A wealth tax (also called a capital tax or equity tax) is a tax on an entity's holdings of
asset
In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
s. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownership of
unincorporated businesses,
financial securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
, and personal trusts (a one-off levy on wealth is a
capital levy
A capital levy is a tax on capital rather than income, collected once, rather than repeatedly (regular collection would make it a wealth tax). For example, a capital levy of 30% will see an individual or business with a net worth of $100,000 pay a ...
).
[Edward N. Wolff, "Time for a Wealth Tax?"]
''Boston Review'', Feb–Mar 1996 (recommending a net wealth tax for the US of 0.05% for the first $100,000 in assets to 0.3% for assets over $1,000,000
/ref> Typically, liabilities (primarily mortgages and other loans) are deducted from an individual's wealth, hence it is sometimes called a net wealth tax.
Of 36 OECD countries, five had a personal wealth tax in 2017 (in 1990 there were 12 countries). One of its goals is to reduce the accumulation of wealth by individuals.
Critics note that a wealth tax can have the unintended consequence of wealthy entrepreneurs and businesspeople leaving the country and moving their wealth to a more tax friendly nation. It can also serve as a disincentive for entrepreneurs that wish to create wealth in the nation that implements this tax.
In practice
require declaration of the taxpayer's balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
(assets and liabilities), and from that ask for a tax on net worth
Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net ...
(assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. Wealth taxes can be limited to natural person
In jurisprudence, a natural person (also physical person in some Commonwealth countries, or natural entity) is a person (in legal meaning, i.e., one who has its own legal personality) that is an individual human being, distinguished from the bro ...
s or they can be extended to also cover legal persons
In law, a legal person is any person or 'thing' (less ambiguously, any legal entity) that can do the things a human person is usually able to do in law – such as enter into contracts, sue and be sued, own property, and so on. The reason for ...
such as corporations
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
. In 1990, about a dozen European countries had a wealth tax, but by 2019, all but three had eliminated the tax because of the difficulties and costs associated with both design and enforcement. Belgium, Norway, Spain, and Switzerland are the countries that raised revenue from net wealth taxes on individuals in 2019 with net wealth taxes accounting for 1.1% of overall tax revenues in Norway, 0.55% in Spain, and 3.6% in Switzerland for 2017.
According to an OECD study on wealth taxes, it is "difficult to firmly argue that wealth taxes would have negative effects on entrepreneurship. The magnitude of the effects of wealth taxes on entrepreneurship is also unclear".
A 2022 study found that wealth taxes are most likely to be implemented in the aftermath of major economic recessions.
Current examples
*Argentina: It is named Impuesto sobre los Bienes Personales. For assets held within Argentina, the tax is progressive from 0.50% on assets above ARS 3,000,000 (approx. at April 2021 official exchange rate) to 1.25% on assets above ARS 18,000,000 (approx. at April 2021 official exchange rate). For assets held outside of Argentina, the tax is progressive from 0.70% on assets above ARS 3,000,000 to 2.25% on assets above ARS 18,000,000.
*Colombia: On January 1, 2019, the Senate passed a tax reform bill that includes a lower corporate tax rate, a new tax rate for financial corporations, and a new wealth tax. For the years 2019, 2020, and 2021, the new wealth (equity) tax has been set at 1% for Colombian-resident individuals' worldwide net worth, and 1% for non-resident individuals on Colombian properties only, such as real estate, yachts, artwork, vessels, ships, and other assets with a net equity of at least COP5 billion (). Shares in Colombian firms, accounts receivable from Colombian debtors, some portfolio assets, and financial lease agreements are all exempt from the tax. Following the COVID-19 pandemic
The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identif ...
, the richest Colombians will face higher taxes on wages, dividends, and properties, as well as a one-time "solidarity levy" on high incomes. All of which is part of a new bill that was sent to congress in April 2021. The bill aims to collect about 25 trillion pesos () a year through new taxes and budget restraints, equating to 2.2 percent of GDP.
*France: Until 2017, there was a solidarity tax on wealth The solidarity tax on wealth (french: Impôt de solidarité sur la fortune or ISF) was an annual direct wealth tax on those in France having assets in excess of €1,300,000 (since 2011). on any net assets above €800,000 for those with total net worth of €1,300,000 or more. Marginal rates ranged from 0.5% to 1.5%. In 2007, it collected €4.07 billion, accounting for 1.4% of total revenue. From 2018 onwards, it has been replaced by a wealth tax on real estate, exonerating all financial assets.
*Spain: There is a tax called ''Patrimonio''. The tax rate is progressive, from 0.2 to 3.75% of net assets above the threshold of €700,000 after €300,000 primary residence allowance. The exact amount varies between regions.
*Netherlands: There is a tax called ''vermogensrendementheffing''. Although its name (''wealth yield tax'') suggests that it is a tax on the ''yield'' of wealth, it qualifies as a wealth tax, since the actual yield (whether positive or negative) is not taken into account in its calculation. Up to and including 2016, the rate was fixed at 1.2% (30% taxation over an assumed yield of 4%). From the fiscal year of 2017 onwards, the tax rate progresses with wealth. See Income tax in the Netherlands
Income tax in the Netherlands (personal, rather than corporate) is regulated by the ''Wet inkomstenbelasting 2001'' (Income Tax Law, 2001).
