Annual Wealth Tax Research Articles

The Wealth Tax and the Tax Mix

This paper explores the potential role for a wealth tax as part of the mix of taxes applying to assets in the Canadian tax system. The existing system taxes assets in a variety of ways. Asset incomes, such as interest, dividends, capital gains, and profits, are taxed in the income tax system, albeit imperfectly. The value of assets is taxed by capital taxes on selective types of corporations and by the property tax on residential and non-residential property. Taxes applying to asset transfers include the deemed realization of capital gains on death as well as probate fees. There is neither a general tax on wealth nor a tax on wealth transferred through bequests. There are some glaring shortcomings of existing taxes on assets, such as the preferential treatment of capital gains, the exclusion of imputed returns, and the absence of a tax on inheritances. The authors argue that these deficiencies are best addressed by reforming the capital income tax system and introducing an inheritance tax rather than implementing an annual wealth tax.

Who should pay a wealth tax? Some design issues

AbstractAny wealth tax design needs to resolve the question of who should pay it it How wide should the net be cast? Setting high or low exempt thresholds affects avoidance behaviour and may influence whether one should tax by reference to the household (and if so how that should be defined) or simply on each individual who owns wealth over a certain threshold. Typically, wealth taxes in other countries have not been imposed on non‐residents except in relation to real property but questions remain over whether any exempt period should be given to new arrivals, not least for administrative convenience. A one‐off wealth tax would require a different design in a number of respects from an annual wealth tax. For example, a one off tax t would need to be designed to catch those who have recently left the UK and contain modifications for recent arrivals. Trusts, foundations and similar vehicles pose particular problems in the design of a wealth tax and the author suggests some possible solutions and connecting factors that could be considered.

The economic arguments for and against a wealth tax

AbstractThis paper asks when a wealth tax would, in principle, be a desirable part of the tax system, setting aside the practicalities and politics that would be crucial in reality. The case for a one‐off wealth tax is simple. If it were unexpected and credibly one‐off – a major challenge in practice – this would be an efficient way to raise revenue and could be used to address existing wealth inequality. Whether such a tax is desirable hinges on whether it is considered fair, about which reasonable people will differ. Making the case for an annual wealth tax, which would affect future wealth accumulation as well as existing wealth, is less straightforward. It requires explaining why it is better to tax the same wealth every year – penalising those who save – rather than raising the same revenue by taxing all sources of wealth once when they are received (and/or when they are spent). Such a case can be made based on subtle arguments for why taxing wealth might help to ease the trade‐off between redistribution and work incentives; and a wealth tax might also be justified if holding on to wealth, rather than spending it, benefits the holder or harms others. These theoretical arguments probably justify some taxation of wealth in principle, though we have little basis for judging the appropriate level, so only part of the theoretical benefit could be attained. It is questionable whether the achievable benefits outweigh the costs of an imperfect wealth tax in practice.There are strong reasons to radically reform how we currently tax the sources/uses of wealth; this includes reforming capital income taxes in order to properly tax high returns. An annual wealth tax would be a poor substitute for doing that. But to the extent that taxes remain imperfect and that responses to a wealth tax would not affect revenue from other taxes (such as on income, expenditure and bequests), there may be a benefit to adding a wealth tax in order to diversify sources of revenue and prevent any one tax getting too high – though that must be weighed against the extra administrative burdens of having another tax.

Revenue and distributional modelling for a UK wealth tax

AbstractIn this paper, we model the revenue that could be raised from an annual and a one‐off wealth tax of the design recommended by Advani, Chamberlain and Summers in the Wealth Tax Commission's Final Report (2020). We examine the distributional effects of the tax, in terms of both wealth and other characteristics. We also estimate the share of taxpayers who would face liquidity constraints in meeting their tax liability. We find that an annual wealth tax charging 0.17 per cent on wealth above £500,000 could generate £10 billion in revenue, before administrative costs. Alternatively, a one‐off tax charging 4.8 per cent (effectively 0.95 per cent per year, paid over a five‐year period) on wealth above the same threshold, would generate £250 billion in revenue. To put our revenue estimates into context, we present revenue estimates and costings for some commonly proposed reforms to the existing set of taxes on capital.

Public attitudes to a wealth tax: the importance of ‘capacity to pay’

AbstractIn this paper, we present findings from the first ever study, to our knowledge, to focus in detail on public attitudes to an annual wealth tax. We start with a brief review of relevant recent studies before outlining the mixed methods used, which involved a nationally representative survey of 2,243 members of the general public and four focus groups conducted during the summer of 2020. The study aimed to measure, explore and explain the overall levels of support for a wealth tax compared with other taxes, the arguments for and against a wealth tax, and opinions on the particular design of such a tax. Key findings include high levels of public support for a wealth tax compared with other taxes, and support for the base of the tax to include financial investments and property wealth (after excluding the main home). The most popular rate/threshold combination is for the tax to be levied at a rate of at least 1 per cent over £500,000. Support for the tax appears to be driven by a combination of rational self‐interest and beliefs about fairness but, in particular, the public are keen for the tax to be focused on those with capacity to contribute the most.

