Taxation is a hotly debated subject all over the world. There are supporters of capitalism who already believe that the rich are being taxed too much. On the other hand, there are supporters of socialism who cite increasing wealth disparity and argue that the rich should be taxed even more.

The idea that the rich should be taxed as much as possible is not really new. In fact, the concept of Wealth Tax existed in many countries across the world. However, with the passage of time, economies experienced negative effects of this wealth tax. This is the reason why it was abolished in the first place. It seems like many politicians and people have forgotten the pitfalls of wealth tax. This is the reason why many Democrats are lobbying for the introduction of this tax in the United States.

Before any wealth tax is levied on the American people, it is important to have a look at the true meaning of wealth tax as well as its pitfalls.The same is being explained in this article.

What is Wealth Tax?

Wealth Tax is a tax on the wealth i.e. the net worth of an individual. This is opposed to the normal income tax which is levied on the income in a particular year. In order to compute the wealth tax payable, the government needs to have a record of all the assets that a person has viz. cash, vehicles, properties, stocks, bonds etc. If the sum total of all these assets goes over a certain threshold level, then the person is liable to pay wealth tax.

Pitfalls of Wealth Tax

• Double Taxation: Wealth taxes are unjust by definition. They are just a means for the politicians to get their hands in the coffers of the rich. Wealth is a result of the accumulation of income over many years. If the government is already taxing income which has been generated over the years, it does not really have the right to tax the wealth that has been accumulated after tax. A wealth tax is basically a levy by the government which is meant to prevent people from getting rich! Citizens work hard to generate a certain level of wealth. As soon as they reach there, the government wants to take another cut which it surely doesn’t deserve.
• Flight of Capital: Many countries across the world had levied wealth taxes. These countries included France, Sweden and even developing nations like India. These economies soon realized that in order to avoid paying wealth tax, the wealthy were taking their money out of the country.

  For instance, the billionaire founder of Swedish company Ikea was managing most of his money from offshore companies and accounts. This is when the Swedish government realized that the gain from wealth tax was very small. However, they were paying a big price since once the capital left the country, so did the interest income on that capital. As a result, Sweden had less taxable income next year.

  If Sweden just allows the capital to stay in the country untaxed, it can tax the interest income next year! Or else, if the capital is deployed in some kind of industry, it can tax the income created from jobs in that industry. Also creation of jobs is much more effective at reducing income inequality than a wealth tax.

  In this globalized world, capital can move electronically from one state to another in a matter of seconds. Hence, holding on to an outdated concept such as wealth tax would be foolish to say the least.

• Difficult to Implement: Another major problem with the wealth tax is the difficulty which is commonly faced while implementing such a tax. Income tax can be levied easily since income is a fact.

  The first issue with levying wealth tax is that one needs to ascertain the value on which it will be levied.

  Assets can be valuated based on their market value or their historical value. Neither of these values can be used as a base for taxation. The historical value may be too outdated. On the other hand, the market value could be too inflated.

  Hence taxing the market value would be like taxing notional gains. This would obviously be unfair to the taxpayer since tomorrow if the notional value of the asset drops, the government is not going to refund the tax!

  Many governments tried creating inflation indexed values for assets to be used as tax base. However, that system also doesn’t work many times since there are many people who have assets such as land but do not have the liquid income to pay taxes.

• Discourages Capital Formation: Lastly, wealth taxes discourage local capital formation. Since savings are taxed, people don’t save money at all. If they do, they tend to remit it overseas. Hence the extent of domestic capital reduces drastically whereas the share of foreign capital in the economy grows.

  Having more foreign capital is inherently dangerous since it is unstable and can leave the economy at any time. Wealth tax basically ends being a scheme wherein local savings are channelled to other economies instead of benefitting the economy that they were generated in.

The bottom line is that the wealth tax is a draconian and unfair tax which has been abolished by most countries across the world. There is no reason why the United States should adopt this tax system which has been an undoubted failure in both developed as well as developing countries.

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