How to convert between wealth and income tax

Summary

May 2026How do you convert between wealth and income tax? If a government imposes a wealth tax of 1%, what's the equivalent in income tax?It's clear from the way most politicians talk about the subject that they not only don't know the answer, but don't even realize there's such a question.In fact the conversion rate between them is about 20. A wealth tax of 1% is equivalent to an income tax of 20%.To convert between wealth and income tax rates, you have to divide by the rate of return on capital. The conversion rate of 20 comes from assuming that the risk-free rate of return is 5%. Historically that's an optimistic assumption. 4% might be more realistic. But 5% will do. [1]If we run through an example it will be clear how this works. Suppose you have $100, you're getting a 5% rate of return on this capital, and there's a 20% income tax. The 5% rate of return means at the end of one year your $100 has made you another $5. But you have to pay 20% of that, or $1, in income tax, so your after-tax income is $4. At the end of the year, after paying taxes, you have $100 + $4 = $104.Now suppose instead of a 20% income tax, there's a 1% wealth tax. At the end of the year your $100 has made you another $5, as before. But that year you had to pay 1% of your $100, or $1, in wealth tax. So at the end of the year you have $99 + $5 = $104.Each 1% of wealth tax is equivalent to 20% of income tax.It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing. [2]Politicians understand that an additional 20% income tax would be a lot. And indeed a US state that added 20% to its top income tax rate would have extraordinarily high taxes.Currently the country with the highest marginal income tax rate is Denmark, at 60.5%. The top US federal tax rate is 37%, and the median state income tax rate is Oklahoma's, which is 4.75%. So in the ...