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The Wealth Tax: Pros & Cons

wealth tax pros and cons

The US Presidential Elections are coming up in 2020 and several candidates from the Democratic Party have vowed to implement a wealth tax if elected.

For example, Elizabeth Warren, the US Senator for Massachusetts, has included in her campaign a 2-to-3 percent annual wealth tax on individuals with an amassed wealth of more than $50 million.

This differs greatly from the more radical and aggressive plan proposed by Bernie Sanders, the US Senator for Vermont, who wants to implement a progressive 1-to-8 percent tax on people with more than $32.1 million in wealth.

wealth tax sanders warren

Since the wealth tax has been a heated topic of discussion not only in the USA, we thought it’d be a good idea to take a closer look at the wealth tax as policy and discuss its many advantages and disadvantages.

First of all, what is a wealth tax?

According to Investopedia, a wealth tax is a levy “based on the market value of assets that are owned.”

Generally speaking, this type of tax applies to “a person's net worth which is assets minus liabilities. These assets include, but are not limited to, cash, bank deposits, shares, fixed assets, personal cars, assessed value of real property, pension plans, money funds, owner-occupied housing, and trusts. An ad valorem tax on real estate and an intangible tax on financial assets are both examples of a wealth tax.”

Advantages of the Wealth Tax

Eliminates Inequality: With most of the world’s wealth concentrated in the hands of a few, a wealth tax is a way for governments to redistribute wealth and balance the scale in favor of the lower and middle classes. Revenue accrued via a wealth tax could be used to improve healthcare, housing, education, public infrastructure and other social services destined to those in need.

Effectively Targets the Wealthy: Plenty of wealth tax advocates believe this sort of levy is the best way to tax wealthy individuals who earn most of their money via investments and real estate. According to these wealth tax proponents, an income tax does not apply to the wealthy in the same way it does to regular salaried employees. Hence, a wealth tax is a more efficient way to actually capture tax revenue from the wealthy.

Use It or Lose It: As reported by the Financial Times, some argue that, “compared with taxes on profits, dividends and capital gains, the wealth tax favours those who deploy their assets more productively” since “it is a levy on the same slice of a fortune regardless of the returns the assets produce.” According to Fatih Guvenen, an Economics Professor at the University of Minnesota, “a net wealth tax effectively redistributes from those who invest their capital badly to those who find high-return uses for it,” therefore “[rewarding] talented entrepreneurs and [boosting] productivity growth in the economy overall — a combination that could just begin to look politically attractive.”

Disadvantages of the Wealth Tax

Leads to Double Taxation: One of the main pitfalls of the wealth tax is that it leads to double taxation. An annual tax on wealth basically means rich individuals would be coughing up separate fees to the country’s tax authority, one for earning their income (in the form of the ubiquitous income tax) and another one (the aforementioned wealth tax) for retaining that same income.

Causes Capital Flight: Another often mentioned criticism of the wealth tax is that it encourages the wealthy to transfer their assets abroad.  Wealth businesspeople could very easily move out to never come back to avoid having to deal with this sort of tax. In the US case, it might lead to many individuals giving up their US citizenship to rid themselves of this additional tax burden.

It’s Tough to Calculate: A big issue with the wealth tax is how to calculate it. Talking to Business Insider, Blanche Lark Christerson, Deutsche Bank’s Managing Director of Wealth Management, explained, “It's easy for the IRS to figure how much to tax a billionaire's investment portfolios…but the value of other assets like yachts and fine art are up for interpretation.” Furthermore, she believes “appraising is more of an art than a science” and many tax authorities throughout the globe, particularly the US IRS, are not “currently equipped to do that.”

What are your thoughts on the wealth tax and its effectiveness as policy?

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