Wealth Tax Add-Ons: An Alternative to Comprehensive Wealth Taxes

Abstract

Comprehensive wealth taxes offer the possibility of reducing inequality while raising revenue. However, implementing comprehensive wealth taxes can be difficult, especially in emerging economies where administrative and political limitations are often substantial. This Article offers an alternative set of instruments – wealth tax add-ons – that countries can use to achieve many of the goals of a comprehensive wealth tax. Rather than trying to tax all wealth with a new tax instrument, add-ons would target and tax particular forms of wealth and be attached to existing tax systems. This Article focuses on three different types of add-ons: (1) a surtax on real property for the property tax system, (2) a minimum tax for closely-held businesses for the corporate tax system, and (3) a Netherlands-style presumptive tax for financial assets for the personal income tax system. Add-ons can improve the taxation of disparate forms of wealth in ways that are difficult to incorporate into a single instrument. For example, we argue that wealth in the form of closely-held businesses is best taxed at the entity level to avoid the problems of attribution and valuing minority interests – challenges that would face any comprehensive wealth tax applied at the individual level.

This Article presents an analytical framework for how particular countries might pick and tailor these wealth tax add-ons. The starting point is to collect data to understand the distribution of wealth in the country, the composition of wealth (the relative importance of different types of assets), and how the composition of wealth changes across the wealth distribution. This information will influence the design of the add-ons (especially the threshold for taxation and the rate) and the relative attractiveness of these instruments. Because taxing only certain forms of wealth entails some costs, the add-ons together should cover a substantial portion of the wealth tax base. Countries should make these determinations in the context of existing tax systems, and, in particular, how well a country’s existing systems tax income from capital.

Keywords: Comprehensive wealth taxes, wealth tax add-ons, distribution of wealth, wealth tax bases, tax systems, tax reform