Taxing the accumulated wealth of America’s ultrarich should be a top tax-reform priority for the next administration. To be sure, there are other low-hanging tax-policy fruit, such as reversing recent giveaways to businesses large and small, and putting the United States back on a path to share in historic global commitments to tax multinational firms more effectively. But the ultrarich, and billionaires in particular, have become perhaps the central story in U.S. political life. They dominate campaign spending, and have bought up influential spots in media, infrastructure, and the President’s Cabinet. Tax policy alone cannot repair that problem, of course. But it can do far more than it does today. Indeed, by one recent estimate from researchers at my home institution of University of California, Berkeley, the wealthiest billionaires pay only one-third the effective income tax rate that top earners faced under President Ronald Reagan.

The key word in that sentence is “effective.” Taxing the ultrarich isn’t likely to be as simple as just raising the tax rates they face. Because most of the wealth and power of the ultrarich derives from growth in the value of investment assets, we face a series of practical, legal, and even constitutional challenges in designing an effective tax that can reach a meaningful share of their stockpiles of earnings.

These challenges are solvable, as I explain in great detail in my recent report from the Roosevelt Institute, “How to Tax the Ultrarich.” Briefly, the United States should follow the path of other countries in instituting a tax on wealth, or alternatively an income tax on individuals’ annual accumulations of value that today escape the U.S. tax system. But to satisfy recent demands from the Supreme Court, that tax would not be imposed annually, but rather deferred until taxpayers choose to sell their property. At sale, the taxpayer would pay a higher rate, with the exact rate set so that the taxpayer cannot get any net “time value of money” benefits from deferral. (The time value of money is the extra investment gains taxpayers get from being able to set aside and invest money they would otherwise have paid in tax.) This same system can help to repair our currently dysfunctional regime for intergenerational transfers of wealth as well.

The Multiple Challenges to Taxing Wealth…

Let’s unpack the challenges in a bit more detail, then return to a more detailed version of the possible solution. The core problem we have in the income tax today, both in the United States and around the world, is that income taxes are largely built around what’s known as the “realization” principle. The realization principle is the notion that we should measure income from investment assets only when they are sold (or otherwise disposed of). That approach reflects early-twentieth-century limits on a tax administrator’s capacity to verify what assets a taxpayer owns and how much they are worth. And yet, even as early as 1909, some taxpayers did have to report and pay tax on annual changes in their investments’ value. For instance, that was how the U.S. Treasury implemented the definition of “income” under the corporate income tax, which predated the 1913 adoption of the modern individual income tax.

Unfortunately, though realization helps make an income tax easier to administer, it also empowers the richest households to choose when, and often whether, to pay tax. Most families don’t have the option to delay tax liability: They earn nearly all their income in salary, or they regularly sell what investments they hold to pay their bills. Among the richest few hundred thousand Americans today, though, household wealth grows faster than the household can realistically spend. These families have the luxury of waiting to sell their investment gains and putting off their tax liability indefinitely.

Indeed, another quirk of U.S. law makes this option even more appealing, allowing many families to choose to effectively never pay tax on their accumulated wealth. When an individual dies, heirs will owe no income tax on any accumulated value that occurred during the life of the decedent. Tax mavens call this rule the “step-up in basis.” Tech billionaires can hand the reins of their business to a next generation without anyone ever paying tax on the accumulated billions.

For these reasons, among others, it is unlikely we could get more traction on today’s massive inequality just by raising rates on capital gains and other investment income. If we raise rates, the wealthy will likely respond by selling a smaller share of their wealth. To be sure, researchers have found recently that many of the richest households do pay tax on a fair chunk of their investment gains, perhaps one-quarter or so overall. But if rates were significantly higher it is likely even that modest fraction would decline.

Other countries have tried to mitigate this failing of the income tax by also imposing an annual tax on household net worth: a wealth tax. Wealth taxes take away the choice of when to pay that income taxes offer to the most successful investors.

