In Switzerland, each Canton levies a tax on individual wealth along with income which can vary by municipality. A wealth tax is considered anathema in the United States and is viewed by some as unconstitutional. But a recent court ruling might change that.

An amendment to the US, constitution passed in 1909 and ratified in 1913 established the right for the US congress to impose an income tax at the Federal level. Article 16 states «The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.» There is no mention of a wealth tax, and the argument boils down to a single word. Realization.

US Court Case

In a recent court case,  Moore v USA, a Federal Court of appeals upheld a lower court ruling which dismissed a case brought against the United States. Shareholders being taxed on holdings challenged the legality of taxation through something called the Mandatory Repatriation Act. At the heart of the matter is that the plaintiffs said that without having sold shares or received a dividend, they were seen as having received income, which incurred a tax liability.

In an opinion piece in the «Wall Street Journal» (behind paywall), former SEC Chairman Christopher Cox, and accounting professor Hank Adler write the «ruling upends a bedrock principle of taxation, which is that to create taxable income, there must be a transaction or 'realization.' That’s what distinguishes an income tax from a tax on property or wealth.»

They go on to argue that the appreciation of an asset in contrast to a realized gain from its sale are two different things. An asset value is constantly changing leaving the measurement of that «income» at the whim of the government and Internal Revenue Service (IRS).

Income Vs Wealth Tax

To be sure, some assets are more difficult to value than others. In Switzerland, the value of an asset on the last day of the year is taken and declared in the tax submission for the wealth tax calculation. The tax rates vary by Canton.

In Switzerland, each of its Cantons sets a level for income tax and wealth tax. In the Canton of Schwyz, the income tax rate on one million Swiss francs of income was 21.92 percent in its lowest tax municipality, according to transforma consulting. The tax on a million francs of assets was 0.22 percent according to the study. 

Among the 26 Cantons, wealth taxes ranged from a low of 0.13 percent to 0.76 percent in Nidwalden and Basel-Stadt respectively.  Income tax rates were between 22.38 percent in Zug and 41.50 in Vaud. Both taxes are for one million of assets and income. 

Not Over Yet

The plaintiffs seek to appeal the ruling to the US Supreme court in which the notion of only realized income being subject to tax is considered. If the high court declines to hear the case, the lower court's ruling stands. 

In assessing what such a result would mean, the authors cite the dissenters of the ruling by the circuit court of appeals.

«Divorcing income from realization opens the door to new federal taxes on other types of wealth without the constitutional requirement of apportionment.»

A question arises as to what might be done with additional funds generated from such a tax. It certainly won't go very far to reduce the current US national debt which stands at $31.5 trillion, according to the US debt clock. 

At the end of last year, the wealthiest five Americans were: Elon Musk, Jeff Bezos, Bill Gates, Warren Buffet, and Larry Page, with a collective wealth of $748 billion, according to Forbes. Applying Switzerland's highest wealth tax of 0.90 percent for wealth over five million Swiss francs, applicable in Geneva, nets an extra $6.7 billion.  

That is roughly the sum Switzerland is paying to obtain 36 F-35A fighters, according to a 6.035 billion Swiss francs ($6.5 billion), procurement agreement signed last year.