Wealth tax

From Wikipedia, the free encyclopedia
Jump to navigation Jump to search

A wealth tax (also called a capital tax or equity tax) is a levy on the total value of personal assets, including bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts.[1] Typically, liabilities (primarily mortgages and other loans) are deducted from an individual's wealth, hence it is sometimes called a net wealth tax.

In practice[edit]

Some jurisdictions[clarification needed] require declaration of the taxpayer'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. Wealth taxes can be limited to natural persons or they can be extended to also cover legal persons such as corporations.[2]

Examples[edit]

  • Argentina: It is named Impuesto a los Bienes Personales, on assets above ARS 800,000 (approx. US$21,000), the annual rates are 0.75% for 2016, 0.50% for 2017, 0.25% in 2018, and they raised it in 2019 to 0.75%.
  • Canada: British Columbia has recently implemented a tax on personal homes. The tax is in addition to regular property tax and begins at homes worth more than $3 million Canadian (approx. US$2,300,000). The tax is 0.2% on the first million above the $3 million and 0.4% on any value above that. No recognition of mortgages, lien, or taxes due is taken into account.
  • France: Until 2017, there was a solidarity tax on wealth 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to 1.5%.[3] In 2007, it collected €4.07 billion, accounting for 1.4% of total revenue.[4] From 2018 onwards, it has been replaced by a wealth tax on real estate, exonerating all financial assets.[5]
  • 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.[6] The exact amount varies between provinces.
  • 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. 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 1,480,000 kr (approx. US$200,000) as of 2017.[7] 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).[8] 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.[9]
  • Switzerland: A progressive wealth tax that varies by residence location. Most cantons have no wealth tax for individual net worth less than CHF 100,000 (approx. US$102,000) 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.[10] Wealth tax is levied against worldwide assets of Swiss residents, but it is not levied against assets in Switzerland held by non-residents.[10][11]
  • 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 0.15% 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.[12]

Historical examples[edit]

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.[citation needed]

Some other European countries have discontinued this kind of tax in recent years: Austria, Denmark (1995), Germany (1997), Finland (2006), Luxembourg (2006) and Sweden (2007)[13]

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 of 1696, the rates, to some extent the Council Tax, municipal property taxes, and a new mansion tax proposed by some political parties.

Concentration of wealth[edit]

In 2014, French economist Thomas Piketty published a widely-discussed book entitled Capital in the Twenty-First Century that posits the theory that economic inequality was worsening and proposes wealth taxes as a solution. 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 (r) is greater than the rate of economic growth (g) 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 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.

However, Piketty's work is not without its critics. Other economists have challenged key aspects of Piketty's proposals and interpretations, stating that they are often inconsistent and/or flawed.[14][15][16][17][18][19]

Revenue[edit]

In 1999, Donald Trump proposed for the United States a one 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.[20] However, as President in 2018, Trump signed a tax bill which substantially reduced taxes on capital by reducing corporate tax rates and that contributed to multi-billion dollar deficits.[21]

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.[22]

Effect on investment[edit]

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."[23] 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.

Housing and consumer debt[edit]

Unlike property taxes which 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.[citation needed]

Criticisms[edit]

There are many arguments against the implementation of a wealth tax, including claims that a wealth tax would be unconstitutional, that property would be too hard to value, and that wealth taxes would reduce the rate of innovation.

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."[24][25] 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.[citation needed]

Valuation issues[edit]

In 2012, the Wall Street Journal 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."[26]

Examples of such fraud and malfeasance were revealed in 2013, when French budget minister Jerome Cahuzac 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."[27] 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.[28]

Effect on seniors[edit]

For the largest segment of people subject to the wealth tax, it means taxing the accumulated savings 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.[29] Wealth taxes would have maximum impact just as retirees are shifting and adjusting to fixed-income living. Others have pointed out that a progressive wealth tax would only affect those with a net worth in excess of ten million dollars, thus making it less important at what stage of the taxpayer's life the obligation was incurred.[30]

Social effects: envy, work ethic, incentives, and property rights[edit]

Opponents of wealth taxes have argued that much of the motivation to institute wealth taxes is based in an 'undercurrent' of envy and antipathy.[30] 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.[31][32] These results lend credence to the theory that a prime motivator for support of a wealth tax is not economic improvement in absolute wealth for recipients.

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.[33] 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 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."[34]

Past Repeals[edit]

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".[35]

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 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.[36]

Legal impediments[edit]

United States[edit]

Wealth taxes, or income taxes that are extremely similar to wealth taxes, are likely constitutional according to most U.S. legal scholars. In 2018, a lengthy essay in the Indiana Journal of Law argued that "... the  belief that the  U.S. Constitution effectively makes a national wealth tax impossible … is wrong, and its casual repetition has been harmful."[37]:112 The authors noted that in the 1796 Supreme Court decision for Hylton v. United States, 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."[37]:114

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.

