The Pros and Cons of Wealth Tax: Efficiency, Double Taxation, and Capital Flight

Despite all those advantages a wealth tax has, many countries abolished it because of the high cost of implementation and the little revenue it generated. There are high administrative costs and complex annual tax returns linked to the wealth tax, which make it less efficient. Also, sometimes it is quite difficult to measure wealth. Values can be misrepresented and in a lot of cases, it is not possible to know the real value of an asset until it is sold.

Furthermore, the argument of double taxation can be applied to the wealth tax. If wealth is accumulated from salaries, savings, or personal business income, double taxation is likely to happen since these flows in many cases have already been taxed. This argument, though, can be used for almost every type of tax.

Moreover, a wealth tax is a distortive tax since it gives disincentives to save and invest. People will modify their behavior in order to pay fewer taxes. Less investment can actually lead to a reduction in economic growth, which could also have negative effects on employment.

Another big contra-argument of a wealth tax is the resulting capital flight and people leaving the country to places with lower or no wealth tax. A wealth tax also makes a country less attractive for wealthy people to immigrate or invest in. All these factors combined could result in a reduction in other taxes, which ultimately leads to a net loss of total tax revenue.

So to make a wealth tax more efficient, it has to become simpler and interact well with the general tax system, like taking into account tax rates on capital income to prevent capital flight. Recently, there have been propositions in the USA to introduce a wealth tax. It is argued to be better than other wealth taxes in the past since it has a higher threshold that would only affect millionaires and billionaires. It is also discussed to introduce a high exit tax to prevent capital flight.