Wealth tax
Encyclopedia
A wealth tax is generally conceived of as a levy based on the aggregate value of all household holdings actually accumulated as purchasing power stock (rather than flow), including owner-occupied housing
; cash
, bank deposits, money fund
s, and savings in insurance
and pension plans
; investment in real estate
and unincorporated businesses
; and corporate stock
, financial securities, and personal trusts.
.: A progressive wealth tax with a maximum of around 1.5% may be levied on net assets. The exact amount varies between cantons
.: 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%. See Income tax in the Netherlands
.: Up to 0.7% (municipal) and 0.4% (national) a total of 1,1% levied on net assets exceeding NOK. 700,000.: Wealth tax is 1% on wealth exceeding Rs 30,00,000. However, non-residents returning to India are given exemption for seven years.
s 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
" and in some cases legal "persons".
In France
, the net worth tax on "natural person
s" is called the "solidarity tax on wealth
". In other places, the tax may be called, or be known as, 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
, Germany
(1997), Sweden
(2007), and Spain
(2008). On January 2006, wealth tax was abolished in Finland
, Iceland
and Luxembourg
. In other countries, like Belgium
or Great Britain
, no tax of this type has ever existed, although the Window Tax
of 1696 was based on a similar concept.
es 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
).
Because property taxes have often been labeled unfair (other assets such as CDs
, equities, or partnership
s are taxed rarely, if at all), some properties, such as certain farm
s 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.
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 do those who hold no property rights. Coupled with market-driven assessment (bids in escrow, for example) and deferment of tax liability at interest equal to long term government debt rates, the "beneficiary pay" criterion of "fairness" contrasts with the "ability to pay" criterion of "fairness" which is more expedient than essentially reciprocal.
Revenue: In 1999, Donald Trump
proposed 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.
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. More economic equality has been correlated with higher levels of innovation.
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. This would promote social mobility, mean more citizens reach their full potential of productivity, and so improve 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.
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, "Eric 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."
There are several major flaws in a wealth tax system. First, valuation of illiquid assets including real estate, privately held businesses, antiques, art etc can be purely arbitrary. Secondly, wealth valuation fluctuates in time due primarily to the money supply fluctuations. This creates a moral hazard whereby governments can use inflation as a direct means of raising revenue. Finally, elderly citizens whose income is much smaller than their non-revenue generating assets may find it near impossible to pay their taxes without continued asset liquidation.
Due to valuation and accounting difficulties, wealth taxes systems have high management costs, for both the taxpayer and the administrating authorities, compared to other taxes. Per one study in the Netherlands the aggregated cost of the tax’s yield was roughly five times that of income tax.
Home
A home is a place of residence or refuge. When it refers to a building, it is usually a place in which an individual or a family can rest and store personal property. Most modern-day households contain sanitary facilities and a means of preparing food. Animals have their own homes as well, either...
; cash
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
, bank deposits, money fund
Money fund
A money market fund is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are widely regarded as being as safe as bank deposits yet providing a higher yield...
s, and savings in insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
and pension plans
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
; investment in real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
and unincorporated businesses
Unincorporated entity
An unincorporated entity is an entity that has the same characteristics as a company but is not incorporated. It is also sometimes called a voluntary association....
; and corporate stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
, financial securities, and personal trusts.
Existing net wealth/worth taxes
: 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 wealthSolidarity tax on wealth
The solidarity tax on wealth is an annual direct wealth tax on those in France having assets in excess of €800,000, . It was one of the Socialist Party's 1981 electoral program's measures, 110 Propositions for France...
.: A progressive wealth tax with a maximum of around 1.5% may be levied on net assets. The exact amount varies between cantons
Cantons of Switzerland
The 26 cantons of Switzerland are the member states of the federal state of Switzerland. Each canton was a fully sovereign state with its own borders, army and currency from the Treaty of Westphalia until the establishment of the Swiss federal state in 1848...
.: 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%. See Income tax in the Netherlands
Income tax in the Netherlands
Income tax in the Netherlands is regulated by the Wet inkomstenbelasting 2001 .The fiscal year is the same as the calendar year. Before April 1 citizens have to report their income from the previous year...
