Understanding Wealth Tax: A Comprehensive Guide

Posted on Nov 8, 2024 in Economy

Introduction

What is Wealth?

Wealth is one of the three manifestations of the ability to pay, alongside income and consumption.

Justification for Wealth Tax

This duty is arguably justified by the following reasons:

  1. It helps to correct some problems of income tax (e.g., unrealized capital gains).

  2. Increased wealth leads to a higher tax liability.

  3. It reduces the concentration of wealth, which is both socially and politically desirable.

  4. Taxes on wealth are paid on benefits that wealth holders have received from the public sector.

Classification of Wealth Tax

Six Criteria Characterizing Wealth Tax

  1. Assessment Scope

    General taxes: Apply to the entire estate.

    Partial taxes: Apply only to one category of assets.

  2. Connection to a Person

    Taxes on personal wealth: Focus on the individual’s wealth.

    Taxes on real wealth: Not connected to a specific person.

  3. Tax Base Computation

    Taxes on net value: Debts and charges are deducted from the total wealth.

    Taxes on gross value: No deductions are made.

  4. Chargeable Event

    Taxes based on acquisition or transfer: Levied upon acquiring or transferring wealth.

    Taxes based on ownership: Levied on possessing or owning wealth.

  5. Function in the Tax System

    Supplementary income tax: Complements income tax.

    Separate tax: Independent of income tax.

  6. Payment Frequency

    Regular taxes: Paid regularly (e.g., annually).

    Casual taxes: Paid once in exceptional circumstances.

Resulting Tax Figures

Combining these six criteria results in the following tax figures:

  1. Tax on Equity

  2. Tax on Inheritance and Gifts

  3. Transfer Tax

  4. Property Tax

  5. Special Tax on Capital (paid in exceptional economic circumstances, typically military-related)

Equity Tax

Features

  1. Personal Income Tax: Considers the taxpayer’s personality.

  2. General Tax: Two types exist with exclusions:

    1. Subject to Tax Exclusions:

      1. Human capital
      2. Difficult-to-control or unimportant fixed assets
      3. Economic policy solutions

    2. Subject Exclusions:

      1. Basic allowance
      2. Legal entities (equity firms are not taxed)

  3. Net Wealth Tax: Charges affecting the property are deducted.

  4. Progressive or Proportional: Varies by country.

  5. Regular Annual Tax: Due to its importance and coordination with income tax.

  6. Additional Tax to Income Tax: Supplements income tax.

Definition

A general and personal tax levied on property or wealth. It is a recurrent annual supplementary income tax.

Organization

Taxable Income

Equity, in principle, includes all movable and immovable property or rights with economic significance. However, exceptions exist:

  1. Human Capital: Capitalized value of future expected earnings.

  2. Copyright and Patents: Assumed to be work remuneration (recorded by income tax).

  3. Pension Rights: A form of savings integrated into heritage, but widely excluded.

  4. Life Insurance Policies: Excluded for political rather than technical reasons.

  5. Household Furnishings and Personal Effects: Difficult to control and assess, leading to varied tax definitions:

    • Pure or conditional exclusion
    • Lump-sum valuation
    • Accurate ratings

  6. Works of Art: Either fully or partially excluded (e.g., Spain).

  7. Liabilities (Deduction): Debts and burdens affecting the estate are deductible.

Taxable Event

Determined by ownership of property and heritage rights. The estate itself is the object, and ownership is the taxable event.

Liable Subjects

Natural persons and legal entities holding equity. This raises two questions:

  1. Are companies subject due to potential double taxation with corporate tax and equity tax? Tax harmonization in the EU suggests applying it to individuals.

  2. For accumulated heritage in a single taxpayer unit (supplementary to income tax), should the taxpayer unit be the same as for income tax (individual or family)?

The tax base is the net value:

Base = Asset Value – Debts and Burdens

Tax Base Activities

  1. Cash:

    • Hoarding is virtually impossible to police.
    • Bank accounts are the only ones considered.

  2. Financial Assets:

    • Fixed Income (e.g., government bonds)
    • Equity (e.g., shares)

  3. Real Assets:

    • Movable (e.g., jewelry, artwork)
    • Real Estate

  • Property Valuation Criteria: Market value is preferred. If unavailable, cost, taxable value, or total asset value are used.

  • Real Estate Valuation Criteria: Often based on income capitalization, calculating the capital needed to generate observed profits given a market interest rate.