Assuming that a wealth tax was passed, wouldn't the cause here be proper reporting and collection of said tax? You can declare illegal income on your federal return and pay taxes on it. They're not (in this hypothetical I guess?) asking what you're doing, just how much it's made you.
The issue is that people can change how they own things so they don't have to disclose. The law is necessarily public and people can adjust the way they structure ownership accordingly.
We see this all the time already. For example, Medicaid won't pay for your extremely expensive end of life care if you have assets. So, people give away their assets (to a trust, to family) before applying for Medicaid to cover their nursing home. It becomes a game of cat and mouse. People will adjust where they can to avoid tax.
This also already happens with income tax. For example, executive compensation is primarily provided as capital gains rather than income because it's much more tax efficient. Everything is in the open.
The other issue here is one of cost. The IRS has to fund the cost of analyzing filings and deciding to audit. This is very different from a post-judgement scenario.
And the added problem that the assets need to be valued to tax them - for liquid assets this will be much more challenging than income. Things like CGT or income tax happen at the same time as a transaction in dollars so they are easy to value. Wealth taxes would be open to gaming using the same process you describe here.
I don't think there's really any way around this. It just lowers the maximum amount you can extract via that tax. You have to tax at a rate low enough where it's not worth the expense to get around it in the first place. Maybe this is enough to make a wealth tax altogether not worth it federally (how much does it cost to set up a trust and transfer assets? can't be a lot), I don't know. But I think that's all part of the calculus of whether or not it's reasonable to institute the tax in the first place.
