Wealth tax – definition and meaning

Wealth tax is a tax on a person’s assets, on his or net net worth. It is not a tax on income, but rather on an individual’s wealth. Targeting wealthy people for taxation is popular among politicians.

In virtually every country in the world, most of the wealth is concentrated within a very small percentage of the population.

In other words, wealth tax is a tax on what we have, as opposed to income tax, which is a tax on what we earn.

By focusing on wealthy people and proposing or implementing a wealth tax, a great deal of money can be raised from a relatively small number of people – so the theory goes.

This may be popular for the rest of the population, because they are told that their tax burden is either reduced or kept down.

Most politicians and some economists claim that a wealth tax helps reduce inequality – the difference in wealth between the top 1% or 10% richest people in the country and the rest of the population or the poorest individuals.

Wealth TaxWealth tax is a tax levied on personal capital, the things you own, your possessions, including cash, bank accounts, cars, airplanes, homes, bonds, shares, jewelry, expensive works of art, patents, copyrights, antiques, etc.

In most cases, when calculating how much wealth is to be taxed, the person’s liabilities are deducted, hence it is often referred to as net wealth tax.

There are many wealth tax critics

Wealth tax critics say that it discourages creative and hardworking people from being creative and working hard – both wealth-generating economic activities. In other words, if you target the assets of wealthy people, you may be erasing future assets that would have been created if the wealth tax had not existed.

If it prevents future assets from being created or accumulated, the tax is self defeating, because in future tax revenue from this source will decline, critics argue.

Critics add that this type of tax destroys jobs, because it discourages the accumulation of wealth, which they insist drives economic growth.

Wealth tax in FranceFrom 1998 to 2006, France’s wealth tax brought in very little revenue for the government, and triggered a colossal flight of capital.

Wealth tax brings in little revenue

Most governments that introduce a wealth tax are soon disappointed at the tiny amount of revenue it generates. The world’s richest people have the smartest, best-trained accountants and lawyers. These people are experts in **tax avoidance.

** Tax avoidance refers to legal methods for reducing one’s tax bill, unlike tax evasion, which is illegal.

Across the OECD (Organization for Economic Co-operation and Development) nations, wealth tax represents less than two percent of total tax revenue for governments.

The world’s richest people find it much easier to emigrate than their counterparts further down the socioeconomic ladder. Emigrating costs a lot of money – something rich people have in abundance.

If lawmakers target wealthy individuals too severely, they are likely to move abroad into countries with more ‘rich-friendly’ tax regimes. History has shown that this always happens if the tax burden on a country’s wealthiest individuals reaches a certain point.

In an article published in the Washington Post in 2006Old Money, New Money Flee France and Its Wealth Tax – Molly Moore wrote that while France’s wealth tax brought in approximately $2.6 billion annually in revenue, it cost the country more than $124 billion in capital flight from 1998 to 2006.

Winston Churchill - Tax QuoteAccording to the British Government: “Winston Churchill was an inspirational statesman, writer, orator and leader who led Britain to victory in the Second World War. He served as Conservative Prime Minister twice – from 1940 to 1945 (before being defeated in the 1945 general election by the Labour leader Clement Attlee) and from 1951 to 1955.” (Images: adapted from Wikipedia)

Examples of wealth tax

Argentina: called Impuesto a los Bienes Personales, the tax is imposed on assets above $53,500 (ARS 800,000) at an annual rate of 0.75% for 2016, 0.5% for 2017, and 0.25% in 2018.

France: called Impôt de solidarité sur la fortune, it applies to any assets above €800,000 ($872,000) if an individual’s net worth is at least €1.3 million ($1.42 million). Marginal tax rates range from 0.6% to 1.5%. In 2007, just 1.4% of total tax revenue came from this wealth tax.

Spain: called Patrimonio, it is a progressive tax that ranges from 0.2% to 3.75% of net assets for individuals with a net worth of at least €700,000 ($763,000). Tax rates vary between provinces.

Alan Greenspan - Tax QuoteAlan Greenspan is an American economist who currently provides consulting for companies through Greenspan Associates LLC. He served as Chairman of the Federal Reserve, the US central bank, from 1987 to 2006. (Image: adapted from britannica.com)

India: used to have a wealth tax. This was abolished in 2016.

Norway: individuals with a net worth of more than Kr1.2 million ($139,413), as of 2015, pay 0.7% (municipal) and 0.15% (national), i.e. a total of 0.85%, which is levied on their assets. The Progress and Conservative parties in Norway’s current government, as well as the Liberal Party say they plan to reduce and eventually abolish wealth tax.

Switzerland: the majority of cantons have no such taxes for people with a net worth lower than CHF100,000 ($100,603), and progressively increase the tax rate on net assets from 0.13% to 0.94%. Wealth tax is levied against the global assets of Swiss residents, but not against the assets held by non-resident individuals in Switzerland.