Inequality and the wealth tax
Daniel Mulcahy
The idea of a wealth tax has existed for millennia, and is frequently proposed as a method of reducing inequality, by taxing the wealth of the super-rich and redistributing the revenue to the less fortunate. In this essay I will argue that a wealth tax could be very effective at fighting inequality, if introduced and enforced in the right way. In order to come to this conclusion, I will examine the potential benefits and costs of a wealth tax, the failures and successes of previous attempts at implementing wealth taxes and the types of wealth tax proposed in recent years. Wealth taxes have featured prominently throughout history, often being the preferred method calculating tax before the rise of income taxes. Historically, wealth has been harder to conceal and easier to put a value on, exemplified by the wealth tax in Ancient Rome (although this was used to fund military conquests rather than to reduce inequality). England’s window tax of 1696 was essentially a wealth tax on property, but famously ended up with many people bricking-out their windows, demonstrating the extent to which people will go to exploit loopholes and avoid paying tax. In the last few decades, more than a dozen European countries have introduced some form of wealth tax, but this number is now down to just 4: Switzerland, Belgium, Spain and Norway. One of the most notable examples of an unsuccessful wealth tax was in France, where the solidarity tax was levied between 1986 and 2017. Ultimately it was removed because it was poorly designed and enforced, with significant loopholes such as not including artwork in the valuation of assets, and not restricting the movement of wealth abroad. While the French wealth tax brought in € 4.42 billion in 2007 alone, it was estimated that 843 people left France in 2006 as a result of the tax, causing a net loss to the economy. The tax was ultimately scrapped by Macron and replaced by a real estate tax which was easier to enforce. The wealth taxes of Luxembourg and Switzerland were more successful, generating 7.18% and 4.77% of total tax revenue respectively. However, in Germany the figure was just 0.03%, demonstrating how the success of a wealth tax at increasing revenue varies greatly depending on the design and enforcement of the tax, as well as the wealth of the citizens who have to pay it. One of the most significant benefits of a well-designed and enforced wealth tax is the additional revenue it generates for the government. Elizabeth Warren claimed that her proposed wealth tax could raise 1.4% of US GDP in tax revenue if implemented, and more recently a study by the UK Wealth Tax Commission has suggested that a one off 5% wealth tax in the UK could raise £262 billion to cover costs incurred by the coronavirus pandemic, equivalent to about 7% of GDP. 1 Annual revenue from a wealth tax could be spent in a variety of ways aiming to reduce wealth and income inequality. For example, improving public education is one of the most effective ways to reduce future income inequality, and helps improve social mobility by improving the skills of the future workforce. Universal Basic Income or Guaranteed minimum income could be funded by the additional revenue generated by a successful wealth tax, which would significantly reduce income inequality. However, to tackle wealth inequality,
1 In the UK, income tax raises about 23%, national insurance about 17% and VAT about 16%. Corporation tax raises roughly 6%.
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