The fiscal year is the same as the calendar year. Before May 1 citizens have to report their income from t ...
. In addition to the ''vermogensrendementheffing'', owners of real estate pay a tax called ''onroerendezaakbelasting'', which is based on the estimated value of the real estate they own. This is a local tax, levied by the city council where the property is located.
*Norway: 0.7% (municipal) and 0.15% (national) a total of 0.85% levied on net assets exceeding 1,500,000 kr (approx. ) as of 2019. For tax purposes, the value of the primary residence is valued to 25% of the market value, secondary residences to 90% of the market value, while working capital such as commercial real estate, stocks, and stock funds are valued at various percentages. The Conservative Party
The Conservative Party is a name used by many political parties around the world. These political parties are generally right-wing though their exact ideologies can range from center-right to far-right.
Political parties called The Conservative P ...
, Progress Party and the Liberal Party
The Liberal Party is any of many political parties around the world. The meaning of ''liberal'' varies around the world, ranging from liberal conservatism on the right to social liberalism on the left.
__TOC__ Active liberal parties
This is a li ...
have stated that they aim to reduce and eventually eliminate the wealth tax.
*Switzerland: A progressive wealth tax that varies by residence location. Most cantons
A canton is a type of administrative division of a country. In general, cantons are relatively small in terms of area and population when compared with other administrative divisions such as counties, departments, or provinces. Internationally, t ...
have no wealth tax for individual net worth less than (approx. ) and progressively raise the tax rate on net assets with a top rate ranging from 0.13% to 0.94% depending on canton and municipality of residence.[Switzerland Wealth Tax](_blank)
Lowtax.net Wealth tax is levied against worldwide assets of Swiss residents, but it is not levied against assets in Switzerland held by non-residents.
*Italy: Two wealth taxes are imposed. One, IVIE, is a 0.76% tax imposed on real assets held outside Italy. The values of such assets are determined by purchase price or current market value. Property taxes paid in the country where the real estate exists can offset IVIE. Another tax, IVAFE, is 0.20% and is levied on all financial assets located outside the country, including, so far as the language seems to imply, individual pension schemes such as 401(k)s and IRAs in the US.
*Belgium: The Act of 7 February 2018, which is effectively a "wealth tax," imposes a 0.15% annual tax on financial instruments kept in securities accounts worth more than €500,000.
Historical examples
Ancient Athens had a wealth tax called eisphora (see symmoria The ''symmoria'' ( el, συμμορία, pl. συμμορίαι, ''symmoriai'') was a group of wealthy citizens in Classical Athens during the 4th century BC, assessed together for the purposes of taxation.
Fiscal ''symmoriai''
The ''symmoriai'' ...
), and a wealth registry consisting of self-assessments (τίμημα), limited to the wealthiest. The registry was not very accurate.
Iceland had a wealth tax until 2006 and a temporary wealth tax reintroduced in 2010 for four years. The tax was levied at a rate of 1.5% on net assets exceeding 75,000,000 kr for individuals and 100,000,000 kr for married couples.
Similar to Iceland, Denmark taxed household income above a certain exemption threshold, which was about the 98th percentile of the wealth distribution, until 1997. A dozen OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
countries imposed similar taxes until the 1990s, but the Danish wealth tax was the highest of its kind. Until the late 1980s, the marginal tax rate on wealth was 2.2 percent, leading to a very high rate on the return on wealth. After minimizing the tax for some years, the Danish government eventually abolished the tax altogether in 1997.
Some other European countries have discontinued this kind of tax in recent years: Germany (1997), Finland (2006), Luxembourg (2006) and Sweden (2007).
In the United Kingdom and other countries, property (real estate) is often a person's main asset, and has been taxed – for example, the window tax
Window tax was a property tax based on the number of windows in a house. It was a significant social, cultural, and architectural force in England, France, and Ireland during the 18th and 19th centuries. To avoid the tax, some houses from the pe ...
of 1696, the rates
Rate or rates may refer to:
Finance
* Rates (tax), a type of taxation system in the United Kingdom used to fund local government
* Exchange rate, rate at which one currency will be exchanged for another
Mathematics and science
* Rate (mathema ...
, to some extent the Council Tax
Council Tax is a local taxation system used in England, Scotland and Wales. It is a tax on domestic property, which was introduced in 1993 by the Local Government Finance Act 1992, replacing the short-lived Community Charge
The Community C ...
.
Proposed examples
USA
Senators Elizabeth Warren
Elizabeth Ann Warren ( née Herring; born June 22, 1949) is an American politician and former law professor who is the senior United States senator from Massachusetts, serving since 2013. A member of the Democratic Party and regarded as a ...
and Bernie Sanders
Bernard Sanders (born September8, 1941) is an American politician who has served as the junior United States senator from Vermont since 2007. He was the U.S. representative for the state's at-large congressional district from 1991 to 2007 ...
included a billionaire wealth tax in their campaign platforms during the 2020 United States Presidential Election
The 2020 United States presidential election was the 59th quadrennial presidential election, held on Tuesday, November 3, 2020. The Democratic ticket of former vice president Joe Biden and the junior U.S. senator from California Kamala Ha ...