Taxing Our Wealth

This paper evaluates proposals for an annual wealth tax. While a dozen OECD countries levied wealth taxes in the recent past, now only three retain them, with only Switzerland raising a comparable fraction of revenue as recent proposals for a US wealth tax. Studies of these taxes sometimes, but not always, find a substantial behavioral response, including of saving, portfolio change, avoidance, and evasion, and the impact depends crucially on design features, especially the broadness of the base and enforcement provisions. Because the US proposals are very different from any previous wealth tax, experience in other countries offers only broad lessons, but we can gain insights from closely related taxes, such as the property and the estate tax, and from optimal tax analysis of the role of wealth taxation.

An Annual Wealth Tax: Pros and Cons

An Annual Wealth Tax: Pros and Cons

Escape or Play Again? How Retiring Entrepreneurs Respond to the Wealth Tax

We investigate the impact of wealth taxation on the behavior of entrepreneurs in France. Before 2018, business sales triggered the conversion of tax-exempt business assets into taxable wealth. Using personal tax data, we confirm that retirement of entrepreneurs leads to large annual wealth tax payments. There is no evidence of higher expatriation by entrepreneurs following retirement, but their take-up of tax-favored investments in SMEs increases. The elasticity of such investments to the tax increase is far higher than for charity donations. These investments fall after financial wealth becomes tax-exempt in 2018. This evidence suggests that a wealth tax, combined with tax-favored investment schemes, may have encouraged former entrepreneurs to reinvest their wealth in SMEs.

Policy Forum: The Case for an Annual Net Wealth Tax

The public and policy makers are showing a renewed interest in wealth taxes as a possible response to the problem of wealth inequality. This article describes the recent trend of rising wealth inequality, and the factors contributing to it, in developed countries, including Canada. The authors argue that an annual wealth tax could and should counter the trend, and that such a tax is both justifiable on economic grounds and technically feasible. They assert that the taxation of capital income does not adequately address the largely tax-free accumulation of large fortunes, and that an annual wealth tax is preferable to property taxes, which exclude the taxation of financial assets and are levied on gross rather than net wealth. The article responds in detail to major criticisms of an annual tax on wealth, arguing that such a tax is needed to achieve a more equal distribution of wealth while raising additional revenues.

Policy Forum: Taxing Wealth Transfers in Canada Using an Accession Tax

Wealth transfer taxes have had a long history in Canada: the Rowell-Sirois report suggested federal administration; the Carter report emphasized the importance of including wealth transfers in income. Yet by the 1980s wealth transfer taxes had largely disappeared in Canada. This article makes the case for consideration of an accession tax, which taxes wealth transfers in the recipients' hands. An accession tax has significant administrative advantages over the annual wealth tax featured in current popular debates.

Wealth Tax Design: Lessons from Estate Tax Avoidance

Presidential candidates Elizabeth Warren and Bernie Sanders have both proposed ambitious new annual wealth taxes based on academic work by Emmanuel Saez and Gabriel Zucman. They project these proposals to raise trillions of dollars over the next ten years. Some critics challenge the Saez-Zucman approach to measuring the aggregate wealth of those subject to a wealth tax. Other critics including Larry Summers and Natasha Sarin have used data from estate tax returns and the relatively small amount of revenue the estate tax currently raises to question the revenue projections of these proposals. This comparison can be useful only if one thinks carefully about specific estate tax strategies and how these strategies translate to an annual wealth tax. This article engages in that exercise. When one takes a closer look at estate tax avoidance and how it maps onto an annual wealth tax, a much more complex narrative emerges. That narrative has four major themes. First, there are some estate tax planning techniques (like valuation games and charitable contributions) which pose similar challenges to an annual wealth tax. These structures provide some support for critics like Summers and Sarin who argue that the annual wealth tax will struggle to raise the projected revenue. Second, other structures (such as grantor-retained annuity trusts ) work well to minimize estate taxes but are of limited use for structuring around an annual wealth tax. Projecting wealth tax revenue using estate tax revenue without considering the revenue consequences of these strategies will understate wealth tax revenue. Third, other techniques (including the use of lifetime estate/gift exemptions) highlight possible synergies between an estate and wealth tax. In many ways, a robust estate tax will make the wealth tax harder to avoid and vice-versa. The converse is also true: a poorly designed estate/gift tax will undermine an annual wealth tax. Adopting a wealth tax without strengthening the gift and estate makes little sense. Fourth, one of the major lessons of estate tax planning is that it is much easier to minimize estate taxes on future wealth than existing wealth. A myriad of techniques allow taxpayers to “freeze” the value of assets for estate tax purposes. Freezing techniques will also prove helpful in minimizing wealth taxes. It is possible that even a well-designed wealth tax will have a base that shrinks rather than grows over time.

