Wealth Tax

What It Is and How It Works

Taxes are compulsory payments to be made by (certain) citizens without a direct consideration. These taxes can be direct -when they fall directly on individuals or companies according to their economic capacity-, or indirect -when what is taxed are transactions on goods or services-. One of the best known direct taxes is the wealth tax, which is paid according to the wealth of the individual or household. As with any tax, in order to determine its value, the following must be taken into account: the taxpayers (who pay it?), the taxable base (the amount on which the tax is applied) and the tax rate (the percentage of the taxable base that must be paid to the tax authorities).

The Policy’s Impact

The wealth tax is one of the most progressive taxes in existence, since its payment is directly proportional to the taxpaying capacity of the citizen. This makes it possible to finance state expenditures in a more equitable manner, with the effort falling mainly on those who can meet these expenses with less difficulty. At the same time, in many cases it is a way of encouraging productive investment in the short-term, since the expenditures made for new projects are deducted from the taxpayer's personal wealth.

The application of this type of tax usually also includes a system of valuation of specific assets, in order to homogenize the calculation of the wealth of different citizens.

Stakeholders and Political Implications

Given that in most of the countries where wealth taxes are applied, there is a a non-taxable minimum level of wealth, we can affirm that the direct stakeholders are those who exceed or are close to exceeding that threshold.

In recent decades, various tax evasion and avoidance mechanisms have been created that tend to declare the assets of individuals and companies in places specially organized to collect low or no taxes of this type, thus harming tax collection in the countries where the wealth was actually generated.

Some Debates Among Economists

Among the main arguments in favor of the wealth tax are: the greater collection by the State; the fiscal justice that arises from such tax; the possible stimulus to economic growth by encouraging investment; and its tendency to reduce inequality, which may be an economic objective per se.

On the other hand, different economists could claim that the wealth tax causes a flight of capital and talent to other countries (where this type of tax is not applied), or that in many cases what happens is a double taxation, since a tax is paid at the moment of receiving an income (rent tax), and then taxes continue to be paid when that same income is transformed into an asset.