. A February, 2020, poll found 67% of registered American voters supported a wealth tax on billionaires to reduce inequality, with support at 85% of Democrats, 66% of independent voters, and 47% of Republicans. While commentators have raised concerns:
France
In France, the left candidate at the presidential election of 2022, Jean-Luc Mélenchon, proposed to tax the wealth income as the labour income. Also he wanted to increase inheritance tax on the highest estates by accounting for all gifts and inheritances received throughout life and create a maximum inheritance of 12 million euros (i.e. 100 times the median net wealth).
Germany
In order to bridge the wealth gap between rich and poor in Germany, the Social Democratic Party of Germany
The Social Democratic Party of Germany (german: Sozialdemokratische Partei Deutschlands, ; SPD, ) is a centre-left social democratic political party in Germany. It is one of the major parties of contemporary Germany.
Saskia Esken has been the ...
called for a nationwide wealth tax to be reintroduced in 2019. According to the proposed tax reform, wealthy households would be required to pay an extra tax between 1% and 1.5%. A single household would need to pay 1% of their net worth on every euro surpassing €2 Million and married couple would have to pay for every euro surpassing €4 Million. A married household with a combined net worth of €4.2 Million would have to pay an annual wealth tax of €2,000. The proposition was eventually vetoed by the CDU/CSU
CDU/CSU, unofficially the Union parties (german: Unionsparteien, ) or the Union, is a centre-right Christian-democratic political alliance of two political parties in Germany: the Christian Democratic Union of Germany (CDU) and the Christian Soc ...
and therefore never again considered.
Concentration of wealth
In 2014, French economist Thomas Piketty
Thomas Piketty (; born 7 May 1971) is a French economist who is Professor of Economics at the School for Advanced Studies in the Social Sciences, Associate Chair at the Paris School of Economics and Centennial Professor of Economics in the Int ...
published a widely discussed book entitled ''Capital in the Twenty-First Century
''Capital in the Twenty-First Century'' (french: Le Capital au XXIe siècle) is a book written by French economist Thomas Piketty. It focuses on wealth and income inequality in Europe and the United States since the 18th century. It was initially ...
'' that starts with the observation that economic inequality is increasing and proposes wealth taxes as a countermeasure. The central thesis of the book is that inequality is not an accident, but rather a feature of capitalism, and can only be reversed through state interventionism. The book thus argues that unless capitalism is reformed, the very democratic order will be threatened. At the core of this thesis is the notion that when the rate of return on capital () is greater than the rate of economic growth () over the long term, the result is the concentration of wealth, and this unequal distribution of wealth causes social and economic instability. Piketty proposes a global system of progressive wealth taxes to help reduce inequality and avoid the trend towards a vast majority of wealth coming under the control of a tiny minority. This analysis was hailed as a major and important work by some economists. Other economists have challenged Piketty's proposals and interpretations.
France
In 2017, when introducing the fiscal reform of the solidarity wealth tax, the government of the French president E. Macron used the first argument of capital flight. The other argument stated by the comity of evaluation of reforms on wealth fiscalism was that the previous wealth tax was not enough progressive for the top 0.1% wealthier.
The “IFI” as the “ISF” are wealth tax thus they concerned high earners. A big part of people paying this tax are in the ninth decile of income distribution and the “IFI” represents one over two household in the wealthiest 0.01%. Therefore, in the general tax system, the “IFI” contributes, as did the ISF, to make the tax system more progressive. But this progressivity has limits: “the IFI represents on average 0.1% of income around the ninth decile and 1.2% of income of 0.1% of very well-off households in 2018. While the income tax rate under the ISF was stable overall, within the top 0.1% of income, the income tax rate under of the IFI declines for the wealthiest and falls to 0.6% for the top 0.01%.”
Broadly, this reform largely benefits to the 0.1% wealthier and did not make this wealth tax more progressive as it was supposed to be. In fact, it reduced the number of accountable people of wealth tax leaving the country but in term of investment, the gains of this reforms has been traduced in an increasing of dividend on capital earnings (37.4 billion from non-financial society had been paid) and not on direct investment on corporate (see “Capital flight”). In average and from different studies, those fiscal reforms benefited more to top-wealthier households. For Ben Jelloul and al. (2019), the reforms benefit for the top 1% more wealthier household with +5.5 point of disposable revenue. For Madec and al. (2019) it had affected on the top 2% of the wealthier households and for Pasquier and Sicsic (2019), the 5% of the top distribution perceived 57% of the gain of the fiscal reform.
Revenue
Revenue from a wealth tax scheme depends largely on the presence of net wealth
Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net ...
and wealth inequality
The distribution of wealth is a comparison of the wealth of various members or groups in a society. It shows one aspect of economic inequality or economic heterogeneity.
The distribution of wealth differs from the income distribution in that ...
within the target country. Revenue depends on the plan that is in place, but it generally can be modeled as , where t represents the tax rate and w is the amount of wealth affected by that tax rate. Many plans include tax bracket
Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, though that is rarer). Essentially, tax brackets are the cutoff values for taxable income—income past a certain point ...
s, where a certain portion of the individual's wealth will be taxed at a given rate and any wealth beyond that amount will be taxed at a different rate.
A small number of countries have been using wealth tax regimes for some time. Revenues earned from wealth tax schemes vary by country from 0.98% of GDP in Switzerland to 0.22% in France, for example.[OECD (2020), "Revenue Statistics: Comparative tables", ''OECD Tax Statistics'' (database),https://doi.org/10.1787/data-00262-en (accessed on 17 February 2020).] 2020 United States presidential candidate Elizabeth Warren claimed a wealth tax plan could generate 1.4% of GDP in revenue for the United States.
