Wealth taxes are increasingly popular. Across Europe, wealth tax proposals are par for the course in economic policy debate. In the U.S., recent proposals include Sen. Elizabeth Warren’s Ultra-Millionaire Tax Act and the 2025 Billionaires Income Tax Act. While it sounds appealing to “tax the rich”, the U.S. should resist the apparent quick-fix of taking money from the wealthy to plug gaps in public finances.
With rising wealth inequality and governments struggling to fund their programs, politicians and voters want the wealthiest to provide a larger share to the public. The wealthy are less excited, with people like Bernard Arnault, France’s richest man, warning against it. One criticism is that wealth taxes would make some billionaires leave – something proponents consider acceptable.
However, the bigger problem may not be billionaires leaving. Wealth taxes would see Western states destroy wealth for the sake of consumption. A lot of wealth is not liquid, but held in assets such as stocks or real estate. To pay taxes, the wealthy may have to turn some of these into liquid funds, selling stocks or houses. Supporters of a wealth tax might not care, but they should. If someone has to liquidate wealth in order to pay taxes, it could mean that next year, there is less wealth for the state to tax. The tax erodes its own base.
For friends of such a tax, this may still be acceptable. After all, the state can convert private into public wealth. It could use the new funds to build roads, schools or hospitals. It could fund research or expand the production of renewable energy. But the issue is Western governments seem unwilling to do that. Instead, they are more interested in subsidizing the consumption of some groups.
Germany can be an instructive example. Germany’s debt brake prohibited the federal government from borrowing, which, after the dual shocks of the Covid-pandemic and Russia’s invasion of Ukraine, has come under scrutiny. Germany, the story went, could not invest enough into its future since it could not borrow enough money. The current government has loosened the debt brake and taken up a record sum of 500 billion euros in debt, which economic advisors called “both necessary and urgent.” This large amount would give the government the necessary freedom to invest in its infrastructure and its defense capabilities.
This sounds fine on paper. But reality diverged quickly from that ideal. Germany’s council of economic advisors – the Wirtschaftsweisen – were positive in the spring of 2025, but by November, they had begun criticizing how the government spent its new funds. While Germany is using some of the new debt for infrastructure and defense, less than half of these expenses are actually in addition to what was planned in the budget. Instead of turning the new funds into additional investments, Germany is using the debt to keep investment levels steady, while shifting the original funds towards things such as higher pensions for mothers. This, the country’s economic council argues, limits the positive economic effects of the new debt.
Instead of funding economic efficiency, Germany is subsidizing consumption for a few privileged groups. The issue becomes even starker as the German ruling coalition is having internal, intergenerational fights over its new pension legislation, which would increase the pressure on the young to fund Germany's expensive pension-system. Germany spends 41% of its budget on social expenditures: half of that goes to pensions. With demographic shifts, the pressure is set to increase. Since the median voter is also getting older, reducing pensions will become even more politically unfeasible – not just in Germany, but across the developed world. Governments will struggle to acquire funds for their pension systems. With pensions and social assistance as political priorities, the money from wealth taxes may likely end up there.
Wealth taxes allow the state to cover up irresponsible spending. As long as European governments do not reform their welfare schemes, a wealth tax will only erode wealth for the sake of short-term consumption. Retired people will likely not invest the money they may receive, but spend it on consumption. In the private domain, everyone knows taking out a loan to go on vacation is bad financial planning. For governments, it seems like the most natural thing to do. Wealth taxes might be unproblematic if the money is spent on creating lasting public wealth or invested to boost economic efficiency. But as the example of Germany shows, the incentives to spend it on consumption may be too great for governments to resist.
Michael Haiden is a research associate at the University of Hohenheim, Chair of Economic and Social Ethics. He is a writing fellow with Young Voices, specialising in European politics and policy.
