The Problem With How America Taxes the Wealthy and Why Current Proposals Fall Short

The United States income tax system is designed to be progressive, with higher earners paying higher rates. In practice, however, the wealthiest Americans have exploited structural gaps in the tax code to reduce their effective tax burden well below what ordinary wage earners pay. Research by Saez et al. (2025) found that the top 100 wealthiest Americans paid an average effective tax rate of just 22% between 2018 and 2020, compared to 45% for individuals whose wealth derived primarily from wages and salaries. The overall effective tax rate for the U.S. population was 30.2% during the same period, meaning that the ultra-wealthy paid less than the average American despite holding vastly disproportionate shares of national wealth.

The mechanism enabling this disparity is well documented. Ultra-wealthy individuals accumulate appreciating assets such as stocks, real estate, and private equity, whose value is not taxable until sold. Rather than selling, they borrow against these assets at low interest rates, generating tax-free liquidity while the underlying assets continue to appreciate. Upon death, the stepped-up basis provision eliminates accumulated capital gains entirely, allowing wealth to transfer across generations without ever being taxed (DC Fiscal Policy Institute, 2024). USC law professor Edward McCaffery, who coined the term "buy, borrow, die" in the 1990s, described this strategy as a legally sanctioned framework that allows the ultra-wealthy to live lavishly while their taxable income remains minimal (SmartAsset, 2022).Several policy responses have been proposed to address this inequity, but each introduces problems as significant as those it purports to solve. Direct wealth taxes, which are annual levies on net worth, have the most extensive real-world track record, and it is largely a record of failure. In 1990, twelve European nations levied individual wealth taxes; by 2019, all but three had abandoned them (Wikipedia, 2025). The OECD identified consistent themes driving these repeals: high enforcement costs, capital flight, widespread avoidance through exemptions, and revenues too modest to justify administrative burdens (Perret, 2021). France’s wealth tax contributed to the emigration of an estimated 42,000 millionaires between 2000 and 2012 before being repealed in 2017 (NPR, 2019).

Proposals to tax unrealized capital gains face equally serious objections. Because gains exist only on paper until an asset is sold, such taxes create acute liquidity problems, particularly for holders of illiquid assets like private businesses, farmland, and closely held real estate, who may owe taxes on wealth they cannot access without selling (Tax Foundation, 2025). Valuation of non-traded assets is notoriously complex and gameable, and would require a significant expansion of IRS enforcement infrastructure (Ave Maria School of Law, 2024). Constitutional challenges present an additional barrier, as the apportionment requirements of Article I may prohibit direct federal taxation of wealth, a question the Supreme Court has declined to resolve definitively (Kiplinger, 2024). What is needed is a framework that addresses the structural incentives driving income suppression without taxing assets directly, forcing asset liquidation, or requiring a costly new enforcement apparatus. This is precisely the opportunity gap the Grand Tax System fills.

The Current Federal Income Tax System

The United States federal income tax operates on a progressive, marginal rate system. Income is divided into segments called brackets, with each segment taxed at a progressively higher rate as income rises. Taxpayers are never taxed at their highest bracket rate on all of their income, only on the dollars that fall within that bracket. As of 2025, there are seven federal brackets for single filers:

Revenue share estimates are approximated from IRS income percentile data (Tax Foundation, 2025) and do not represent official IRS bracket-level reporting, which is not published.

The table above, however, only captures declared taxable income. The wealthiest Americans can legally suppress their declared income through asset accumulation and borrowing strategies, meaning they may not appear in the top brackets at all, despite holding enormous wealth. When taxpayers are sorted by net worth rather than declared income, a starkly different picture emerges:

Based on Saez et al. (2025) and U.S. Treasury Office of Tax Analysis (2024), measuring federal income, payroll, and allocated corporate taxes against comprehensive income. Rates would be substantially lower if measured against total wealth growth including unrealized gains.

