How to Convert Between Wealth and Income Tax -->

May 2026

How do you convert between wealth and income tax? If a government<br>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<br>that they not only don't know the answer, but don't even realize<br>there's such a question.

In fact the conversion rate between them is about 20. A wealth tax<br>of 1% is equivalent to an income tax of 20%.

To convert between wealth and income tax rates, you have to divide<br>by the rate of return on capital. The conversion rate of 20 comes<br>from assuming that the risk-free rate of return is 5%. Historically<br>that's an optimistic assumption. 4% might be more realistic. But<br>5% will do.<br>[1]

If we run through an example it will be clear how this works. Suppose<br>you have $100, you're getting a 5% rate of return on this capital,<br>and there's a 20% income tax. The 5% rate of return means at the<br>end of one year your $100 has made you another $5. But you have to<br>pay 20% of that, or $1, in income tax, so your after-tax income is<br>$4. At the end of the year, after paying taxes, you have $100 + $4<br>= $104.

Now suppose instead of a 20% income tax, there's a 1% wealth tax.<br>At the end of the year your $100 has made you another $5, as before.<br>But that year you had to pay 1% of your $100, or $1, in wealth tax.<br>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<br>about a "mere 1%" wealth tax. None of them would speak of adding a<br>"mere 20%" to the income tax rate, even though that's mathematically<br>the same thing.<br>[2]

Politicians understand that an additional 20% income tax would be<br>a lot. And indeed a US state that added 20% to its top income<br>tax rate would have extraordinarily high taxes.

Currently the country with the highest marginal income tax rate is<br>Denmark, at 60.5%. The top US federal tax rate is 37%, and the<br>median state income tax rate is Oklahoma's, which is 4.75%. So in<br>the median case, a state adding an additional 20% in income tax<br>would have a total marginal tax rate of 37% + 4.75% + 20%, or 61.75%.<br>[3]

In the median case, US state politicians talking about adding a<br>"mere 1%" wealth tax are talking about causing the residents of their<br>state to have the highest taxes in the world. That's not the sort<br>of decision you make lightly.

That's why I think few politicians currently understand<br>how to convert between wealth and income taxes. You can tell from<br>the way they talk about the subject that they don't understand the<br>momentousness of what they're proposing. But I'm optimistic that<br>we can teach them. The answer's not hard to understand, once you<br>realize the question exists.

Notes

[1]<br>It's possible to get a higher rate of return if you're willing<br>to risk losing your capital. But to convert<br>between tax rates you should use the risk-free rate of return,<br>because considered as an anti-investment, a wealth tax is absolutely<br>risk-free: you will absolutely owe the government that money. And<br>while you do have to put "risk-free" in scare quotes when talking<br>about returns, the kind of risks you're talking about now are the<br>almost apocalyptic kind that would make tax rates a moot point.

[2]<br>The same conversion rate applies to capital gains. The source<br>of the multiple is whether the money is taxed every year or just<br>once. Indeed it's the same math you'd use to calculate the value<br>of any income-generating asset.

[3]<br>You can deduct some state tax from your federal income taxes,<br>but there's a cap on how much you can deduct, which means in the<br>marginal case we simply add the two rates.

Thanks to Jessica Livingston,<br>Carolynn Levy, Jon Levy, Alex Tabarrok, and Harj Taggar for reading drafts of this.