Wealth tax

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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.[1] 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).

Details[edit]

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, reintroduced 2011-13). 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[citation needed] , but the window tax of 1696 was based on a similar concept, and a new Mansion Tax is now proposed by some political parties in the UK.

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.[2][3][4] 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.[5]

Advantages[edit]

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."[6]

Fairness[edit]

According to the "beneficiary pay" criterion of tax fairness, a tax on property rights can be seen as a use fee.[citation needed] Specifically, protection of property rights is a primary purpose of government[citation needed]. Holders of property rights enjoy the existence of government more than those who hold no property rights do.[citation needed] This is also true of ownership interests or stock .[citation needed]

Revenue[edit]

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.[7] 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[citation needed].

Economic growth[edit]

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[citation needed]. The higher return on investment results from the removal of taxes on profits. More economic equality has been correlated with higher levels of innovation.[8]

Investment[edit]

A wealth tax serves as a negative reinforcer ("use it or lose it"), which coerces the productive use of assets.[citation needed] 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."[9] 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. 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.[10]

Job creation and Social Security reform[edit]

In the United States 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.[citation needed] Millions of jobs would be created with no government spending.[11][not in citation given] Using a wealth tax to fund Social Security and Medicare would also eliminate any short term need to reduce benefits.[citation needed]

Housing and consumer debt[edit]

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.[citation needed]

Social effects[edit]

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.[12]

Disadvantages[edit]

Potentially Unlawful[edit]

In the United States, depending upon how Article 1, Sections 2 and 9 of the United States Constitution would be interpreted, the implementation of a wealth tax may require a Constitutional amendment in order to be passed into law. There is sufficient question about its Constitutionality that the issue is debatable.[13]

In Germany, the Constitutional Court 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.[14]

Capital Flight[edit]

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."[15][16] 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, although this has proven to be a non-starter in international politics.[17]

Economic Impacts[edit]

Wealth taxes have the net effect of pulling assets out of the free market economy, and could create recessionary effects, including job loss. A 2012 article by Forbes magazine, "A tax on wealth certainly has a negative impact on capital formation. Many family-owned businesses that are marginally profitable would find this tax to be a tremendous burden on their shareholders. While the tax may be imposed on the business owners, in many cases the only source for payment of the tax would be to take funds from (or liquidate) the business. This is why many tax policy analysts have said that a wealth tax could result in a recession by inhibiting capital formation and job creation."[18]

For individuals, depending on the rate of the proposed wealth tax, impacts on stock and bond asset values could also be sufficient to create larger-scale economic impacts. The two largest areas of personal investment are personal housing and pension plans. Thus, the first source to be tapped for tax liquidity would be pension plans and financial investments. If the taxes were progressive enough, there may a recessionary effect on the economy as stock and bond assets are liquidated each year to pay ongoing wealth taxes.[19]

Valuation Issues[edit]

The Wall Street Journal articulated 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, boats, real estate, and (most importantly) private business. Private businesses account for nearly 40% of their wealth and are the largest single category." [20] 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 that they really are, through accounting, valuations and assumptions about the future. "Even the rich don’t know what exactly what they’re worth in any given moment" -- Wall Street Journal.[21]

More difficult questions arise as to the equitable valuation of homes and real estate by geographic area, where values per square foot of home and per acre of land can vary by more than 400 percent in the United States. In addition, critics claim that the inherent difficulty of evaluating personal property would create a labyrinth of bureaucracy and potential for fraud, and perhaps the emergence of a class of tax-exempt and special-consideration assets that would only further cloud and burden an already over-whelmed tax system. Analysts predict that the process of appraisal of personal property, with some items appreciating and others depreciating, would be onerous and the costs of dispute resolution with the IRS would skyrocket.[22]

Liquidity Issues[edit]

Some property such as small businesses, 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 or enterprise in order to obtain the capital necessary to pay the tax. This is disruptive and would deter ownership. As a result, it may also have a deflating effect on the value of high-end real estate and personal property.

Disproportionate Impact on Seniors[edit]

A 2013 Forbes article addressed the issue of wealth taxes upon seniors, "The acquisition of wealth is a function of the ‘life cycle’ – our usual point of maximum wealth in our lifetime is just as we retire: we’ve paid off the mortgage and have housing equity, our pension plan is as full as it’s ever going to be.”[23] Thus, for the largest segment of people subject to the wealth tax, it means taxing the accumulated pensions and houses of those on the verge of retiring. Wealth taxes would impact their pension plans, 401K, IRA, and other deferred and retirement-related accounts ... as well as the accumulated value of their real estate. In addition, there may be the possibility that the tax value of life insurance policies and charitable remainder trusts could be included in these wealth calculations.[24] Wealth taxes would have maximum impact just as retirees are shifting and adjusting to fixed-income living.