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 not apportioned by the populations of the states might require a Constitutional amendment in order to be passed into law. The United States Constitution prohibits any federal 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.[38][39][40] Although a federal wealth tax is prohibited unless the receipts are collected from the states by their populations, state and local government property tax amount to a wealth tax on real estate.[41]

Germany[edit]

The Federal Constitutional Court of Germany 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.[42]

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. ^ https://www.imf.org/external/pubs/nft/1998/tlaw/eng/ch10.pdf "Taxation of Wealth"]
  3. ^ "Worldwide personal tax guide 2013–2014: France" (PDF). HSBC. July 1, 2013. Retrieved December 11, 2014.
  4. ^ French wealth tax explained in full in The Connexion
  5. ^ "There has never been a better time to invest in France". Financial Times. May 17, 2018. Retrieved August 9, 2018.
  6. ^ Spanish Wealth Tax (Patrimonio)
  7. ^ Skatteetaten (March 8, 2015). "Skatteetaten – Wealth tax". www.skatteetaten.no. Retrieved July 2, 2017.
  8. ^ "3.1 Endringer i formuesskatten" (in Norwegian). Department of Finance. Retrieved March 19, 2014.
  9. ^ NTB (February 13, 2014). "Politisk flertall for å fjerne formuesskatten" (in Norwegian). Dagens Næringsliv. Retrieved March 19, 2014.
  10. ^ a b Switzerland Wealth Tax, Lowtax.net
  11. ^ "Worldwide personal tax guide 2012 – 2013" (PDF). HSBC.
  12. ^ [1], agenziaentrate.gov.it/
  13. ^ "Sweden axes wealth tax". www.ft.com. Retrieved March 28, 2007.
  14. ^ 'Piketty’s theory about the increase in the return of capital in relation to labor is patently wrong, as anyone who has witnessed the rise of what is called the “knowledge economy” (or anyone who has had investments in general) knows.' Nassim Nicholas Taleb, Skin in the Game (2018), Random House
  15. ^ Thomas Piketty Is Wrong: America Will Never Look Like a Jane Austen Novel, New Republic, 2014
  16. ^ Thomas Piketty's Wealth Illusion, Barrons, August 5, 2014
  17. ^ What Piketty Gets Wrong About Capitalism, Reason, May 23, 2014
  18. ^ Thomas Piketty's Wrong Conclusions on Rising U.S. Income Inequality, U.S. News & World Report, June 5, 2014
  19. ^ Inequality A Piketty problem?, Economist, May 24, 2014
  20. ^ "Trump proposes massive one-time tax on the rich". CNN. November 9, 1999.
  21. ^ "How the Trump Tax Cut Is Helping to Push the Federal Deficit to $1 Trillion". New York Times. 2018.
  22. ^ "Trump proposes massive one-time tax on the rich – November 9, 1999". cnn.com. Retrieved January 8, 2017.
  23. ^ 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
  24. ^ Washington Post. Old Money, New Money Flee France and Its Wealth Tax, July 16, 2006
  25. ^ "The Economic Consequences of the French Wealth Tax", papers.ssrn.com, 05/04/07
  26. ^ The Problem with a Wealth tax, Wall Street Journal January 11, 2012
  27. ^ Chazan, David (October 22, 2014). "French MPs face investigation over tax scandal". The Telegraph.
  28. ^ France Medias Monde. "France's Finance Chairman facing tax nightmare". RFI News (National French Radio).
  29. ^ The Coming Global Wealth Tax, National Liberty Federation, December 4, 2013
  30. ^ a b An Immodest Proposal: A Global Tax on the Super Rich, Businessweek, October 23, 2013
  31. ^ Does Envy Destroy Social Fundamentals? The Impact of Relative Income Position on Social Capital, 2006
  32. ^ Social Capital and Relative Income Concerns: Evidence from 26 Countries, 2008
  33. ^ Umfairteilung, Economist, September 8, 2012
  34. ^ A wealth tax would be ethically wrong and economically destructive, July 28, 2014
  35. ^ Wealth Tax in Europe: Why The Decline? Institut de l'enterprise, June 2004
  36. ^ Why was a wealth tax for the UK abandoned?: Lessons for the policy process and tackling wealth inequality, London School of Economics, 2011
  37. ^ a b Johnsen, Dawn; Dellinger, Walter (January 1, 2018). "The Constitutionality of a National Wealth Tax". 93 Indiana Law Journal 111 (2018). 93 (1). ISSN 0019-6665.
  38. ^ 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).
  39. ^ Jensen, Erik M. (2004) "Interpreting the Sixteenth Amendment (By Way of the Direct-Tax Clauses)" 21 Const. Comment. 355
  40. ^ Isaacs, Barry L. (1977–78) "Do We Want a Wealth Tax in America?" 32 U. Miami L. Rev. 23
  41. ^ Yglesias, Matthew (March 6, 2013). "America Does Tax Wealth, Just Not Very Intelligently". Slate. Retrieved March 18, 2013.
  42. ^ Economist. Umfairteilung, Economist, September 8, 2012