How to design a wealth tax.

Wealth taxes are very popular in general, but not in particular because it usually means that asset ownership gives rise to taxation. One example of this would be property tax.

If ‘wealth’ is going to be taxed it has to be defined, the classical example is to use the accounting equation in which ‘assets minus liabilities equals capital’. The issue after that is where debt is involved because if you owned a home worth €300,000 and had debts on it of €200,000 then your ‘wealth’ is €100,000.

People could potentially try to game the system, it’s not as simple as getting indebted, if you had €300,000 in cash and then bought a property and remortgaged it to the hilt you’d still have to have €300,000 cash somewhere, so the issue becomes one of reporting and valuation.

This puts a weight upon the individual to make declarations and returns which people don’t like doing so a simplified process would be a good thing, where a person can provider a simple number of ‘assets minus liabilities equals wealth’ and file it online.

If wealth inequality is a bad thing (not everybody agrees that it is inherently bad at all times) then all wealth needs to be taxed and done so in a uniform fashion – that implies a flat rate because proportionally any tax will be a bigger sum when you have more wealth. The penalties for non compliance would also need to be such that it hurts more not to comply than to comply so the following idea might be something worth considering.

We’ll imagine the wealth tax is 1% a year, if you have a debt free house worth €1,000,000 and a cash deposit of €100,000 then your tax bill would be €11,000. That may seem like a large sum but lets not forget that the rate is only 1% on free and clear wealth. In such a situation you’d abolish DIRT tax. If a person didn’t want to pay this, or couldn’t or opted out then you could also acrue it towards the estate, this would ensure that older people living alone are not punished unduly because they have a large asset but perhaps low income.

The tax in that case would be €11,000 plus inflation for the year plus the standard Revenue rate of interest so that it stays the same in real terms.

Many assets cannot be hidding, actual cash can, but for the majority of people it’s in very visible things like pensions, houses, physical assets, deposits accounts and the like. The anti-avoidance piece would be to have a penalty system whereby an estate is charged, this would mean a person could avoid a tax in life but would have to pay it in death.

Typical evasion measures would be to underreport or undervalue assets, to say that a house worth €1,000,000 was only worth €500,000. In a case like that it would be necessary at probate to have a set of rules which dictate the evasion penalty.

Only the declared sum total of wealth (perhaps the most recent 3yrs plus or minus a certain amoung for fluctuations) would be considered ‘reported’. After that the amount above becomes taxable at 120% which means you’d lose out on all of the non-reported €500,000 and an additional €100,000 for the evasion. After that the €400,000 estate would be divided as per the will (or in the absesnce of a will as per the usual rules).

This is just a thought experiment, but one which looks at taxing wealth and doesn’t take into consideration the many other taxes that it could interact with (for instance we’d have to have lower income tax rates to make this fair as it would be a cashflow claim on an asset basis), but it does consider the role of wealth and how you might go about taxing it.

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