Wealth Tax

Thomas Piketty

A wealth tax is a levy based on the aggregate value of all household assets (e.g. 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).

Some governments 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. The tax is in place for both natural persons and, in some cases, legal persons such as corporations. 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 2006, a 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.

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 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.

The concept of a wealth tax is strongly opposed by proponents of laissez-faire economic policies. 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.

Additionally, some property such as real estate, automobiles or artwork cannot be sold piecewise. 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. Also, valuation and accounting difficulties mean that wealth taxes systems have had higher management costs for both the taxpayer and the authorities than other taxes. The problem can be solved by demanding tax only from citizens whose net assets exceed a high threshold, which reduces the number of assets statements. Furthermore, advances in access to internet databases over the last decade have made digital filing of tax returns more common and mandatory increasing administrative efficiency.

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