Wealth Tax

A WEALTH TAX IS a tax that is based on all assets and income owned by individuals. It is a progressive tax in that the more that individuals own, the more they contribute to the government to provide essential and nonessential services.

Taxable assets include income, stock and share holdings, property, and valuable items; some of these may have been inherited. Generally, there is a minimum threshold of wealth that an individual must possess before being required to pay taxes. There is an incentive for individuals to seek to minimize their tax liability by nominally redistributing assets to family members or associates, so that each can claim the reduction for the minimum threshold.

Wealth taxes include periodic or sporadic net wealth taxes, transferor taxes (such as gift tax), and recipient taxes (such as inheritance taxes). The degree of efficiency of these taxes varies from country to country and over the course of time. Most developed states have wealth taxes of some sort, while transfer taxes are generally more common than net taxes. These are among the oldest forms of financial redistribution, and examples occur throughout history.

In Islam, for example, individuals are expected to pay the zakat, which is a religiously mandated wealth tax, so long as their wealth exceeds the minimum threshold or nisab. The zakat is intended to support the poor and needy. Many Christian churches encourage members to contribute a tithe or one-tenth of income or wealth.

Progressive taxes are generally considered fairer or more equitable than regressive taxes in which poor people have to pay proportionately more than richer people, as for example with value-added taxes on basic goods. Nevertheless, no tax system will be entirely fair, and under wealth taxation there may be, for example, people with illiquid assets and little cash income required to pay high levels of tax. This includes old people with a large house but modest personal income, and churches too often fall into this category.

The perception of fairness is important in ensuring sufficient popular support that people observe the laws and favor prosecution of those who do not observe them. In countries where the popular media is dominated by a small number of wealthy individuals with the power to control broadcast content, atypical examples can be seized upon to try to create a climate of opposition to wealth taxes, including intergenerational taxes and other forms of unearned income.

The demand for many government services is highly elastic with respect to income and thus enjoyed much more by the wealthy than by the poor. Such services, including public parks, museums, and cultural institutions, should therefore be more fairly paid for by the wealthy.