[SoftTalker]

Yes it is.

($1,000 * 1%) + ($5 * 20%) = $11 tax due on $5 income. They are separate taxes but he's expressing them both in terms of an effective income tax rate.

In this case, since you owe more taxes than income you've earned, you'll need to sell off some of your wealth to pay up.

If you have no income at all, but do have wealth, then you get a division by zero error so I do get that it's maybe absurd to frame it this way, but the premise of TFA was "how to convert between a wealth tax and an income tax" and the context is a presumed 5% return on capital.

[philipallstar]

But when you liquidate assets you... pay tax! Capital gains tax. So you liquidate, pay capital gains, and use the proceeds to pay a wealth tax?

[SoftTalker]

In the contrived example, the 5% return was "risk free" so assume it was something like CDs, no capital gains.

[golem14]

CDs generate interest, which is taxed as income, higher than capital gains. Just sayin ...

[SoftTalker]

Right, but you don't trigger additional taxable income by redeeming them to pay your wealth tax, unlike e.g. selling stock shares.

[Dylan16807]

It's not an effective tax rate, it's an absurd parody of an effective tax rate.

If that $5 of ""income"" is actually capital gains, then it won't be taxed very highly, and adding another 20% is fine. The discussion of 37% + 4.5% + 20% is misdirection.

If that $5 is honest to goodness income, then on average you're also getting $5 of unrealized capital gains, which means you're not paying $2 on $5, you're paying $2 on $10. Or maybe you realize part of the gains and you're paying somewhere between $2 and $3 on $10. A much smaller impact, and that's only if someone in a medium tax bracket with 20x their income in wealth is even affected by the wealth tax at all.