TAXING WEALTH IN AN UNCERTAIN WORLD

An annual wealth tax, a mark-to-market income tax, and a retrospective capital gains tax are three approaches to capital taxation that yield roughly equivalent outcomes under certain conditions. The three approaches differ starkly, however, in their exposure to uncertainty of various types. This essay seeks to highlight the effect of uncertainty on the implementation and operation of alternative capital taxation regimes. An annual wealth tax is highly vulnerable to valuation uncertainty and constitutional uncertainty, but less so to political uncertainty. A retrospective capital gains tax, by contrast, minimizes valuation uncertainty and effectively eliminates constitutional uncertainty but remains highly exposed to political uncertainty. A mark-to-market regime falls somewhere between the two extremes on dimensions of political and constitutional uncertainty but shares in a wealth tax’s exposure to valuation uncertainty. Ultimately, the choice among alternative capital taxation regimes reflects a trade-off among uncertainties of different varieties.

Over the Top: Why an Annual Wealth Tax for Canada is Unnecessary

The idea of a wealth tax has taken on new prominence since French economist Thomas Piketty famously proposed a global wealth tax in 2013; Senator Elizabeth Warren has even made a national wealth tax a plank in her campaign to become the Democratic presidential candidate in 2020. The current interest in wealth taxation is a response to the increase in wealth concentration and income inequality that has occurred in most OECD countries. It has been well documented that both income and wealth inequality have risen significantly in recent decades. In this Commentary, we critically evaluate the case for an annual wealth tax as part of Canada’s tax system. To do so, we review current received wisdom on the elements of a good tax system, drawing on the normative tax design literature and best practices. We do not address the issue of how responsive tax policy needs to be to deal with the evolving inequality of income and wealth. Our focus, instead, is on the mix of policy instruments that are most effective for whatever degree of responsiveness policymakers choose. Our argument is that wealth taxes add relatively little to the taxes on capital and capital income that are already in place, and that concerns about the social consequences of wealth concentration are better addressed by reform of existing capital income taxes and by considering wealth transfer (inheritance) taxation. Our argument against wealth taxation is over and above the substantial administrative challenges in measurement, collection and coverage for annual wealth taxes. These alone are enough to raise red flags about wealth taxation. For our part, we rely on the more fundamental argument that annual net wealth taxes are unnecessary since their objectives can be better achieved by suitably designed taxes on capital income and wealth transfers.

The Long-Run Redistributive Power of the Net Wealth Tax

There is growing debate, both social and academic, about the possibility of levying an annual wealth tax. Until a few years ago, such a proposal appeared difficult to both implement and control, but recent technological innovations, which could greatly facilitate the periodic valuation of wealth, combined with improvements in international tax information sharing could make a “modern wealth tax” possible. Nonetheless, a number of challenges regarding its design still need to be addressed. In this paper, taking advantage of the Spanish experience – the only EU country to levy a wealth tax – we simulate the tax’s redistributive impact in the long run. This impact could well be substantial if all wealth were to be valued at market prices and compliance were high. Our results show that the family business exemption and the common income and wealth tax ceilings are highly regressive. We develop a tax simulator (SIMPA) that helps assess the effectiveness of alternative reforms with more comprehensive tax bases.

The Tenuous Case for an Annual Wealth Tax

We explore the case for and against an annual wealth tax as part of the overall tax mix. Few countries now use wealth taxes, and those that do adopt narrow tax bases. Taxes on inheritances or bequest are more common, but they generate limited revenue and apply to relatively few taxpayer. In principle, annual wealth taxes are roughly equivalent to capital income taxes on the assets to which they apply, although there are some assets for which wealth taxes might be simpler to implement than capital income taxes. Annual wealth taxes are distinct in purpose from inheritance taxes which are useful adjuncts to income taxes even if capital income is exempt. We recount the persuasive arguments for taxing capital income, albeit at different rates than for other income, and for taxing inheritances regardless of whether capital income is taxed. We argue that if the desire to tax asset income and wealth transfers is appropriately addressed by capital income and inheritance taxation, the additional need for an annual wealth tax is minimal and its benefits do not outweigh its administrative costs.

