A tiny fraction of New Jersey families hold a staggering amount of the state’s wealth, according to a new 50-state report by the D.C.-based research organization the Institute on Taxation and Economic Policy (ITEP).
The wealth inequality highlighted by the holdings of these extremely wealthy families limits economic opportunities for everyday New Jerseyans, and both reflects and exacerbates racial inequality.
Tax policy is a critical way that policymakers could start addressing this inequality, but right now federal and state tax codes barely tax extreme wealth at all, and instead often favor sources of income that are derived from wealth.
“Runaway wealth inequality is an enormous problem for New Jersey, but the good news is that we have the tools to fight it,” said Sheila Reynertson, Senior Policy Analyst at New Jersey Policy Perspective (NJPP). “Closing the tax loopholes that have helped build so much of this nation’s extreme wealth is a commonsense way that lawmakers in Trenton and D.C. can combat inequality and promote opportunity.”
The report defines extreme wealth as the wealth held by households with net worth over $30 million. This tiny fraction of families holds more than one in four dollars of wealth in the U.S. ITEP estimates that total extreme wealth will reach $371 billion this year in New Jersey and $26 trillion nationally.
Other key findings:
- A nationwide tax of 2 percent on wealth over $30 million could have raised nearly $415 billion if it were in effect this year, including $9 billion from extremely wealthy New Jerseyans.
- This tax would affect just 1 in 330 households in New Jersey, or 0.30 percent of the population. Nationally it would affect 0.25 percent of the population.
- Ninety-two percent of extreme wealth is owned by white, non-Hispanic families.
- A large share of New Jersey’s extreme wealth – 40 percent – is held in the form of unrealized capital gains, meaning investment income on which these families have yet to pay tax (and may never pay tax under current law). Nationally, this share is 43 percent.
- A tax on the stock of unrealized gains in 2022 could be expected to raise between $529 billion and $3.9 trillion nationally depending on the tax rate chosen and the percentage of gains deemed to be realized. This includes between $3 billion and $54 billion from extremely wealthy New Jerseyan. The report models six different policy options for taxing unrealized gains.
In addition to a wealth tax or a tax on unrealized capital gains as outlined above, the report identifies other ways to strengthen the federal taxation of extremely wealthy people, including:
- taxing increases in wealth annually as an asset grows (mark-to-market taxation)
- taxing increases in wealth before they are passed on to heirs (ending stepped-up basis)
- eliminating the tax preference that makes tax rates on realized capital gains lower than on income from work
- strengthening the estate tax
- creating an inheritance tax
All of these are viable policy options for lawmakers looking to curb wealth inequality.
At the state level, tax codes are already overwhelmingly regressive when it comes to income – and are even more lopsided when it comes to wealth. State lawmakers seeking to fix this imbalance in New Jersey’s tax code also have several readily available options as identified in the report, such as:
- implementing new or increased current top income tax rates
- raising rates on realized capital gains income
- enacting progressive taxation of real estate wealth
- strengthening taxation of corporate profits and
- reinstating or enhancing estate and inheritance taxes
“A very small number of households hold a staggering share of nationwide wealth, and they’ve been able to grow their fortunes in part because our tax system asks very little of them,” said Carl Davis, ITEP’s research director and an author of the report. “New and strengthened taxes on extreme levels of wealth could dramatically reduce the runaway inequality we face today.”