Critics of wealth taxes often raise the familiar practical challenges of taxing unsold investment gains, such as how to value privately held businesses. And indeed, though many U.S. states imposed general wealth taxes at the beginning of the twentieth century, the states mostly phased them out in favor of income taxes because in that era income was easier to measure than wealth. In the twenty-first century, though, many countries have invented new, and fairly successful, mechanisms for assessing private wealth. In the wealth-tax systems of Switzerland and Spain, for instance, private businesses are assessed primarily based on the assets and income reported on their financial statements. This process is similar to how private appraisers typically value a business.

“Mark-to-market” taxation offers a similar alternative to a wealth tax, but within the familiar income-tax system. Under a mark-to-market approach, a household just pays tax on annual changes in the value of its assets each year.. For the most part there have not been many efforts at broadly implementing a mark-to-market approach globally, though both the United States and many other countries have long included some mark-to-market components within their overall realization-based systems. In the United States, for instance, many financial derivatives are taxed under a mark-to-market regime.

Unfortunately, shortly after the Biden Administration signaled an interest in pursuing a broad mark-to-market tax approach for very wealthy households, the Supreme Court stepped in to try to derail that effort. In 2024, the Court decided Moore v. United States, a challenge to a 2017 provision under which certain U.S. investors were taxed immediately on their gains in active foreign businesses. (The levy was part of a Republican-led effort to shift how multinational businesses were taxed, which on net led to substantial savings for most businesses.) The Court upheld that provision, in essence by ruling that it was really a tax on the business’s income, and hence not a real mark-to-market tax. Some of the conservative justices also took the opportunity to warn in their decision that they would not be similarly welcoming of a genuine federal effort at a wealth or mark-to-market tax.

The hows and whys of federal constitutional limits on wealth and mark-to-market taxes are mostly unimportant for us here, but a little brief sketch might still be useful. The “Direct Taxes Clause” of the Constitution makes it very difficult for Congress (but not states) to impose direct taxes. The Constitution famously does not define what taxes count as “direct,” and that uncertainty, and the Court’s controversial resolution of it, led to the 1913 enactment of the Sixteenth Amendment. The Amendment states simply that taxes on income are not subject to the rules that otherwise apply to direct taxes.

The key takeaway from the Moore decision, then, is that a majority of the current Supreme Court justices would probably say that “income” only happens when an investment asset is sold or transferred. The 2017 provision at issue in the case met that test, because it was permissible for Congress to tax the individual owner on the realized income of the foreign business they owned, much as partnership income has always been taxed to individual partners. But a wealth or mark-to-market income tax would impose a levy at times other than sale, and so would have to meet the almost-impossible procedural hurdles the Direct Taxes Clause imposes.

…And the Best Way Around Them

These, then, are the multiple challenges facing efforts to reform the taxation of the ultrarich. Their wealth is mostly in investment gains. And the Supreme Court will likely impose a rule that constrains us to tax investment gains only at a time of the investor’s choosing. That choice allows investors to pocket the time value of money. And if investors can afford to wait until death, as the ultrarich generally can, they can escape tax altogether.

My argument is that it’s possible to get all the benefits of an annual wealth or mark-to-market tax even if Congress is allowed to impose taxes only when assets are sold. The essential step is to impose a variable tax rate at sale. This isn’t a particularly novel idea. We have been taxing capital gains at different rates, depending on how long the owner held the underlying asset, since the 1920s. In my proposal, instead of making rates depend just on the holding period, they would vary depending on how much appreciation the owner has. The more appreciated the asset, the higher the rate.

More precisely, when an investor sells an asset, the tax they pay will be the amount that exactly matches the benefits of deferral. For each asset, taxpayers calculate the amount they would have had left over if they had been taxed under a mark-to-market system. Then the tax they pay at sale is the amount that leaves them with just that amount. Figuring out the tax doesn’t require dozens of computations. With a little algebra, it’s easy to show that the right amount is the output of just one formula with three numbers in it: the sale price, the purchase price, and the tax rate.