Behavioral Responses to Wealth Taxes: Evidence from Sweden

This paper provides an empirical assessment of an annual wealth tax. Using Swedish administrative data, I estimate net-of-tax-rate elasticities of taxable wealth in the range [0.09, 0.27]. Cross-checking self-reported assets against asset data unavailable to the tax agency reveals that around a third of the elasticity estimates are due to underreporting of asset values. Difference-in-difference designs further suggest that the responses reflect evasion and avoidance rather than changes in saving. (JEL H24, H26, H31)

Does Australia Need an Annual Wealth Tax? (And Why Do We Now Apply One Only to Pensioners)

This paper argues that given the current hybrid income-expenditure tax system in Australia (hybrid IT/ET) a wealth tax could make sense as a way of ironing out disparities in the tax treatment of different assets. A wealth tax could be designed to approximate a comprehensive income tax (CIT) outcome by combining a wage tax with imputed asset income (deeming), or it could fall more lightly. We already have a harsh wealth tax in the welfare system, the asset test; the issue arises as to why we would confine wealth taxation to the not-so-well-off. If we move the income tax to an ET of, e.g., a consumption tax (CT) type a wealth tax might still make good sense, although the implied rate may be lower than under the wage tax as the CT taxes some part of economic rents. However if we move towards explicit taxation of economic rents using, say, the rate of return allowance (RRA) or its cash-flow counterpart, the Z-tax, a wealth tax may be less needed, as such rents comprise two-thirds the total return on capital.

The Case for Replacing Investment Income Taxes with an Annual Wealth Tax

The tax reform debate in America is largely framed as a conflict of competing principles rather than shared goals and the resulting politicized power struggle has left us blind to a critical flaw in fiscal policy: Structural preferences that shelter wealth from direct taxation are subsidizing unproductive and illiquid capital, thereby distorting investment incentives and obstructing sustainable economic growth and job creation. Those preferences are both inefficient and inequitable, contrary to core principles of both democracy and capitalism. A properly designed annual wealth tax could facilitate removal of those preferences and serve as the cornerstone element of simultaneously more equitable and efficient comprehensive tax reform: a) stimulating more productive investment and thereby job growth, while allowing us to b) equalize effective tax rates between labor and capital, and c) lower the maximum marginal tax rate to 25%. The most direct way to both stimulate our productive economy and restore the American Dream is to reduce the marginal tax burden imposed upon earned income. Increasing the take-home pay of the working class would both stimulate personal consumption which constitutes over 2/3 of GDP, and facilitate savings among the portion of the population which otherwise places demands upon our social services programs. The most efficient way to stimulate productive domestic investment is to equalize the imposed burden upon all investible capital; removing misguided structural tax preferences toward illiquid and unproductive assets would trigger a rapid and aggressive redeployment of private capital. If 3% of the nation’s $97 Trillion national wealth were redeployed it would unleash a $3 Trillion stimulus program funded entirely with private capital.

Why Was a Wealth Tax for the UK Abandoned? Lessons for the Policy Process and Tackling Wealth Inequality

AbstractThe distribution of wealth is widening in many countries and with it the growing importance of inherited wealth. In 1974, a Labour Government came to power in the United Kingdom committed to introducing an annual wealth tax. It left office without doing so. Using the official archives of the time and those of a key advisor this paper traces both the origins of the policy and its fate at the hands of the civil service. It explores two related questions. What does this experience tell us about the role of the civil service in the policy process in the UK and what lessons might be learned by those wishing to tackle the issue of widening wealth disparities today?

An Empirical Analysis of Wealth Taxation: Equity vs.Tax Compliance

Capital taxation is currently under debate, basically due to problems of administrative control and proper assessment of the levied assets. We analyze both problems focusing on a capital tax, the annual wealth tax (WT), which is only applied in five OECD countries, being Spain one of them. We concentrate our analysis on top 1% adult population, which permits us to describe the evolution of wealth concentration in Spain along 1983-2001. On average top 1% holds about 18% of total wealth, which rises to 19% when tax incompliance and under-assessment is corrected for housing, the main asset. The evolution suggests wealth concentration has risen. Regarding WT, we analyze whether it helps to reduce wealth inequality or, on the contrary, it reinforces vertical inequity (due to especial concessions) and horizontal inequity (due to the de iure and to de facto different treatment of assets). We analyze in detail housing and equity shares. By means of a time series analysis, we relate the reported values with reasonable price indicators and proxies of the propensity to save. We infer net tax compliance is extremely low, which includes both what we commonly understand by (gross) tax compliance and the degree of under-assessment due to fiscal legislation (for housing). That is especially true for housing, whose level of net tax compliance is well below 50%. Hence, we corroborate the difficulties in taxing capital, and so cast doubts on the current role of the WT in Spain in reducing wealth inequality.