According to data from the Organisation for Economic Co-operation and Development
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organization, intergovernmental organisation with 38 member countries ...
(OECD), the revenues generated from wealth taxes account for about 0.46% of all tax revenue on average in 2018 for companies which have wealth tax schemes in place. However this varies from country to country, the highest would be that of Luxembourg
Luxembourg ( ; lb, Lëtzebuerg ; french: link=no, Luxembourg; german: link=no, Luxemburg), officially the Grand Duchy of Luxembourg, ; french: link=no, Grand-Duché de Luxembourg ; german: link=no, Großherzogtum Luxemburg is a small lan ...
where it accounted for 7.18% of total tax revenue in 2018, the lowest would be Germany where it accounted for 0.03% of total tax revenue in 2018.
Estimates for a wealth tax's potential revenue in the United States vary. Several Democratic presidential candidates in the 2020 election have proposed wealth tax plans. Elizabeth Warren
Elizabeth Ann Warren ( née Herring; born June 22, 1949) is an American politician and former law professor who is the senior United States senator from Massachusetts, serving since 2013. A member of the Democratic Party and regarded as a ...
, for example, has proposed a wealth tax of 2% on net wealth
Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net ...
above and 6% above . The conservative-leaning nonprofit Tax Foundation
The Tax Foundation is an American think tank based in Washington, D.C. It was founded in 1937 by a group of businessmen in order to "monitor the tax and spending policies of government agencies". The Tax Foundation collects data and publishes ...
estimates revenue generated by Senator Warren's proposal would total around over the next 10 years. Separate estimates from campaign advisors and economists Emmanuel Saez
Emmanuel Saez (born November 26, 1972) is a French, naturalized American economist who is Professor of Economics at the University of California, Berkeley. His work, done with Thomas Piketty and Gabriel Zucman, includes tracking the incomes of th ...
and Gabriel Zucman
Gabriel Zucman (born 30 October 1986) is a French economist who is currently an associate professor of public policy and economics at the University of California, Berkeley‘s Goldman School of Public Policy. The author of '' The Hidden Wealth o ...
put the revenue at about 1% of GDP per year, in alignment with USD revenue estimates. These estimates put Senator Warren's tax plan revenues at about in 2020. The sum of United States tax revenues in 2018 were in 2018, meaning the tax collected by this plan would be equal to 4% of current tax revenues. Additionally, the Tax Foundation estimates 2020 presidential candidate Senator Bernie Sanders
Bernard Sanders (born September8, 1941) is an American politician who has served as the junior United States senator from Vermont since 2007. He was the U.S. representative for the state's at-large congressional district from 1991 to 2007 ...
' wealth tax plan would collect between 2020 and 2029.
Previous proposals for a wealth tax in the United States had already existed. Senator Huey Long
Huey Pierce Long Jr. (August 30, 1893September 10, 1935), nicknamed "the Kingfish", was an American politician who served as the 40th governor of Louisiana from 1928 to 1932 and as a United States senator from 1932 until his assassination ...
of Louisiana proposed a wealth tax as part of his Share Our Wealth
Share Our Wealth was a movement that began in February 1934, during the Great Depression, by Huey Long, a governor and later United States Senator from Louisiana. Long first proposed the plan in a national radio address, which is now referred t ...
movement in 1934. Eileen Myles
Eileen Myles (born December 9, 1949) is a LAMBDA Literary Award-winning American poet and writer who has produced more than twenty volumes of poetry, fiction, non-fiction, libretti, plays, and performance pieces over the last three decades. No ...
proposed a net assets tax in her presidential campaign in 1992, as did Donald Trump
Donald John Trump (born June 14, 1946) is an American politician, media personality, and businessman who served as the 45th president of the United States from 2017 to 2021.
Trump graduated from the Wharton School of the University of Pe ...
during his presidential campaign in 2000.
A net wealth tax may also be designed to be revenue-neutral if it is used to broaden the tax base, stabilize the economy, and reduce individual income and other taxes.
Effect on investment
A wealth tax serves as a negative reinforcer
In behavioral psychology, reinforcement is a consequence applied that will strengthen an organism's future behavior whenever that behavior is preceded by a specific antecedent stimulus. This strengthening effect may be measured as a higher freq ...
("use it or lose it"), which incentivizes the productive use of assets (rather than letting assets accumulate without being used). According to University of Pennsylvania Law School professors David Shakow and Reed Shuldiner, "a wealth tax also taxes capital that is not productively employed. Thus, a wealth tax can be viewed as a tax on potential income from capital." Net wealth taxes can complement rather than replace gift taxes, capital gains taxes, and inheritance taxes to increase administrability and the effectiveness of enforcement efforts.
In their article, "Investment Effects of Wealth Taxes Under Uncertainty and Irreversibility," Rainer Niemann and Caren Sureth-Sloane found that the effects of wealth taxation on investment mainly depends upon the tax method employed and the broadness of the wealth threshold for taxation. Niemann and Sureth-Sloane found that, "Broadening the wealth tax base tends to accelerate investment during high interest rate periods." Caren Sureth and Ralf Maiterth concluded that wealth tax revenues from entrepreneurs may decrease in the long term and the revenue from a wealth tax may be negative if the wealth taxation thresholds are too low.
