Wealth tax

from David Richardson and RWER #98

To the extent they are taxed at all, capital gains are only taxed on realisation. In that way avoidance avenues can take place by simply not realising capital gains. The arguments against taxing gains as they accrue are pragmatic. It would be difficult to measure the value of assets each year to calculate tax liabilities.

If capital gains are difficult to tax because they are difficult to value, then perhaps wealth should be taxed instead. Wealth could be deemed to have a provisional value equal to historic cost plus the general level of inflation since purchase. The existing capital gains tax could then be used to impose additional tax or give credit for any gains on realisation above or below the amounts previously assessed.  Atkinson points out that while the increasing inequality due to capital gains suggests that tighter capital gains taxes may be warranted, in fact a good deal of the capital gains have already taken place and dramatically increased the wealth of the wealthy (Atkinson, 2015). Past capital gains can only be captured by a wealth tax of some sort. 

A capital tax or wealth tax is the major policy Piketty calls for to address the fundamental problem identified in his book—the tendency for wealth to grow more quickly than the economy generally and so for wealth to be more and more unequally distributed among the population.^[1] Piketty suggests that those with “fortunes” worth less than €1 million might pay nothing, while a tax of 1 per cent would apply to “fortunes” between €1 million and €5 million, and 2 per cent to those greater than €5 million. Piketty thought the tax would need to involve international cooperation with respect to rates, definitions and similar so as to avoid countries being played off against each other. A wealth tax as a tax on capital is not related to the rate of return on capital or the way it is invested and so wealth owners will be undeterred from seeking out the best pre-tax return options. Such a tax design would indeed seem to leave the investor with a fixed tax irrespective of the return they might earn.

Stiglitz (2020) has argued that Europe should pursue wealth taxes more aggressively both for the revenue potential but also to address concentrations of family wealth built up through inheritance. That would include annual wealth taxes but also death duties. Stiglitz cites studies that show inherited wealth discourages work on the part of the beneficiaries.  That makes sense; people who can live in comfort without working are unlikely to take it up.

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