.: Up to 0.7% (municipal) and 0.4% (national) a total of 1,1% levied on net assets exceeding NOK. 700,000.: Wealth tax is 1% on wealth exceeding Rs 30,00,000. However, non-residents returning to India are given exemption for seven years.
Details
Some governmentGovernment
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
s require declaration of the tax payer's balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
(assets and liabilities), and from that ask for a tax on net worth
Net worth
In business, net worth is the total assets minus total outside liabilities of an individual or a company. For a company, this is called shareholders' preference and may be referred to as book value. Net worth is stated as at a particular year in time...
(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
Natural person
Variously, in jurisprudence, a natural person is a human being, as opposed to an artificial, legal or juristic person, i.e., an organization that the law treats for some purposes as if it were a person distinct from its members or owner...
" and in some cases legal "persons".
In France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, the net worth tax on "natural person
Natural person
Variously, in jurisprudence, a natural person is a human being, as opposed to an artificial, legal or juristic person, i.e., an organization that the law treats for some purposes as if it were a person distinct from its members or owner...
s" is called the "solidarity tax on wealth
Solidarity tax on wealth
The solidarity tax on wealth is an annual direct wealth tax on those in France having assets in excess of €800,000, . It was one of the Socialist Party's 1981 electoral program's measures, 110 Propositions for France...
". In other places, the tax may be called, or be known as, 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
Austria
Austria , officially the Republic of Austria , is a landlocked country of roughly 8.4 million people in Central Europe. It is bordered by the Czech Republic and Germany to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the...
, Denmark
Denmark
Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
(1997), Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
(2007), and Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
(2008). On January 2006, wealth tax was abolished in Finland
Finland
Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...
, Iceland
Iceland
Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...
and Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
. In other countries, like Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
or Great Britain
Great Britain
Great Britain or Britain is an island situated to the northwest of Continental Europe. It is the ninth largest island in the world, and the largest European island, as well as the largest of the British Isles...
, no tax of this type has ever existed, although the Window Tax
Window tax
The window tax was a significant social, cultural, and architectural force in England, France and Scotland during the 18th and 19th centuries. Some houses from the period can be seen to have bricked-up window-spaces , as a result of the tax.-Details:The tax was introduced in England and Wales under...
of 1696 was based on a similar concept.
Property tax
In the United States, property taxProperty tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
es are annual taxes on the market value
Market value
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...
of real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
(ranging from about 0.4% in Alabama
Alabama
Alabama is a state located in the southeastern region of the United States. It is bordered by Tennessee to the north, Georgia to the east, Florida and the Gulf of Mexico to the south, and Mississippi to the west. Alabama ranks 30th in total land area and ranks second in the size of its inland...
to 4% in New Hampshire
New Hampshire
New Hampshire is a state in the New England region of the northeastern United States of America. The state was named after the southern English county of Hampshire. It is bordered by Massachusetts to the south, Vermont to the west, Maine and the Atlantic Ocean to the east, and the Canadian...
) 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
Paper wealth
Paper wealth means wealth as measured by monetary value, as reflected in the price of assets – how much money one's assets could be sold for. Paper wealth is contrasted with real wealth, which refers to one's actual physical assets....
, 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
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
, 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
California Proposition 13 (1978)
Proposition 13 was an amendment of the Constitution of California enacted during 1978, by means of the initiative process. It was approved by California voters on June 6, 1978. It was declared constitutional by the United States Supreme Court in the case of Nordlinger v. Hahn,...
).
Because property taxes have often been labeled unfair (other assets such as CDs
Certificate of deposit
A certificate of Deposit is a time deposit, a financial product commonly offered to consumers in the United States by banks, thrift institutions, and credit unions....