Effective tax rates rise with wealth, until they don’t. At the very top, rates decline as asset-based wealth increasingly escapes the income tax system entirely. Total federal individual income tax revenue in 2022 was approximately $2.1 trillion, representing the single largest source of federal revenue (IRS, 2022); however, millions of dollars of "income" escape these taxes every year through strategic compensation package structures.

The Grand Tax System: A New Dimension of Progressivity

The core problem with taxing wealth directly is that it confuses the accumulation of assets with the ability to pay taxes. A direct wealth tax or unrealized capital gains tax demands payment on value that exists only on paper, forcing asset sales to generate the cash needed to pay the bill. This is economically destructive, constitutionally questionable, and administratively unworkable, as demonstrated by the failure of nearly every country that has attempted it. Penalizing ownership itself discourages investment, stifles entrepreneurship, and drives capital out of the country without meaningfully addressing the underlying inequity in how income is taxed.

The Grand Tax System takes a fundamentally different approach. Rather than taxing assets directly, it uses net asset value as a second dimension of the existing income tax bracket system. A taxpayer's accumulated wealth determines which set of income tax brackets applies to their earned income. Higher asset wealth results in higher marginal rates on income, but taxation never touches the assets themselves. Only declared income is taxed, at all times. This structure closes the core loophole in the current system. Under existing law, accumulating wealth in assets rather than declaring it as income carries no immediate tax consequence. Under the Grand Tax System, every dollar converted from income into personal assets increases a taxpayer's asset tier, raising the rate applied to all future income. Hiding income in assets becomes self-defeating rather than advantageous.

What Counts as an Asset?

For the purpose of determining asset tier, the following are included in a taxpayer's assessed asset value:

• Personal investment portfolios including stocks, bonds, and other financial instruments
• Primary residence equity above $500,000
• Single family homes regardless of ownership structure or rental status
• Private LLC and business ownership interests, valued at the taxpayer's estimated equity stake
• Vacation homes and other personal property above a de minimis threshold
• Inherited assets, which count toward asset tier assessment upon receipt

The following are excluded from asset tier assessment:

• Retirement accounts including 401(k) and IRA balances
• Primary residence equity below $500,000
• Assets held within active operating business entities, including commercial real estate, multi-unit residential properties, and business equipment

Illustrative Bracket Structure

The following tables demonstrate how the system works across three asset tiers. Tier 1 rates are modestly lower than current federal rates, reflecting the system's intent to reduce the tax burden on those with limited accumulated wealth. Rates increase with each subsequent tier. These percentages are illustrative only and have not yet been calibrated through microsimulation modeling.

Asset Tier 1: Net Asset Value $0 - $500,000

Asset Tier 2: Net Asset Value $500,000 - $1,500,000

Asset Tier 3: Net Asset Value $1,500,000 - $2,500,000

Tax rates shown in all three tables are illustrative only and are intended to demonstrate the structure of the system. Final rates will require calibration through microsimulation modeling to ensure the core incentive constraint is satisfied at all income and asset levels.

The System in Action: Three Taxpayers, Same Salary

Consider three individuals each reporting $100,000 in taxable income in the same year:

Taxpayer A is a recent college graduate renting an apartment with no meaningful assets. Their total assessed asset value is $0, placing them in Tier 1.

Taxpayer B is 40 years old with $100,000 in stock, a $60,000 car, and 70% equity in an $800,000 home. Their assessed assets break down as follows:

• Stock: $100,000
• Car: $60,000
• Home equity: $560,000, minus the $500,000 primary residence threshold = $60,000 counted
• Total assessed asset value: $220,000, placing Taxpayer B in Tier 1 alongside Taxpayer A.

Taxpayer C also reports $100,000 in salary, but their lifestyle suggests significantly greater wealth. They own 100% equity in a $1,200,000 home, $700,000 in stock, two cars worth $100,000 each, and a $600,000 vacation home. Their assessed assets break down as follows:

• Home equity: $1,200,000, minus the $500,000 threshold = $700,000 counted
• Stock: $700,000
• Two cars: $200,000
• Vacation home: $600,000
• Total assessed asset value: $2,200,000, placing Taxpayer C in Tier 3.

