Wealth tax

Taxation An aspect of fiscal policy
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Types Direct · Indirect · Ad valorem · In rem Capital gains · Consumption Dividend · Excise  · Georgist Gift · Gross receipts · Income Inheritance (estate)  · Land value Payroll · Pigovian · Property Sales · Sin · Stamp · Turnover Value-added (VAT) Corporate profit · Excess profits Windfall profits
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This article may be inaccurate in or unbalanced towards certain viewpoints. Please improve the article by adding information on neglected viewpoints, or discuss the issue on the talk page.

A wealth tax is generally conceived of as a levy based on the aggregate value of all household holdings actually accumulated as purchasing power stock (rather than flow), including owner-occupied housing; cash, bank deposits, money funds, and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts.^[1]

Contents 1 Existing net worth taxes 2 Details 3 Property tax 4 Arguments in favor 5 Arguments against 6 See also 7 Notes

[edit] Existing net worth taxes

•  France: A progressive rate from 0 to 1.8% of net assets. In 2006 out of €287 billion "general government" receipts, €3.68 billion was collected as wealth tax. See Solidarity tax on wealth.
•  Switzerland: A progressive wealth tax with a maximum of around 1.5% may be levied on net assets.^[2] The exact amount varies between cantons.
•  Liechtenstein
•  Netherlands: Interest income is taxed like a wealth tax e.g. a fixed 1.2% out of an assumed yield of 4% is a rate of 30%. See Income tax in the Netherlands.
•  Norway: Up to 0.7% (municipal) and 0.4% (national) a total of 1,1% levied on net assets exceeding NOK. 700,000.
•  India: Wealth tax is 1% on wealth exceeding Rs 30,00,000. However, non-residents returning to India are given exemption for seven years.

[edit] Details

Some governments require declaration of the tax payer's balance sheet (assets and liabilities), and from that ask for a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax is in place for both "natural" and in some cases legal "persons".

In France, the net worth tax on "natural persons" is called the "solidarity tax on wealth". In other places, the tax may be called, or be known as, a "Capital Tax", an "Equity Tax", a "Net Worth Tax", a "Net Wealth Tax", or just a "Wealth Tax".

Most of the governments levying this net worth tax are welfare states with a relatively high government spending to GDP rate.

Some European countries have abandoned this kind of tax in the recent years: Austria, Denmark, Germany (1997), Sweden (2007), and Spain (2008). On January 2006, wealth tax was abolished in Finland, Iceland and Luxembourg. In other countries, like Belgium or Great Britain, no tax of this type has ever existed, although the Window Tax of 1696 was based on a similar concept.

[edit] Property tax

In the United States, property taxes are annual taxes on the market value of real estate (ranging from about 0.4% in Alabama to 4% in New Hampshire) assessed both locally and by state governments to pay for local schools, as well as other services and infrastructure of various kinds. Local jurisdictions rely upon property taxes because real estate cannot be moved out of a jurisdiction, whereas paper wealth, income, etc. are more easily moved to other localities where they may be taxed less or not at all.

Over time, the property taxes add up significantly, such that over a generation of 25 years, a family may pay, with annual increases for inflation, up to 50% of a property's market value in taxes (though over the same period of time, the land value of the family's home could have increased substantially as well). Heavy property taxation and especially sudden, large increases in appraised valuations caused by infrequent or inaccurate appraisals are major causes of local political discontent in jurisdictions throughout the United States and in other countries (see California's Proposition 13).

Because property taxes have often been labeled unfair (other assets such as CDs, equities, or partnerships are taxed rarely, if at all), some properties, such as certain farms or forest land, may have reduced valuations. However, unlike the value of most other assets, the value of land is largely a function of government spending on services and infrastructure (a relationship demonstrated by economists in the Henry George Theorem). This relationship argues that the land value portion of property taxes, at least, satisfies the "beneficiary pay" criterion of tax fairness.

Non-profit (especially church) and government-owned properties are often exempt from property taxes.

[edit] Arguments in favor

There are four lines of argument in favor of a tax based on household wealth. The claims are that such a wealth tax improves the fairness of most tax systems, effectively raises government revenue, can further economic growth, and could have desirable secondary, social effects by reducing economic inequality.

Fairness: It is generally held that taxes should be commensurate with ability to pay, and the tax laws of nearly all nations reflect this to a greater or lesser extent. A household’s wealth, its net worth, along with its income, are usually considered the best measures of socioeconomic status and so ability to pay.^[1][3] Net worth is also a good measure of the extent to which a household has profited from the economic infrastructure provided by governments, that is all taxpayers. For instance, it can be claimed that a wealthy investor or business owner has profited more than average citizen from the public education (of the work force), roadways (for carrying on commerce), financial security for the elderly (consumers), a judiciary to enforce commercial agreements, financial regulation, government subsidies to and rescues of corporations, and so on.^[4][5]

It is argued that a wealth tax would improve the fairness of a tax system particularly to the extent that it replaces taxes that are less commensurate with ability to pay and profits from government-provided financial infrastructure. Sales and value added taxes are generally regressive as to income or wealth, since the wealthy spend a smaller fraction of their income and wealth than the middle class and poor.^[6] Real estate property taxes are generally regressive on overall wealth since the tax is a fixed percentage of the full value of the home.^[6] For young, middle-class families especially, this full value is often many times their net worth, while for the very wealthy it is generally a small fraction of their net worth.^[4]