With this approach, we should get all the revenue, equity, and incentive effects of a mark-to-market tax without the constitutional or valuation challenges of annual taxation. By imposing tax at sale, we have a ready measure of what assets are worth. With no net benefits from deferral available, households should have no tax incentive to hold onto their investments. In effect, investors would pay interest on their deferred mark-to-market tax, with the interest rate equal to the appreciation rate of the asset they sold. A Jeff Bezos, whose Amazon stock has shot into orbit at an average rate of more than 20 percent per year, would face an equally steep tax upcharge if he chooses to hold his stock for long periods.

This system would apply only to the very richest taxpayers. For example, we could exempt any person’s first $15 million in gains over their lifetime from interest charges. At that exemption level, only the wealthiest top 0.1 percent or so—the richest 340,000 out of 340 million Americans—would pay the extra tax.

Obviously, to really eliminate the tax benefit of waiting, we’d also have to get rid of the step-up in basis at death. Congress has twice before swapped out that rule with a “carryover” rule in which heirs inherit the tax liability of their parents. But both those efforts were quickly repealed because they didn’t actually accomplish much: The heirs had the same opportunity to just wait indefinitely as their parents had. Under my proposal, heirs would also inherit the accumulated interest charges of their parents, and the meter would keep running. Death offers no tax discounts.

Indeed, my proposal also can be combined with patches to the currently defunct estate and gift tax system. Infamously, it’s said that “only morons” pay the estate tax today. That’s not quite right. Although good tax lawyers all know how to dodge estate tax, the best methods take time and a little luck. Still, as New York University professor Lily Batchelder reports, the effective tax rate on inheritances today is in the low single digits, even though the official top rate is 40 percent. In recent work, I find that the wealthiest families have likely stashed more than $5 trillion in trusts that are permanently beyond the reach of the estate-tax regime. These are troubling facts if one believes, as I do, that intergenerational transfers of vast wealth are bad for the economy, bad for democracy, and undermine the ideal of equal opportunity for all. (There’s quite a bit of econometric evidence for all three of these, as my Roosevelt Institute report describes.)

What we might do instead is switch from the current estate tax to an inheritance tax that triggers when heirs sell their inherited property. Using my method, the heirs would face an interest charge that starts to run when they receive their inheritance, ensuring that they would have a healthy incentive to sell rather than holding onto their heirlooms forever. The Constitution even permits an annual wealth tax on heirs and the trusts wealthy families use currently as one of their best estate-tax avoidance tools.

Some might worry that these proposals would actually go too far and make investors over-eager to sell their assets, encouraging short-termism. But that too is a problem that we can design around. Another major element of my proposal would be that taxpayers can voluntarily make a down payment each year against their eventual tax liability at sale. Agreeing to down payments would cut off additional interest charges. This rule has the side benefit of bringing more revenue within the ten-year “budget window” Congress employs.

Similarly, as a transition rule, the proposal would allow anyone with untaxed gains on the effective date of the reform to voluntarily pay tax on those gains, whether their assets have been sold or not. The offer would be open for two years after enactment. Households that take up the offer would not have to pay any extra interest charges and could spread their tax payments over the next seven years. Since the top 0.1 percent of households today likely hold tens of trillions of dollars in untaxed gains, this transition rule has the potential to generate multiple trillions of dollars of revenue by spurring voluntary payments on assets that likely would never otherwise be taxed.

It’s true that we can’t solve all of today’s budget problems just by taxing the ultrarich. By a very rough estimate, all my proposals together might raise $10 trillion over the next ten years. That would pay, for example, for expanding the child tax credit and revitalizing the clean energy incentives of the Inflation Reduction Act. That may only be part of a needed domestic agenda, but at least it is $10 trillion that we’d otherwise have to find from other sources. Corporate tax reforms alone are unlikely to come close, given that today we raise only about half a trillion a year from corporations, or an estimated half of what my proposals would generate per year.

Reforming taxes on the ultrarich isn’t necessarily about “soaking” them or singling them out. When the very richest Americans are paying an all-in rate that is 20 percent lower than rates paid by the average household, as my Berkeley colleagues find, there is a lot of room to make the tax system fairer and more efficient. And when billionaires wield the outsized political power they command today, it is hard to defend a system in which they pay among the lowest of tax rates.