Saez and Zucman are two economists that worked on the "Ultra-Millionaire Tax" proposed by Senator Elizabeth Warren
Elizabeth Ann Warren ( née Herring; born June 22, 1949) is an American politician and former law professor who is the senior United States senator from Massachusetts, serving since 2013. A member of the Democratic Party and regarded as a ...
. In their paper, "Progressive Wealth Taxation," they assert that a potential wealth tax in the United States needs necessary parameters to limit detrimental effects on investment. One parameter is a high wealth threshold to limit direct taxation on small business and entrepreneurship. The academic literature on the effects of wealth taxation on investment incentives are inconclusive in the United States; Saez and Zucman assert there are three reasons wealth taxes in European countries are weak comparisons to the United States when analyzing potential effects on investment. First, they claim tax competition
Tax competition, a form of regulatory competition, exists when governments use reductions in fiscal burdens to encourage the inflow of productive resources or to discourage the exodus of those resources. Often, this means a governmental strategy ...
between European countries allows for individuals to avoid taxation by allocating assets to a different country. Reallocating assets to avoid taxation is more difficult in the United States because tax filings apply equally to United States citizens no matter the country of current residence. Second, low exemption thresholds caused liquidity problems for some individuals who were on the lower end of wealth taxation thresholds. Third, they contend European wealth taxes need modernization and improved methods for systematic information gathering.
Further proponents for a wealth tax claim it could have positive effects on investment in the United States. Some extremely wealthy people use their assets in unproductive ways. For example, an entrepreneur could generate much higher returns (though could conversely lose much more capital operating on leverage) than a wealthy individual with a conservative investment such as United States Treasury Bonds.
A wealth tax could lead to negative effects on investment, saving, and economic growth. In the article, "Economic effects of wealth taxation," Kyle Pomerleau states, "A wealth tax, even levied at an apparently low annual rate, places a significant burden on saving." The degree of this impact on savings and investments is reliant on the openness of the United States economy. A wealth tax would shrink national saving and increase foreign ownership of assets. The potential decrease in national savings leads to a decrease in capital stock. An estimate from the Penn Wharton Budget Model indicates that if the revenue from the wealth tax proposed by Elizabeth Warren were used to finance non-productive government spending, GDP would decrease by 2.1 percent by 2050, capital stock would decrease by 6.5 percent, and wages would decrease by 2.3 percent. Some opponents also point out that redistribution through a wealth tax is an inherently counterintuitive way to foster economic growth. Richard Epstein, a senior fellow at the Hoover Institution, contents, "The classical liberal approach wants to simplify taxation and reduce regulation to spur growth. Plain old growth is a much better social tonic that the toxic Warren Wealth Tax."
Housing and consumer debt
Unlike property taxes that fall on the full value of a property, a net wealth tax only taxes equity (value above debt). This could benefit those with mortgages, student loans, automobile loans, consumer loans, etc.
Criticisms
There are many arguments against the implementation of a wealth tax, including claims that a wealth tax would be unconstitutional (in the United States), that property would be too hard to value, and that wealth taxes would reduce the rate of innovation.
Capital flight
A 2006 article in ''The Washington Post
''The Washington Post'' (also known as the ''Post'' and, informally, ''WaPo'') is an American daily newspaper published in Washington, D.C. It is the most widely circulated newspaper within the Washington metropolitan area and has a large nati ...
'' titled "Old Money, New Money Flee France and Its Wealth Tax" pointed out some of the harm caused by France's wealth tax. The article gave examples of how the tax caused capital flight
Capital flight, in economics, occurs when assets or money rapidly flow out of a country, due to an event of economic consequence or as the result of a political event such as regime change or economic globalization. Such events could be an increas ...
, brain drain, loss of jobs, and, ultimately, a net loss in tax revenue. Among other things, the article stated, "Éric Pichet
Éric Pichet (born in 1960) is a French economist and a post-graduate professor at KEDGE Business School. His main areas of expertise include market finance, monetary economics, fiscal economics, corporate governance and fiscal governance.
Biogr ...
, author of a French tax guide, estimates the wealth tax earns the government about a year but has cost the country more than in capital flight since 1998."
In fact the wealth tax named "Impôt sur les Grandes Fortunes" (IGF) tax on great wealth"had been created in 1980, then suppressed in 1986 before finally being reintroduced in 1988 under the name “Impôt de Solidarité sur la Fortune” (ISF) solidarity tax on wealth" In 1999 a new higher tax category was added which increased the money collected from 0.09% of GDP in 1990 to 0.16% in 2004.
