy. According to the authors, wealth taxes impose a heavier burden than may be immediately obvious: an investor holding a long-term bond with a fixed 5 percent annual return would face the equivalent of a 100 percent income tax rate, since the wealth tax would consume all of that taxpayer's capital income. The analysis notes that comprehensive wealth taxes have never been enacted in the US, while most European nations have repealed theirs due to administrative complexities and disappointing revenue gains.
The Tax Foundation's modeling explains that the wealth tax would discourage saving among high-income taxpayers, driving significant declines in wealth from increased consumption. The smaller budget deficit would reduce federal government borrowing and interest payments to foreigners, but those gains would be offset by the shift in investment returns flowing abroad, producing the net 0.1 percent decline in GNP. The report cautions that the policy would almost certainly trigger large transitional effects, including dramatic swings in foreign capital flows and the trade deficit. The estimates don't account for the increase in compliance costs that would result from administering a wealth tax regime, meaning the true economic drag could be larger.
The authors project that the publicly held debt would remain on a downward trajectory relative to GDP compared to current projections, but the economic costs would persist. The wealth tax would lower GNP even as it prevents GDP from falling, a divergence driven by foreign investors claiming a larger share of returns on American capital. For the tiny slice of households affected, the income hit would be severe and sustained. The report's bottom line: a billionaire wealth tax can raise substantial revenue and cut deficits, but it comes with economic contraction, widespread evasion, and a permanent shift in who profits from American investment.