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Summary Chapter 15 - Taxation of wealth
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Chapter 15 - Taxation of wealth
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CHAPTER 15Taxation of wealth
15.1 Wealth and types of wealth taxes
Wealth → the value of accumulated savings, investment, gifts, and
inheritances.
Personal wealth → present value of a person’s expected real income
o Includes:
Tangible goods → houses, land and other durable goods and
financial assets (cash, shares, bonds), insurance policies and
pension rights
Intangible goods → human capital acquired through investments
in education.
Wealth is reduced by liabilities → e.g. mortgage on a house.
o Net value of assets/net personal worth = assets – liabilities.
Wealth tax base → used for wealth taxes (not just personal or individual
wealth)
o Includes the wealth/net assets of companies → company wealth
includes fixed capital in various forms (e.g. premises, plant and
machinery)
o Company wealth may include floating capital (raw materials and
inventory) and financial capital (stocks and shares, cash and bank
deposits)
Main types of wealth tax:
o Annual wealth taxes on people and companies
o Property taxes:
On land and improvements
o Capital transfer taxes:
On estates and gifts
, 15.2 Why tax wealth?
Consider an annual wealth tax on the net wealth/net worth of individuals → taxing
assets of a company is for simplicity not included in these arguments.
Equity considerations of taxation → does fairness or equity justify a wealth tax on
individuals?
o Rely on the benefit and ability to pay principles to analyse whether wealth
taxes are fair.
Benefit principle → the public services that governments provide contribute to the
value of real assets → owners should pay for these services.
Consider real property → value depends on the maintenance of law and order,
and on streetlights that work and perhaps recreational parks in the vicinity.
o The accrual in asset value → a benefit resulting from public services →
taxing the property for the benefit is justified.
Ability to pay → look at horizontal equity → assets have income-generating
potential (property that may be rented out) or it can be sold, realised, to increase
the owner’s purchasing power.
o Serves as economic security against which loan finance may be obtained.
o For two individuals with similar income but vastly different wealth,
horizontal equity would be violated if only taxed according to income and
the unequal wealth is ignored.
Vertical equity → requires that individuals with different taxable capacities be
taxed differently → given the skew distribution of wealth, vertical equity may be
served if wealth is taxed, to reduce the skewness.
Wealth tax is essentially a tax on savings → incidence of the wealth tax depends
on the elasticity of the supply and demand for savings.
o If the supply is perfectly inelastic → incidence of the tax is on owners of
capital (i.e. wealth) → tax is progressive.
o If supply is not perfectly inelastic → owners of capital cannot be made to
absorb the entire tax → tax may be regressive.
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