For example, in 2003, 370 ISF’s accountables people left France and it continued to grow year by year except between 2010 and 2011 when the tax threshold has been raised and accountable people were discarded from it. This capital flight only decrease after 2015 and in 2017 when the French government announced that it will suppress this tax. After the reforms implementation, there were only 163 departures of wealth tax people in 2018
The capital flight was one of the argument to reforms the wealth tax. After 2017, in the financial law of 2018, the new wealth tax was introduced with other tax reforms. The fiscal reform thus included a unique forfeit tax on saving, combined with the replacement of ISF by the IFI “Impôt sur la Fortune Immobilière” (IFI) which reduce the wealth tax to real-estate propriety only and finally a decrease of the corporate tax. This argument of capital flight takes its roots on an economic theory, the runoff theory. By decreasing the wealth tax, the wealth households are supposed to come back inside the country to invest and thus raised the GDP growth which will have effect on all the population by reducing unemployment and boost the economy. In France, the fiscal reform did not have the expected effects of runoff. In fact, the capital flight due to wealth tax household leaving only represented 0.3% and 0.5% of the total amount of money collected by the solidarity tax on wealth, between 2004 and 2015. On the other hand, this decrease of the wealth tax represented an income loss of 2.9 billion for the state
In term of investment, there were fewer invest in real-estate from people accountable of wealth tax. However, this movement could be explained more by the increase in household income, the low level of interest rates on mortgage loans and the general dynamics of the real estate market than by a sale, on the part of wealthy households, of property subject to the IFI for the benefit of investments in transferable securities, therefore the result in investment on corporate are not significant. Moreover, the fiscal reform on wealth tax had an insignificant level at the macroeconomic level for the corporate funds. For example, in 2020 for the non-financial society, the part of listed and non-listed share has been lower from the average of the previous period 2001-2019. It is also hard to measure the effect on corporate investment because of the Covid-19 crises which caused a shut-down of the economy in 2020.
Valuation issues
In 2012, the ''Wall Street Journal
''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
'' wrote that: "the wealth tax has a fatal flaw: valuation. It has been estimated that 62% of the wealth of the top 1% is "non-financial" – i.e., vehicles, real estate, and (most importantly) private business. Private businesses account for nearly 40% of their wealth and are the largest single category." A particular issue for small business owners is that they cannot accurately value their private business until it is sold. Furthermore, business owners could easily make their businesses look much less valuable than they really are, through accounting, valuations and assumptions about the future. "Even the rich don't know exactly what they're worth in any given moment."[The Problem with a Wealth tax, Wall Street Journal](_blank)
January 11, 2012
Examples of such fraud and malfeasance were revealed in 2013, when French budget minister Jérôme Cahuzac
Jérôme André Cahuzac (; born 19 June 1952) is a French surgeon and former politician who served as Minister of the Budget at the Ministry of the Economy and Finance under President François Hollande from 2012 to 2013. A former member of ...
was discovered shifting financial assets into Swiss bank accounts in order to avoid the wealth tax. After further investigation, a French finance ministry official said, "A number of government officials minimised their wealth, by negligence or with intent, but without exceeding 5–10 per cent of their real worth ... however, there are some who have deliberately tried to deceive the authorities." Yet again, in October 2014, France's Finance chairman and President of the National Assembly, Gilles Carrez, was found to have avoided paying the French wealth tax (ISF) for three years by applying a 30 percent tax allowance on one of his homes. However, he had previously converted the home into an SCI, a private, limited company to be used for rental purposes. The 30 percent allowance does not apply to SCI holdings. Once this was revealed, Carrez declared, "if the tax authorities think that I should pay the wealth tax, I won't argue." Carrez is one of more than 60 French parliamentarians battling with the tax offices over 'dodgy' asset declarations.
Moreover, this problem of wealth devaluation is undermined by the administration itself. For example, in France in 1999, the government introduced the notion of “the measured application of the tax law”. But this application of the law is mostly reserved for the self-declared tax, like the wealth tax. Its mean that if there is a fraud in the declaration, there will be no sanction if the household concerned correct his mistake, even if it might have been done in purpose.
This flexibility granted to self-declared taxes is indeed unequal. In fact the other tax that concerned most of the households, like income taxes, can’t be self-declared and this fraud flexibility benefits only to the richer household. More broadly, this self-declaration tax has developed what the sociologist Alexis Spire called “tax law domestication”, which enable richest part of the population to employed fiscal specialist to optimize their declaration and minimize the amount of the wealth tax. Once again those opportunity of optimization, as the flexibility in sanctions are unequally distributed in the tax spectrum and thus in the different part of the population.
Social effects
Opponents of wealth taxes have argued that there is "an undercurrent of envy in the campaign against extremes of wealth."[An Immodest Proposal: A Global Tax on the Super Rich, Businessweek](_blank)
October 23, 2013 Two Yale University
Yale University is a private research university in New Haven, Connecticut. Established in 1701 as the Collegiate School, it is the third-oldest institution of higher education in the United States and among the most prestigious in the wo ...
/London School of Economics
, mottoeng = To understand the causes of things
, established =
, type = Public research university
, endowment = £240.8 million (2021)
, budget = £391.1 millio ...
studies (2006, 2008) on relative income yielded results asserting that 50 percent of the public would prefer to earn less money, as long as they earned as much or more than their neighbor.
Many analysts and scholars assert that since wealth taxes are a form of direct asset collection, as well as double-taxation, they are antithetical to personal freedom and individual liberty. They further contend that free nations should have no business helping themselves arbitrarily to the personal belongings of any group of its citizens. Further, these opponents may say wealth taxes place the authority of the government ahead of the rights of the individual, and ultimately undermine the concept of personal sovereignty. ''The Daily Telegraph
''The Daily Telegraph'', known online and elsewhere as ''The Telegraph'', is a national British daily broadsheet newspaper published in London by Telegraph Media Group and distributed across the United Kingdom and internationally.
It was fo ...