Taxpayer A reports $0 in assets, placing them in Tier 1. They pay $14,399 in federal income tax, a modest reduction from the $16,914 they would owe under the current system. Taxpayer B has a total assessed asset value of $220,000, also placing them in Tier 1. They pay the same $14,399 as Taxpayer A, demonstrating that the $500,000 primary residence threshold successfully protects middle class homeowners from additional burden. Taxpayer C has a total assessed asset value of $2,200,000, placing them in Tier 3. Despite declaring the same $100,000 salary, they pay $19,795, nearly $5,400 more than Taxpayers A and B, without a single dollar of their assets being directly taxed.

All figures above are illustrative only. Because the bracket rates used in these calculations have not yet been calibrated through microsimulation modeling, the specific dollar amounts are not final and are intended solely to demonstrate how the tier system produces meaningfully different tax outcomes for taxpayers at different wealth levels.

Closing the Zero Income Loophole: The Minimum Income Floor

The asset tier system described above creates meaningful bracket pressure for taxpayers who declare income. However, it does not on its own address the most aggressive form of income suppression: reporting little to no income at all. A taxpayer sitting on $50 million in assets who declares a $1 salary is subject to a higher tier, but if there is no income to tax, the tier is irrelevant. The bracket pressure mechanism only works when income is being declared. For the ultra-wealthy who have structured their finances to avoid income declaration entirely, a complementary mechanism is needed. The Grand Tax System addresses this through a minimum income floor. In any given year, a taxpayer must declare a minimum taxable income equal to 40% of the total new asset value they acquired during that year. This floor applies only to genuinely new asset acquisitions and is not triggered by the passive appreciation of assets already owned. It ensures that the act of receiving compensation in the form of assets rather than income cannot fully substitute for income declaration.

What Triggers the Floor

The minimum income floor is calculated based only on assets newly acquired during the tax year. Two categories of asset gains are explicitly excluded to ensure the floor remains fair and realistic:

Unrealized capital gains on assets purchased in prior years. If a taxpayer's existing stock portfolio increases in value, that appreciation does not count as new asset acquisition and does not trigger the floor. The taxpayer did not receive new compensation; their existing assets simply grew.

Inherited assets received during the year. Inheritances are addressed through existing estate and gift tax mechanisms and represent a transfer of wealth rather than disguised income. Counting them toward the floor would be both duplicative and punitive.

What does trigger the floor is the receipt of genuinely new assets, whether that is stock-based compensation, newly purchased property, or other asset acquisitions that represent compensation or income conversion rather than organic appreciation.

The Floor in Practice

Consider two examples at opposite ends of the wealth spectrum. A first-time homebuyer puts a $100,000 down payment on their first home. This represents $100,000 in new asset acquisition, triggering a minimum income floor of $40,000 for the year. For someone in the process of purchasing a home, a $40,000 declared income requirement is an entirely reasonable and non-binding threshold. Any person in a financial position to make a $100,000 down payment is almost certainly already earning well above $40,000 annually. The floor creates no burden and no distortion for ordinary Americans making ordinary financial decisions.

Now consider an ultra-wealthy CEO who takes $10,000,000 of their annual compensation in company stock rather than salary in order to suppress their declared income. Under the current system this person may declare minimal taxable income despite receiving enormous economic value. Under the Grand Tax System, the $10,000,000 in newly acquired stock triggers a minimum income floor of $4,000,000. The CEO must declare at least $4,000,000 in taxable income for the year, which is then taxed at whatever tier their total asset value places them in. They are not forced to sell the stock. Their assets are not taxed directly. But the act of receiving $10,000,000 in compensation can no longer result in a near-zero income tax bill.