Social Effects: Wealth envy, work ethic, incentive, and freedom[edit]

Wealth taxes have been criticized as being a tool of political class warfare. Proponents of wealth taxes have said that much of the motivation to institute wealth taxes is based in an 'undercurrent' of envy and antipathy.[25][26] Two Yale University/London School of Economics 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.[27][28] These results lend credence to the theory that the prime motivator for many who support the wealth tax is not economic improvement in absolute wealth for recipients, but rather, to simply pull down those at upper wealth levels.

Effects upon work ethic and the welfare state: A wealth tax would be a further extension of progressive taxation in the United States and may have an additional corrosive effect upon the work ethic and individual responsibilities of both taxpayer and recipient. President Franklin D. Roosevelt articulated these concerns during his 1935 State of the Union message, “The lessons of history, confirmed by evidence immediately before me, show conclusively that continued dependence on relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. It is inimical to the dictates of sound policy. It is a violation of the traditions of America.”[29]

Empirical evidence exists showing that wealth taxes suppressed both personal savings and investment in small business in countries where wealth taxes were implemented.[30][31][32]

As a form of direct asset confiscation, as well as double-taxation, the wealth tax is antithetical to personal freedom and individual liberty. Many have asserted that free nations should have no business helping themselves arbitrarily to the personal belongings of any group of its citizens.[33] Wealth taxes place the needs of the government ahead of the needs of the individual, and ultimately undermines the concept of personal responsibility. UK Telegraph editor Allister Heath 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."[34]

The Wealth Tax is Based on Flawed "Zero-Sum-Game" Economics[edit]

In 2012, National Affairs journal published the following, "The implicit assumption behind the case for the injustice of income inequality (and subsequent justification for a wealth tax) is that the wealthy are the reason why the poor are poor, or at least why they cannot escape their poverty. If this claim were true, it would be much easier to connect income inequality with injustice, and so to justify a redistributionist agenda. Yet this assumption rests on another economic premise that itself is highly dubious: the idea that income is a zero-sum game. Moral critics of inequality often portray total national income as if it were a pie: There is only a fixed amount to go around, they suggest, so if someone's slice gets bigger, another person's must get smaller. Much of the moral debate about income inequality seems to rest on this zero-sum theory. As Kevin Drum of Mother Jones magazine put it last year, "This income shift is real. We can debate its effects all day long, but it's real. The super rich have a much bigger piece of the pie than they used to, and that means a smaller piece of the pie for all the rest of us."

In a functioning market economy, however, the total amount of income is decidedly not static; economic exchange is not a zero-sum game."[35] This is corroborated by a Pew Charitable Trust report released in 2009 entitled "Ups and Downs: Does the American Economy Still Promote Upward Mobility?" and by a 2007 report by the Congressional Budget Office, finding that both middle and lower income Americans experienced economic gains between 1991 and 2005, thus dispelling the notion that increased earnings of high-income workers generally cause some people to be poor or prevent them from improving their economic status.[36]

Wealth Taxes Have Been Tried and Did Not Work[edit]

In 2004, a study by 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".[37]

In a 2011 study, the London School of Economics 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. Furthermore, there were serious internal debates at the time between moderate Socialists and more leftist Marxist politicians as to the degree of public ownership of means of production. 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’s own reflective conclusion was 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.[38]

Existing net wealth/worth taxes[edit]

  •  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: Patrimonio - a progressive rate from 0.2 to 2.5% of net assets above the threshold of €700,000 after €300,000 primary residence allowance.[39]
  •  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.[citation needed]
  •  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.[40]
  •  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: 0.7% (municipal) and 0.3% (national) a total of 1.0% levied on net assets exceeding NOK 1,000,000 as of 2014.[41] For tax purposes, the value of real estate assets are estimated to approximately 50% of the market value (25% if it is the taxpayer's primary residence).[42] The Conservative and Progress parties in the current government and the Liberal Party have stated that they aim to reduce and eventually eliminate the wealth tax.[43]
  •   Switzerland: A progressive wealth tax with a maximum of around 1.5% may be levied on net assets.[44] The exact amount varies between cantons.

