|An aspect of fiscal policy|
A wealth tax is generally conceived of as a levy based on the aggregate value of all household assets, 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. A wealth tax is a tax on the accumulated stock of purchasing power, in contrast to income tax, which is a tax on the flow of assets (a change in stock).
- 1 Details
- 2 Advantages
- 3 Disadvantages
- 4 Existing net wealth/worth taxes
- 5 Property tax
- 6 Globalisation
- 7 See also
- 8 References
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 persons 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 a "capital tax," an "equity tax," a "net worth tax," a "net wealth tax," or just a "wealth tax."
Some European countries have abandoned this kind of tax in the recent years: Austria, Denmark (1995), Germany (1997), Sweden (2007), and Spain (2008). In January 2006, wealth tax was abolished in Finland, Iceland (but temporarily reintroduced in 2010) and Luxembourg. In other countries, like Belgium and the United Kingdom, no tax of this type has ever existed, but the window tax of 1696 was based on a similar concept.
The United States Constitution prohibits any direct tax on asset holdings (as opposed to income tax or capital gains tax) unless the revenue collected is apportioned among the states on the basis of their population. Although a federal wealth tax is prohibited unless the receipts are distributed to the States by their populations, state and local government property tax amount to a wealth tax on real estate, and because capital gains are taxed on nominal instead of inflation-adjusted profits, the capital gains tax amounts to a wealth tax on the inflation rate.
There are many lines of argument in favor of including a tax based on individual net wealth. Variations in how the details of the particular net wealth tax is implemented, including whether there are exemptions and whether other taxes are lowered or flattened will have an impact. "Income conventionally is defined as the sum of consumption and any change in net worth. This definition highlights three likely bases for a tax: income, consumption, and net worth. Tax rates can be applied to essentially any base (or combination of bases) to raise the revenue that government requires."
According to the "beneficiary pay" criterion of tax fairness, a tax on property rights can be seen as a use fee. Specifically, protection of property rights is a primary purpose of government. Holders of property rights enjoy the existence of government more than those who hold no property rights do. This is also true of ownership interests or stock .
In 1999, Donald Trump proposed for the United States 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. A net wealth tax may also be designed to be revenue neutral as where it is used to broaden the tax base, stabilize the economy and reduce individual income and other taxes.
A wealth tax that decreases other tax burdens, such as income, capital gains, sales, value added and inheritance, increases the time horizon for investment and can increase the return on investments over that time. The increased time horizon of investment results from the competition for investment between the risk-free asset of modern portfolio theory, and commercial assets. The higher return on investment results from the removal of taxes on profits. More economic equality has been correlated with higher levels of innovation.
A wealth tax serves as a negative reinforcer ("use it or lose it"), which coerces the productive use of assets. 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." Because a net wealth tax can be the equivalent of an annual tax on imputed income, the capital gains, estate and gift taxes are not necessary.
When used to lower the income tax rates the combination provides incentives to business to make unproductive and risky investments. The ultrawealthy (the billionaires), who pay significant taxes on their income, would on average only pay net wealth taxes as if they realized a 7% or 8% return.
Job creation and Social Security reform
A wealth tax of 2% could replace the 15% payroll taxes and enable business to have more money to hire workers and increase employee consumer spending. Millions of jobs would be created with no government spending.[not in citation given] Using a wealth tax to fund Social Security and Medicare would also eliminate any short term need to reduce benefits.
Housing and consumer debt
A net wealth tax permits an offset for the full principal of any mortgage, student loan, automobile loan, consumer loan, etc. Thus, even with tax reform that eliminates income tax deductions for interest, taxpayers may be better off with a full credit for the amount of the debt for the net wealth computation. In the US, the net wealth tax offset for debt would be particularly helpful to restore a healthy housing market and help college graduates with unpaid student loans.
By unburdening the poor and middle class of taxation, while stimulating investment in commercial assets that create demand for labor, more financial resources in the hands of the poor and middle class would reduce their reliance on government delivery of social goods, such as improved educational opportunities for their children. That would promote social mobility, mean more citizens reach their full potential of productivity, thus improving the economy. 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.
Tax codes redistribute income, and over time, there is also some redistribution of wealth (even if it is entirely unintended). For example, each year, the US tax code redistributes income of $1.3 trillion in tax expenditures ("loopholes"). The bottom half of the United States had 3.6% of the net wealth in 1995, which was reduced to 1.1% in 2010, Over the same time frame the wealth of the top 10% grew to 75% of the wealth. The annual tax loopholes are twice the size of all the wealth owned by half the United States.
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, "Éric Pichet, author of a French tax guide, estimates the wealth tax earns the government about $2.6 billion a year but has cost the country more than $125 billion in capital flight since 1998." The concern about capital flight is lessened where a country such as the United States has worldwide tax jurisdiction and assets may be taxed wherever they are located. The problem of capital flight could also be solved by a proposed global agreement to tax all wealth at the same rate.
Some property such as real estate, automobiles or artwork cannot be sold piece-wise. As a result, a wealth tax on these assets creates the risk that a taxpayer would need to dispense of the entire property in order to obtain the capital necessary to pay the tax. This is disruptive and would deter ownership.