The contrast between these two examples illustrates the precision of the floor mechanism. It is effectively invisible to ordinary Americans going about their financial lives, while creating a meaningful and unavoidable tax obligation for those using asset accumulation as a deliberate income suppression strategy. Because the minimum income floor compels income declaration rather than taxing assets directly, it operates squarely within established federal taxing authority under the 16th Amendment. The government is not taxing the stock the CEO received, it is requiring that a portion of their compensation be treated as taxable income. This distinction gives the Grand Tax System a significant constitutional advantage over direct wealth taxes and unrealized capital gains proposals, both of which face unresolved legal challenges under the apportionment requirements of Article I.

Contingencies, Exceptions, and Anti-Avoidance Provisions

No tax system is complete without addressing the ways in which it might be gamed. The Grand Tax System has been designed with specific structural safeguards to close the most predictable avoidance strategies while preserving fairness for legitimate edge cases. This section outlines the key exceptions built into the system and the reasoning behind each.

The Primary Residence Threshold

A taxpayer's primary residence equity counts toward their assessed asset value only above a threshold of $500,000. The first $500,000 of primary residence equity is excluded from assessment entirely. This threshold exists to ensure that ordinary homeowners building equity over a lifetime are not penalized for responsible financial behavior. Paying down a mortgage increases a taxpayer's equity, but it does not increase their liquidity or their capacity to pay higher taxes in any meaningful sense. The $500,000 threshold absorbs the equity of the vast majority of American homeowners without consequence, while still ensuring that taxpayers whose primary residence represents genuinely exceptional wealth contribute accordingly. It also means that the act of paying off a mortgage, while it does incrementally increase assessed asset value above the threshold, is never financially irrational since the interest savings from mortgage payoff far exceed any marginal increase in tax burden from a modestly higher asset tier.

The Single Family Home Rule and the Small Landlord Exception

Single family homes count toward a taxpayer's assessed asset value regardless of how they are owned or whether they are being rented out. This rule exists primarily to prevent wealthy individuals from shielding personal real estate holdings by wrapping them in LLCs or other legal structures. Without this rule, a taxpayer could hold dozens of single family properties inside shell companies and argue that none of them constitute personal assets. The bright-line rule eliminates that ambiguity entirely. This rule does create a potential burden for small-scale landlords who own one or two rental properties as a genuine income-generating business rather than as a wealth preservation strategy. To address this, taxpayers may file for a manual exemption reviewed on a case by case basis by the IRS. The exemption process places the burden of proof on the taxpayer to demonstrate legitimate small-scale landlord activity. This approach handles the vast majority of legitimate cases through a simple filing process while ensuring the default rule remains clean, unambiguous, and resistant to exploitation. The manual review process is not scalable enough to serve as a meaningful avoidance mechanism for those attempting to systematically shield real estate wealth.

LLC and Business Ownership

Private LLC and business ownership interests count toward a taxpayer's assessed asset value, valued at the taxpayer's estimated equity stake. This mirrors the treatment of publicly traded stock, where the ownership interest itself is the asset rather than the underlying holdings of the company. Wrapping personal assets inside an LLC does not shield them from assessment because the value of the LLC ownership interest reflects the value of what it contains. The one significant exception is for assets held within genuine active operating business entities. Commercial real estate, multi-unit residential properties, business equipment, and similar productive assets are exempt when they are part of a legitimately operating business. This exemption exists to incentivize productive economic activity and prevent the system from penalizing entrepreneurship and business investment. To prevent abuse of this exemption, the IRS will apply existing legal doctrines already embedded in tax law. The substance over form doctrine allows the IRS to look through the legal structure of a transaction to its economic reality, ensuring that personal assets cannot be reclassified as business assets simply by changing their ownership structure. The step transaction doctrine prevents artificially structured multi-step arrangements designed to manufacture a business purpose where none genuinely exists. Together these doctrines provide robust existing infrastructure for distinguishing genuine business assets from personal wealth disguised as business holdings.