Property tax[edit]

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.

See also[edit]

References[edit]

  1. ^ 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
  2. ^ 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).
  3. ^ Jensen, Erik M. (2004) "Interpreting the Sixteenth Amendment (By Way of the Direct-Tax Clauses)" 21 Const. Comment. 355
  4. ^ Isaacs, Barry L. (1977-8) "Do We Want a Wealth Tax in America?" 32 U. Miami L. Rev. 23
  5. ^ Yglesias, Matthew (March 6, 2013). "America Does Tax Wealth, Just Not Very Intelligently". Slate. Retrieved 18 March 2013. 
  6. ^ 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
  7. ^ "Trump proposes massive onetime tax on the rich" CNN, November 9, 1999
  8. ^ Equity Trust, 2010
  9. ^ 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
  10. ^ Devany, Eugene Patrick, "Creating New Wealth by Taxing Net Wealth", Forbes.com, 17 August 2012 (with introduction by Peter J. Reilly)
  11. ^ Mulligan, Casey B., "How Payroll Tax Cuts Can Create Jobs", New York Times, 14 September 2011
  12. ^ Fair Share Taxes Essay, 2010
  13. ^ National Review. The Constitutional Fiasco of a Wealth Tax, 19 November 2012
  14. ^ Economist. Umfairteilung, Economist, 8 September 2012
  15. ^ Washington Post. Old Money, New Money Flee France and Its Wealth Tax, 16 July 2006
  16. ^ "The Economic Consequences of the French Wealth Tax", papers.ssrn.com, 05/04/07
  17. ^ change.org. Richard Parncutt: We need a Global Wealth Tax, 2012
  18. ^ What A Wealth tax and Lindsay lohan Have In Common, Forbes, November 20, 2012
  19. ^ Why The IMF Wealth Tax Simply Will Not Work, Forbes, October 23, 2013
  20. ^ The Problem with a Wealth tax, Wall Street Journal January 11, 2012
  21. ^ The Problem with a Wealth tax, Wall Street Journal January 11, 2012
  22. ^ What A Wealth Tax and Lindsay Lohan Have In Common, Forbes November 20, 2012
  23. ^ Why The IMF Wealth Tax Simply Will Not Work, Forbes, October 23, 2013
  24. ^ The Coming Global Wealth Tax, National Liberty Federation, December 4, 2013
  25. ^ An Immodest Proposal: A Global Tax on the Super Rich, Businessweek, October 23, 2013
  26. ^ The Limits of Tax Reform Amid Envy, Forbes, November 6, 2011
  27. ^ Does Envy Destroy Social Fundamentals? The Impact of Relative Income Position on Social Capital, 2006
  28. ^ Social Capital and Relative Income Concerns: Evidence from 26 Countries, 2008
  29. ^ Franklin D. Roosevelt - State of the Union Address 1935
  30. ^ Wealth Tax in Europe: Why The Decline? Institut de l'enterprise, June 2004
  31. ^ Why was a wealth tax for the UK abandoned?: lessons for the policy process and tackling wealth inequality, London School of Economics, 2011
  32. ^ The Growing Threat of a Wealth Tax, Cato Institute, May 6, 2014
  33. ^ Umfairteilung, Economist, 8 September 2012
  34. ^ A wealth tax would be ethically wrong and economically destructive, July 28, 2014
  35. ^ Justice, Inequality, and the Poor, National Affairs, 2012
  36. ^ Ups and Downs: Does the American Economy Still Promote Upward Mobility?, The Pew Charitable Trusts, 2009
  37. ^ Wealth Tax in Europe: Why The Decline? Institut de l'enterprise, June 2004
  38. ^ Why was a wealth tax for the UK abandoned?: lessons for the policy process and tackling wealth inequality, London School of Economics, 2011
  39. ^ Spanish Wealth Tax (Patrimonio)
  40. ^ http://law.incometaxindia.gov.in/DIT/other-income-tax-acts.aspx?page=ODTA&TabId=tab_WTA
  41. ^ [1]
  42. ^ "3.1 Endringer i formuesskatten" (in Norwegian). Department of Finance. Retrieved 19 March 2014. 
  43. ^ NTB (13 February 2014). "Politisk flertall for å fjerne formuesskatten" (in Norwegian). Dagens Næringsliv. Retrieved 19 March 2014. 
  44. ^ Switzerland Wealth Tax, Lowtax.net