Income taxes are often a progressive tax on "taxable income," but they generally do not tax unrealized capital gains from investments. Unrealized capital gains are likely the largest source of investment gains, but they are generally not defined as income for purposes of taxation. Therefore, for instance, an individual with a million dollars in an equity mutual fund may have the value of that holding increase $100,000 in a year, but can pay little or no taxes on that gain (in some cases even if he redeems shares from the fund). If Warren Buffett's unrealized capital gains were considered taxable income, his income tax rate would have been 0.13% rather than the 18% rate he reported for 2006.^[4][7]

Taxing unrealized capital gains directly is impractical since it would result in massive yearly swings in tax revenue for governments and even large payouts from the government in years that equity markets are down. However, a 1-2% tax on household wealth above an exempt amount of several hundred thousand dollars, (coupled with elimination of taxes on dividends, realized capital gains and estates) would amount to a roughly 25% tax on typical investment income/gains of 4-6% (including unrealized capital gains). This tax rate would be similar to typical tax rates on income from work or interest on savings accounts. The Netherlands imposes a 1.2% tax on net worth, which is justified as a 30% tax on an assumed ("deemed") investment return (income) of 4%.^[8]This justification could be used to answer criticisms that wealth taxes represent "double taxation" or "confiscation of property." In the United States the same construction could be used to defend a federal wealth tax as a form of income tax, which is authorized by the Constitution.

Effectively raise tax revenue: For instance, in the United States even a 1% tax on household wealth over one million dollars would raise an estimated $360 billion dollars, enough to cut the massive projected 2011 deficit by 30%.^[9] It is held that a low tax rate of 1 to 2% on net worth over the exempt amount makes it less likely taxpayers will be to take legal or illegal measures to evade the tax and so reduce the revenue collected. If the tax improves the economy and allows for government spending to improve economic infrastructure, the resulting economic growth could grow tax revenues further.^[4] In 1999, Donald Trump proposed a once off 14.25% wealth tax on the net worth of individuals and trusts worth $10 million or more. Trump claimed that this would generate $5.7 trillion in new taxes, which could be used to eliminate the national debt.^[10]

Economic growth: A wealth tax as it is generally applied would increase taxes on the wealthy and could allow for a reduction in income and regressive taxes on the poor and middle class. In that case, it would reduce concentration (condensation) of wealth in the very few. Since the poor and middle class tend to spend their extra dollars rather than invest them as the wealthy do, their greater after-tax income would act to increase gross domestic product, two-thirds of which is private consumption.^[11]

The reduction of wealth condensation in the investing class and bringing tax rates for investment returns closer to tax rates for work could reduce excessive investment and risky investment, which create investment bubbles, which in turn often contribute to the formations of some recessions.^[4][12] The reduction in regressive taxes, like property and sales taxes, would reduce the tax burden on newly unemployed workers, who owe these taxes despite having no income. This would help maintain their spending power and could prevent a recession from spiraling deeper.^[4][13] It has also been argued that a wealth tax could encourage the investment in assets that are more productive.^[1][3]

It is argued that more financial resources in the hands of the poor and middle class would improve the educational opportunities for their children. This would promote social mobility, mean more citizens reach their full potential of productivity, and so improve the economy. More economic equality has been correlated with higher levels of innovation.^[14] Increased government revenue from a wealth tax could be used to promote public investment in services like education, basic science research, and transportation infrastructure, which in turn improve economic efficiency. Increased government revenue from a wealth tax coupled with restrained government spending would reduce government borrowing and so free more credit for the private sector to promote business. A strong, steadily growing economy could in turn increase tax revenues further, allowing for more deficit reduction, and so on in a virtuous cycle.^[4]

Empiric evidence from the last twenty years shows that tax increases on the wealthy can be followed by a decade of strong economic growth, rising median household income, and federal budget surpluses,^[15] while tax reductions on the wealthy can be followed a decade of a weak economic growth, falling median household income, and rising budget deficits.^[4]

Social effects: A wealth tax as generally applied would reduce a country’s wealth condensation. In the United States the top 20% now own 85% of the nation’s wealth.^[3][16] It has been argued that reducing the condensation of wealth would in turn reduce the attendant condensation of political power.^[16] Epidemiologic studies have associated less income inequality with reduced rates of infant mortality, high school dropout, teenage pregnancy, obesity, mental health disorders, substance abuse, suicide, homicide, and imprisonment; and improved health, life expectancy, and societal trust.^[14][17][18]

[edit] Arguments against

A 2006 article in The Washington Post 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, brain drain, loss of jobs, and, ultimately, a net loss in tax revenue. Among other things, the article stated, "Eric Pichet, author of a French tax guide, estimates the wealth tax earns the government about $2.6 billion a year but has cost the co untry more than $125 billion in capital flight since 1998."^[19]

Another drawback of wealth taxes is that they generally have high management costs, for both the taxpayer and the administrating authorities, compared to other taxes. Per one study in the Netherlands the aggregated cost of the tax’s yield was roughly five times that of income tax.^[20]

[edit] See also

• Solidarity tax on wealth
• Tax
• Property tax
• Endowment tax
• Tax exporting

[edit] Notes