Wealth tax

"Capital tax" redirects here. For taxes on investment income, see capital gains tax.

A wealth tax (also called a capital tax, equity tax, or net worth tax) is a levy on the total value of personal 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] Typically liabilities (primarily mortgages and other loans) are deducted, hence it is sometimes called a net wealth tax.

A wealth tax taxes the accumulated stock of purchasing power, in contrast to income tax, which is a tax on the flow of assets (a change in stock).

In practice

Some jurisdictions 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. Wealth taxes can be limited to natural persons or they can be extended to also cover legal persons such as corporations.

Current examples

Historical examples

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.

Some other European countries have discontinued this kind of tax in the recent years: Austria, Denmark (1995), Germany (1997), Finland (2006), Luxembourg (2006) and Sweden (2007). In the United Kingdom, 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, and a new Mansion Tax proposed by some political parties.

Rationale

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.

Concentration of wealth

Main article: Wealth concentration

In 2014, French economist Thomas Piketty published a 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 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. Piketty's work is not without its critics, however. Other economists have challenged key aspects of Piketty's proposals and interpretations, stating that they are often inconsistent and/or flawed.[12][13][14][15][16][17]

Fairness

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 and thus Capital In The Twenty-First Century argues that those who benefit the most "owe the most back to the society that permits the capitalist system to exist." This is also true of ownership interests or stock.

Revenue

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.[18] 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.

Economic growth

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.

Investment

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."[19] 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.

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 United States, for example, 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.

Social effects

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.[20]

Disadvantages

There are many arguments against the implementation of a wealth tax; including significant legal hurdles, likely negative economic results, issues with implementation, regulation, and cost, as well as adverse societal and cultural impacts.

Capital flight

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."[21][22] 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.

Economic effects

Wealth taxes have the net effect of pulling assets out of the market economy, and could create recessionary effects, including job loss. [citation needed] 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."[23]

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.[24]

Valuation issues

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, boats, 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 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."[25]

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 overwhelmed 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.[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]

Disproportionate effect on seniors

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.”[24] Thus, 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][31]

Social effects: envy, work ethic, incentives, and property rights

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][31] 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.[32][33] 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.[34] 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."[35]

Past failures

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".[36]

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.[37]

Legal impediments

Germany

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.[38]

United States

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 would 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.[39][40][41] 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.[42] There is sufficient question about its Constitutionality that the issue is debatable.[43]

See also

References

  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. ↑ "Worldwide personal tax guide 2013–2014: France" (PDF). HSBC. 1 July 2013. Retrieved 11 December 2014.
  3. ↑ French wealth tax explained in full in The Connexion
  4. ↑ Spanish Wealth Tax (Patrimonio)
  5. ↑ "Budget 2015: Wealth tax abolished; applicability of GAAR deferred by two years". The Economic Times. 28 February 2015. Retrieved 28 February 2015.
  6. ↑
  7. ↑ "3.1 Endringer i formuesskatten" (in Norwegian). Department of Finance. Retrieved 19 March 2014.
  8. ↑ NTB (13 February 2014). "Politisk flertall for å fjerne formuesskatten" (in Norwegian). Dagens Næringsliv. Retrieved 19 March 2014.
  9. 1 2 Switzerland Wealth Tax, Lowtax.net
  10. ↑ "Worldwide personal tax guide 2012 – 2013" (PDF). HSBC.
  11. ↑ , agenziaentrate.gov.it/
  12. ↑ Thomas Piketty Is Wrong: America Will Never Look Like a Jane Austen Novel, New Republic, 2014
  13. ↑ Thomas Piketty's Wealth Illusion, Barrons, August 5, 2014
  14. ↑ Yet Another Reason Wht Thomas Piketty' Is Wrong, Forbes, June 5, 2014
  15. ↑ What Piketty Gets Wrong About Capitalism, Reason, May 23, 2014
  16. ↑ Thomas Piketty's Wrong Conclusions on Rising U.S. Income Inequality, U.S. News & World Report, June 5, 2014
  17. ↑ Inequality A Piketty problem?, Economist, May 24, 2014
  18. ↑ "Trump proposes massive onetime tax on the rich" CNN, November 9, 1999
  19. ↑ 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
  20. ↑ Fair Share Taxes Essay, 2010
  21. ↑ Washington Post. Old Money, New Money Flee France and Its Wealth Tax, 16 July 2006
  22. ↑ "The Economic Consequences of the French Wealth Tax", papers.ssrn.com, 05/04/07
  23. ↑ What A Wealth tax and Lindsay lohan Have In Common, Forbes, November 20, 2012
  24. 1 2 Why The IMF Wealth Tax Simply Will Not Work, Forbes, October 23, 2013
  25. ↑ The Problem with a Wealth tax, Wall Street Journal January 11, 2012
  26. ↑ What A Wealth Tax and Lindsay Lohan Have In Common, Forbes November 20, 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. 1 2 An Immodest Proposal: A Global Tax on the Super Rich, Businessweek, October 23, 2013
  31. 1 2 The Limits of Tax Reform Amid Envy, Forbes, November 6, 2011
  32. ↑ Does Envy Destroy Social Fundamentals? The Impact of Relative Income Position on Social Capital, 2006
  33. ↑ Social Capital and Relative Income Concerns: Evidence from 26 Countries, 2008
  34. ↑ Umfairteilung, Economist, 8 September 2012
  35. ↑ A wealth tax would be ethically wrong and economically destructive, July 28, 2014
  36. ↑ Wealth Tax in Europe: Why The Decline? Institut de l'enterprise, June 2004
  37. ↑ Why was a wealth tax for the UK abandoned?: Lessons for the policy process and tackling wealth inequality, London School of Economics, 2011
  38. ↑ Economist. Umfairteilung, Economist, 8 September 2012
  39. ↑ 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).
  40. ↑ Jensen, Erik M. (2004) "Interpreting the Sixteenth Amendment (By Way of the Direct-Tax Clauses)" 21 Const. Comment. 355
  41. ↑ Isaacs, Barry L. (1977-8) "Do We Want a Wealth Tax in America?" 32 U. Miami L. Rev. 23
  42. ↑ Yglesias, Matthew (March 6, 2013). "America Does Tax Wealth, Just Not Very Intelligently". Slate. Retrieved 18 March 2013.
  43. ↑ National Review. The Constitutional Fiasco of a Wealth Tax, 19 November 2012
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