'' editor Allister Heath critically described wealth taxes as Marxian in concept and ethically destructive to the values of democracies, "Taxing already acquired property drastically alters the relationship between citizen and state: we become leaseholders, rather than freeholders, with accumulated taxes over long periods of time eventually "returning" our wealth to the state. It breaches a key principle that has made this country great: the gradual expansion of property ownership and the democratisation of wealth."
Past repeals
In 2004, a study by the Institut de l'enterprise investigated why several European countries were eliminating wealth taxes and made the following observations: 1. Wealth taxes contributed to capital drain, promoting the flight of capital as well as discouraging investors from coming in. 2. Wealth taxes had high management cost and relatively low returns. 3. Wealth taxes distorted resource allocation, particularly involving certain exemptions and unequal valuation of assets. In its summary, the institute found that the "wealth taxes were not as equitable as they appeared".[Wealth Tax in Europe: Why The Decline? Institut de l'enterprise](_blank)
June 2004
In a 2011 study, the London School of Economics
, mottoeng = To understand the causes of things
, established =
, type = Public research university
, endowment = £240.8 million (2021)
, budget = £391.1 millio ...
examined wealth taxes that were being considered by the Labour party in the United Kingdom between 1974 and 1976 but were ultimately abandoned. The findings of the study revealed that the British evaluated similar programs in other countries and determined that the Spanish wealth tax may have contributed to a banking crisis and the French wealth tax had been undergoing review by its government for being unpopular and overly complex. As efforts progressed, concerns were developing over the practicality and implementation of wealth taxes as well as worry that they would undermine confidence in the British economy. Eventually, plans were dropped. Former British Chancellor Denis Healey
Denis Winston Healey, Baron Healey, (30 August 1917 – 3 October 2015) was a British Labour Party (UK), Labour politician who served as Chancellor of the Exchequer from 1974 to 1979 and as Secretary of State for Defence from 1964 to 1970; he ...
concluded that attempting to implement wealth taxes was a mistake, "We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle." The conclusion of the study stated that there were lingering questions, such as the impacts on personal saving and small business investment, consequences of capital flight, complexity of implementation, and ability to raise predicted revenues that must be adequately addressed before further consideration of wealth taxes.[Why was a wealth tax for the UK abandoned?: Lessons for the policy process and tackling wealth inequality, London School of Economics](_blank)
2011
Legal impediments
United States
: ''See also'' Pollock v. Farmers' Loan & Trust Co.; ''Sixteenth Amendment to the United States Constitution
The Sixteenth Amendment (Amendment XVI) to the United States Constitution allows Congress to levy an income tax without apportioning it among the states on the basis of population. It was passed by Congress in 1909 in response to the 1895 Sup ...
''
In part because a wealth tax has never been implemented in the United States, there is no legal consensus about its constitutionality. As evidenced below, much scholarly debate on the topic hinges on whether or not such a tax is understood to be a "direct tax," per Article 1, Section 9 of the Constitution, which requires that the burden of "direct taxes" be apportioned across the states by their population.
Barry L. Isaacs interprets current case law in the United States to hold that a wealth tax is a direct tax under Article 1, Section 9. Given the extreme difficulty of apportioning a wealth tax by state population, the implementation of a wealth tax in the United States would require either a constitutional amendment or the overturning of current case law. Unlike federal wealth taxes, states and localities are not bound by Article 1, Section 9, which is why they are able to levy taxes on real estate.
Other legal scholars have argued that a wealth tax does not represent a direct tax and that such a tax could be implemented in the United States without a constitutional amendment. In a lengthy essay from 2018, authors in the ''Indiana Journal of Law'' argued that "... the belief that the U.S. Constitution effectively makes a national wealth tax impossible ... is wrong." The authors noted that in the 1796 Supreme Court decision for ''Hylton v. United States
''Hylton v. United States'', 3 U.S. (3 Dall.) 171 (1796),. is an early United States Supreme Court case in which the Court held that a yearly tax on carriages did not violate the Article I, Section 2, Clause 3 and Article I, Section 9, Clause 4 ...
'', Supreme Court justices who had personally taken part in the creation of the U.S. Constitution "unanimously rejected a challenge to the constitutionality of an annual tax on carriages, a tax akin to a national wealth tax in that it taxed a luxury property." However, Alexander Hamilton, who supported the carriage tax, told the Supreme Court that it was constitutional because it was an "excise tax", not a direct tax. Hamilton's brief defines direct taxes as "Capitation or poll taxes, taxes on lands and buildings, general assessments, whether on the whole property of individuals or on their whole real or personal estate" which would include the wealth tax. Tax scholars have repeatedly noted that the critical difference between income taxes and wealth taxes, the realization requirement, is a matter of administrative convenience, not a constitutional requirement.
To prevent capital flight, proponents of wealth taxes have argued for the implementation of a one-time exit tax on high net worth individuals who renounce their citizenship and leave the country. An additional constitutional objection to such a tax could be raised on the grounds that it violates the takings clause of the Fifth Amendment, which prohibits the federal government from taking private property for public use without just compensation.