, equities, or partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
s are taxed rarely, if at all), some properties, such as certain farm
Farm
A farm is an area of land, or, for aquaculture, lake, river or sea, including various structures, devoted primarily to the practice of producing and managing food , fibres and, increasingly, fuel. It is the basic production facility in food production. Farms may be owned and operated by a single...
s or forest
Forest
A forest, also referred to as a wood or the woods, is an area with a high density of trees. As with cities, depending where you are in the world, what is considered a forest may vary significantly in size and have various classification according to how and what of the forest is composed...
land, may have reduced valuations. However, unlike the value of most other assets, the value of land is largely a function of government spending
Government spending
Government spending includes all government consumption, investment but excludes transfer payments made by a state. Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final...
on services and infrastructure (a relationship demonstrated by economists in the Henry George Theorem
Henry George Theorem
The Henry George Theorem, named for 19th century U.S. political economist and activist Henry George, states that under certain ideal conditions, aggregate spending by government will be equal to aggregate rent based on land value...
). This relationship argues that the land value portion of property taxes, at least, satisfies the "beneficiary pay" criterion of tax fairness.
Non-profit
Non-profit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
(especially church) and government-owned properties are often exempt from property taxes.
Arguments in favor
There are four lines of argument in favor of a tax based on household wealth. The claims are that such a wealth tax improves the fairness of most tax systems, effectively raises government revenue, can further economic growth, and could have desirable secondary, social effects by reducing economic inequality.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 do those who hold no property rights. Coupled with market-driven assessment (bids in escrow, for example) and deferment of tax liability at interest equal to long term government debt rates, the "beneficiary pay" criterion of "fairness" contrasts with the "ability to pay" criterion of "fairness" which is more expedient than essentially reciprocal.
Revenue: In 1999, Donald Trump
Donald Trump
Donald John Trump, Sr. is an American business magnate, television personality and author. He is the chairman and president of The Trump Organization and the founder of Trump Entertainment Resorts. Trump's extravagant lifestyle, outspoken manner and role on the NBC reality show The Apprentice have...
proposed 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.
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
Risk-free interest rate
Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. The risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time....
of modern portfolio theory
Modern portfolio theory
Modern portfolio theory is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets...
, 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.
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. This would promote social mobility, mean more citizens reach their full potential of productivity, and so improve 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.
Arguments against
A 2006 article in The Washington PostThe Washington Post
The Washington Post is Washington, D.C.'s largest newspaper and its oldest still-existing paper, founded in 1877. Located in the capital of the United States, The Post has a particular emphasis on national politics. D.C., Maryland, and Virginia editions are printed for daily circulation...
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
Capital flight
Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event and that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic...
, brain drain
Brain drain
Human capital flight, more commonly referred to as "brain drain", is the large-scale emigration of a large group of individuals with technical skills or knowledge. The reasons usually include two aspects which respectively come from countries and individuals...
, loss of jobs, and, ultimately, a net loss in tax revenue. Among other things, the article stated, "Eric 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."
There are several major flaws in a wealth tax system. First, valuation of illiquid assets including real estate, privately held businesses, antiques, art etc can be purely arbitrary. Secondly, wealth valuation fluctuates in time due primarily to the money supply fluctuations. This creates a moral hazard whereby governments can use inflation as a direct means of raising revenue. Finally, elderly citizens whose income is much smaller than their non-revenue generating assets may find it near impossible to pay their taxes without continued asset liquidation.
Due to valuation and accounting difficulties, wealth taxes systems have high management costs, for both the taxpayer and the administrating authorities, compared to other taxes. Per one study in the Netherlands the aggregated cost of the tax’s yield was roughly five times that of income tax.
See also
- Solidarity tax on wealthSolidarity tax on wealthThe solidarity tax on wealth is an annual direct wealth tax on those in France having assets in excess of €800,000, . It was one of the Socialist Party's 1981 electoral program's measures, 110 Propositions for France...
- TaxTaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
- Property taxProperty taxA property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
- Endowment taxEndowment taxEndowment tax is taxation of endowments. The city of Cambridge, Massachusetts, has proposed taxing MIT and other major universities on these previously exempt, non-profit earnings. A financial endowment is a transfer of money or property donated to an institution, with the stipulation that it be...
- Tax exportingTax exportingTax exporting occurs when a country indirectly encourages economic activity to move to another country with a lower tax burden. This is more likely if the economic activity is more mobile....