Valuation and accounting difficulties mean that wealth taxes systems have had higher management costs for both the taxpayer and the administrating authorities than other taxes. The problem can be solved (i) by demanding tax only from citizens whose net assets exceed a high threshold, which reduces the number of assets statements; (ii) by prioritising the investigation of claims so that those investigations expected to yield the greatest increase in revenue have highest priority; (iii) by only investigating when the projected cost of investigation is much smaller than the expected additional revenue; and (iv) by discouraging the illegal concealment of assets by taxing concealed assets at a much higher rate when discovered. Advances in access to internet databases over the last decade have made digital filing of tax returns more common and mandatory digital filing of combined wealth and income tax returns could result in automated review and administrative efficiency.
Existing net wealth/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.
- Spain: A progressive rate from 0.2 to 2.5% of net assets. The bottom value for wealth tax is €700,000.
- Iceland: Temporary wealth tax was re-introduced in 2010, for four years. A rate of 1.5% on net assets exceeding ISK 75,000,000 for individuals and ISK 100,000,000 for married couples.
- India: Wealth tax is 1% on net wealth exceeding 30 Lakhs (Rs 3,000,000). However, non-residents returning to India are given exemption for seven years.
- Netherlands: Interest income is taxed like a wealth tax, i.e. a fixed 30% out of an assumed yield of 4% is a rate of 1.2% imposed on assets in excess of €21,139 (2012). 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 750,000 as of 2012. From 2013, the bottom value for wealth tax is increased to NOK 870,000
- Switzerland: A progressive wealth tax with a maximum of around 1.5% may be levied on net assets. The exact amount varies between cantons.
|This section does not cite any references or sources. (September 2012)|
A tax on net wealth permits an offset for debt and should not be confused with a property tax on real property or certain assets. For example, a tax on real property will generally be based on a percentage of the market value of the property whereas a net wealth tax applicable to the same property applies to the market value less the outstanding mortgage. A net wealth may be practical for all types of wealth where a country, such as the United States, has worldwide tax jurisdiction but less suited to countries with territorial tax jurisdiction or for taxation at the state or local level.
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 or Proposition 2½ in Massachusetts).
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. Some exempt organizations make payments in lieu of taxes to support or maintain good relations with their host communities.
||The neutrality of this section is disputed. (July 2013)|
The increasing globalisation of the world economy suggests that taxation should also be partly globalised. A globalised wealth tax would be collected within countries using existing mechanisms, but the rate and threshold of taxation would be determined by international agreement. A global standard rate of wealth tax, in conjunction with the winding down of tax havens, would solve the problem of capital flight. Initial discussions could take place within the Global Forum on Transparency and Exchange of Information for Tax Purposes. An agreement could promoted and brokered by the United Nations, the International Monetary Fund, the World Bank, or the G20. Signatories might also agree to channel the additional funds in specific directions, such as repaying national debts incurred during the post-2008 financial crisis, reducing global poverty and achieving the Millennium Development Goals), and combating climate change by financing alternative energy projects and reforestation.
If a single country does not however feel that wealth taxes are justified and don't levy them, the benefits to such a country from not levying the tax will be very large. The combination of a large incentive for non-participants, combined with a situation where only a hand full of countries actually have a tax of this nature (suggesting it is a difficult form of taxation to implement) makes the above suggestion more of a fantasy than a possible reality.
- 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
- See, for example, the United States Supreme Court case of Fernandez v. Wiener, in which the Court stated that a direct tax is a tax "which falls upon the owner merely because he is owner, regardless of his use or disposition of the property." Fernandez v. Wiener, 326 U.S. 340, 66 S. Ct. 178, 45-2 U.S. Tax Cas. (CCH) ¶10,239 (1945).
- Jensen, Erik M. (2004) "Interpreting the Sixteenth Amendment (By Way of the Direct-Tax Clauses)" 21 Const. Comment. 355
- Isaacs, Barry L. (1977-8) "Do We Want a Wealth Tax in America?" 32 U. Miami L. Rev. 23
- Yglesias, Matthew (March 6, 2013). "America Does Tax Wealth, Just Not Very Intelligently". Slate. Retrieved 18 March 2013.
- Shakow, David and Shuldiner, Reed, Symposium on Wealth Taxes Part II, New York University School of Law Tax Law Review, 53 Tax L. Rev. 499, Summer, 2000
- "Trump proposes massive onetime tax on the rich" CNN, November 9, 1999
- Equity Trust, 2010
- Shakow, David and Shuldiner, Reed, Symposium on Wealth Taxes Part II, New York University School of Law Tax Law Review, 53 Tax L. Rev. 499, 506 Summer, 2000
- Devany, Eugene Patrick, "Creating New Wealth by Taxing Net Wealth", Forbes.com, 17 August 2012 (with introduction by Peter J. Reilly)
- Mulligan, Casey B., "How Payroll Tax Cuts Can Create Jobs", New York Times, 14 September 2011
- Fair Share Taxes Essay, 2010
- Levin, Linda, "An Analysis of the Distribution of Wealth Across Households, 1989-2010", Congressional Research Service, page 4, 17 July 2012
- Washington Post. Old Money, New Money Flee France and Its Wealth Tax, 16 July 2006
- "The Economic Consequences of the French Wealth Tax", papers.ssrn.com, 05/04/07
- change.org. Richard Parncutt: We need a Global Wealth Tax, 2012
- Wealth Tax in Europe : Why the Decline ?
- Switzerland Wealth Tax, Lowtax.net