Debt Treatment

The Grand Tax System assesses asset value on an equity basis throughout, meaning only what a taxpayer actually owns is counted. The portion of a home still owed to a lender is never counted because the taxpayer does not own it. Investment portfolios are assessed net of margin debt. LLC ownership interests are valued at equity, not gross asset value. Because the system is equity-based by design, no separate debt offset mechanism is needed. This structure also naturally closes debt-based avoidance strategies, since borrowing against assets does not reduce their assessed equity value once the loan proceeds have been deployed into other assets.

Inherited Assets

Inherited assets count toward a taxpayer's assessed asset tier upon receipt. A $10 million inheritance places the recipient in a higher asset tier just as a $10 million stock portfolio would, reflecting the reality that inherited wealth represents genuine financial capacity regardless of its origin. However, inherited assets are explicitly excluded from the minimum income floor calculation for the year they are received. The floor is designed to capture disguised income, and an inheritance is a transfer of wealth rather than compensation. Counting it toward the floor would create an unfair tax obligation on a transaction already subject to estate and gift tax mechanisms. The distinction is clear: inherited assets affect your tier permanently but do not trigger an income floor in the year of receipt.

Preventing Fraudulent Gift and Inheritance Reporting

The most predictable attempt to exploit the inheritance exclusion from the minimum income floor would be to disguise a purchased asset as a gift or inheritance. This risk is substantially mitigated by existing legal and administrative infrastructure. Large gifts and inheritances are already subject to mandatory reporting through gift tax returns and estate filings, creating clear paper trails. The IRS can challenge any transaction where reciprocal financial flows suggest a disguised purchase rather than a genuine gift, using the substance over form doctrine and existing arm's length transaction standards. The probate process for inheritances involves courts, attorneys, financial institutions, and title companies, all of whom generate independent documentation that makes concealment difficult. While no rule is perfectly airtight, the combination of existing reporting requirements, independent documentation, and established legal doctrines makes fraudulent gift and inheritance reporting a high-risk, high-complexity strategy with limited practical appeal.

Retirement Accounts

Retirement accounts including 401(k) plans and IRAs are excluded from asset tier assessment entirely. Annual contribution limits make it structurally impossible to use retirement accounts as a meaningful income suppression vehicle. No individual can accumulate enough retirement assets through annual contributions alone to distort their asset tier in a way that warrants including these accounts in the assessment. Excluding them also preserves strong incentives for retirement saving, which carries broad social and economic benefits independent of tax policy.

A Note on Enforcement

The Grand Tax System is designed to be enforceable primarily through existing IRS reporting infrastructure rather than requiring a significant expansion of enforcement capacity. Public stock portfolios are already reported through brokerage statements. Property values are assessed annually by county assessors. Business filings already capture ownership structures and equity positions. Retirement account balances are already reported to the IRS. The system aggregates data that already flows to the government through established channels, transforming an enforcement problem into a data aggregation problem. The most complex valuations, primarily private LLC interests, introduce a known and bounded margin of error through existing discount mechanisms, which the system accepts as a reasonable tradeoff for simplicity and enforceability.

Conclusion

The United States tax code was built for an economy where wealth and income were largely the same thing. In the modern era, they are not. The ultra-wealthy have learned to accumulate enormous economic power while declaring little to no taxable income, exploiting a structural gap that existing reform proposals have failed to close without creating problems of their own.

The Grand Tax System closes that gap without taxing assets directly, without forcing asset sales, and without the constitutional vulnerabilities that have plagued alternative proposals. By using asset wealth as a second dimension of the income tax bracket system and pairing it with a minimum income floor tied to new asset acquisition, it realigns incentives so that declaring income is always preferable to hiding it.

The stakes of getting this right extend beyond fairness. Artificial intelligence is rapidly transforming the labor market, concentrating the economic gains of automation among a small class of asset holders while displacing workers at scale. A tax system that captures wealth only when it is declared as income will become increasingly inadequate in a world where fewer people earn traditional wages. The Grand Tax System offers a foundation upon which a sustainable fiscal response to that future can be built.

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