Germany
The Federal Constitutional Court of Germany
The Federal Constitutional Court (german: link=no, Bundesverfassungsgericht ; abbreviated: ) is the supreme constitutional court for the Federal Republic of Germany, established by the constitution or Basic Law () of Germany. Since its inc ...
in Karlsruhe found that wealth taxes "would need to be confiscatory in order to bring about any real redistribution". In addition, the court held that the sum of wealth tax and income tax should not be greater than half of a taxpayer's income. "The tax thus gives rise to a dilemma: either it is ineffective in fighting inequalities, or it is confiscatory – and it is for that reason that the Germans chose to eliminate it." Thus, finding such wealth taxes unconstitutional in 1995. In 2006, the Constitutional Court revised this decision on the so-called "Halbteilungsgrundsatz", stating that "From the property guarantee of the Basic Law, no generally binding absolute upper limit of taxation in the vicinity of a half division can be derived."[''Der Spiegel'']
Staat darf über 50 Prozent Steuern kassieren
March 16, 2006
See also
* ''Ad valorem'' tax
* ''Capital in the Twenty-First Century
''Capital in the Twenty-First Century'' (french: Le Capital au XXIe siècle) is a book written by French economist Thomas Piketty. It focuses on wealth and income inequality in Europe and the United States since the 18th century. It was initially ...
''
* Capital levy
A capital levy is a tax on capital rather than income, collected once, rather than repeatedly (regular collection would make it a wealth tax). For example, a capital levy of 30% will see an individual or business with a net worth of $100,000 pay a ...
(a one-off wealth tax)
* Economic inequality#Environment; addressing human overpopulation
Humans (''Homo sapiens'') are the most abundant and widespread species of primate, characterized by bipedalism and exceptional cognitive skills due to a large and complex brain. This has enabled the development of advanced tools, culture, ...
having similar effects to decrease wealth gap
* Endowment tax
Endowment tax is the taxation of financial endowments that are otherwise not taxed due to their charitable, educational, or religious mission. Endowments can be up to several billion dollars at some universities, some charitable foundations, and ...
* Inheritance tax
An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate (money and property) of a person who has died.
International tax law distinguishes between an es ...
* Land value tax
A land value tax (LVT) is a levy on the value of land (economics), land without regard to buildings, personal property and other land improvement, improvements. It is also known as a location value tax, a point valuation tax, a site valuation ta ...
* Panama Papers
The Panama Papers ( es, Papeles de Panamá) are 11.5 million leaked documents (or 2.6 terabytes of data) that were published beginning on April 3, 2016. The papers detail financial and attorney–client information for more than 214,488 ...
* Paradise Papers
The Paradise Papers are a set of over 13.4 million confidential electronic documents relating to offshore investments that were leaked to the German reporters Frederik Obermaier and Bastian Obermayer, from the newspaper'' Süddeutsch ...
* Progressive tax
A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...
* Property tax
A property tax or millage rate is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or net wealth, taxes on the change of ownership of property through inheri ...
* Redistribution of income and wealth
Redistribution of income and wealth is the transfer of income and wealth (including physical property) from some individuals to others through a social mechanism such as taxation, welfare, public services, land reform, monetary policies, confisc ...
* Tax exporting
Tax exporting occurs when a country (or other jurisdiction) shifts its tax burden (partially) abroad.
For example, if residents of country A hold shares of a company in country B, the government in B might want to levy an inefficiently high tax o ...
* Wealth concentration
The distribution of wealth is a comparison of the wealth of various members or groups in a society. It shows one aspect of economic inequality or economic heterogeneity.
The distribution of wealth differs from the income distribution in that ...
* Wealth inequality in the United States
Wealth inequality in the United States is the unequal distribution of assets among residents of the United States. Wealth commonly includes the values of any homes, automobiles, personal valuables, businesses, savings, and investments, as wel ...
* Welfare state
A welfare state is a form of government in which the state (or a well-established network of social institutions) protects and promotes the economic and social well-being of its citizens, based upon the principles of equal opportunity, equitabl ...
* World taxation system A world taxation system or global tax is a hypothetical system for the collection of taxes by a central international revenue service. The idea has garnered currency as a means of eliminating tax avoidance and tax competition; it has also aroused th ...
* Zakat
Zakat ( ar, زكاة; , "that which purifies", also Zakat al-mal , "zakat on wealth", or Zakah) is a form of almsgiving, often collected by the Muslim Ummah. It is considered in Islam as a religious obligation, and by Quranic ranking, is ne ...
References
Further reading
* Alexandra Thornton and Galen Hendricks, ''Ending Special Tax Treatment for the Very Wealthy'', Center for American Progress
The Center for American Progress (CAP) is a public policy research and advocacy organization which presents a liberal viewpoint on economic and social issues. It has its headquarters in Washington, D.C.
The president and chief executive officer ...
, 4 June 2019
Ending Special Tax Treatment for the Very Wealthy
The report summarizes the problem (gross inequality) and its cause ("special tax treatment for the xtremely rich), and specific "ways to rebalance the tax code
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
and put the economy
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
on a better track."
* Scheuer, Florian; Slemrod, Joel
Joel Brian Slemrod (born July 14, 1951) is an American economist and academic, currently serving as a professor of economics at the University of Michigan and the Paul W. McCracken Collegiate Professor of Business Economics and Public Policy at th ...
(August 2, 2020).
Taxation and the Superrich
. ''Annual Review of Economics''. 12 (1): 189–211.
*Scheuer, Florian; Slemrod, Joel. 2021.
Taxing Our Wealth
" Journal of Economic Perspectives.
{{DEFAULTSORT:Wealth Tax
Personal taxes
Taxation and redistribution
Tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...