Heavier Taxation of Property Income

In Sweden, which relies strongly on income taxation at the national and local levels, the net wealth tax was originally motivated by a desire to impose a heavier burden on income from capital than on income from other sources. It was an integral part of the income tax from 1910, when it became a general annual levy and was called “the national income and wealth tax,” until the adoption of the present form of a separate net wealth tax in 1948. After computing his income, a Swedish taxpayer was required to add to it a small part of his taxable wealth (1/60 before 1938) to get his total taxable income. It was estimated that under the combined measure, income from property would bear a tax burden one third larger than that imposed on other income.⁶

In Colombia, the net wealth tax has always been viewed as part of the income tax system.⁷ A major purpose of the net wealth tax has been to tax income from capital at a higher rate than income from wages and personal services, a purpose which had previously been achieved under the income tax by a differential schedular rate structure. India, Ceylon, and Pakistan, in line with their Governments’ policies of democratic socialism, aimed at a more effective and more equitable personal taxation of the wealthier classes by the use of a net wealth tax to supplement the income tax.

The basic reason for placing a heavier burden on property income seems to be the belief that property income is obtained with less effort and is usually more permanent. Moreover, property itself confers certain advantages on its owner in addition to the income it yields: it serves as a reserve of spending power in emergencies and thus reduces the need to save out of income; it provides security for old age and unemployment; it gives the owner better access to credit; and it confers social status and prestige. Under the unitary income tax system, those who have the same income generally incur the same tax liability, regardless of the kind of income they earn and of the value of wealth they hold.⁸ Wealth not yielding any income is not subject to tax. Two persons with the same income are not equally well off, however, if one has greater wealth than the other. An extreme example is the position of a beggar who has neither income nor property, compared with the position of a wealthy person who keeps the whole of his wealth in the form of jewelry and gold. By the test of income alone, the taxable capacity of both is nil, yet the wealthy person clearly has ability to pay taxes. Thus, it is argued that a basic limitation of the income tax is its tendency to discriminate against those persons who have not accumulated wealth, compared with those who have.⁹

In this context, the Finance Minister of Ceylon stated in the budget speech for 1958/59:

• The basic reason for the imposition of a tax on net wealth is that the present system of taxation discriminates between the property-owner and the man who derives income from work and effort. The unfairness of measuring taxable capacity by the yardstick of income alone can easily be seen when it is considered that under the present system a man who derives an income of, say, Cey Rs 50,000 by dint of hard work, and another who derives the same income from property pays the same tax. If you carry the example a little further and consider the economic position, after their death, of the dependents of these two persons, the unfairness of the present system becomes absolutely clear.¹⁰

Since income and wealth constitute two distinct sources of what may be called “spending power,” a combination of separate taxes on each would be more closely related to taxable capacity than would either tax by itself.

PReventing Undue Concentration of Wealth

Another reason for introducing a tax on net wealth has been to assist in checking the growth of large concentrations of wealth. Reflecting the special conditions in Pakistan, the net wealth tax was designed to discourage the concentration of wealth in the hands of a few families, as well as generally to promote greater equality. The Taxation Enquiry Committee of Pakistan examined the then existing system of income taxation and reported special factors favoring the introduction of a net wealth tax in Pakistan:

• Turning to the special conditions in Pakistan, the accumulation of large fortunes in the decade since Independence underlines the failure of the system of income taxation in the country in its function of preventing undue concentration of wealth. Despite sharply progressive marginal rates, the equalitarian objective has not been achieved partly because of tax evasion and avoidance and partly because accumulations have taken place in fields outside the scope of income tax such as through capital gains. . . . We feel that even apart from the theoretical justification for it, a wealth tax in our conditions would confer several advantages. In the first place it would assist in promoting the objective of equality and preventing undue concentration of wealth.¹¹

It was pointed out that the degree of concentration in the ownership of property has not been reduced, even in highly advanced countries possessing some form of progressive personal taxation, generally based on “income.”¹² However, this problem is believed to be more serious for developing countries where there is an unusual imbalance in the distribution of wealth between a small group of very wealthy people and the mass of poor people. The Pakistan report states that although no definite estimates were available, the economy was characterized by glaring inequalities of income and wealth and by extremes of opulence and poverty. These inequalities were believed to result mainly from centuries of landlordism and undue privileges, in which heredity, custom, and environment had all played a part. Even greater concern was expressed over reports that disparities in income and wealth appeared to have been aggravated after independence. The tax system had also been ineffective in adequately taxing the gains from capital appreciation and unearned increments which had acted as important sources of inequality.¹³ These circumstances were believed to require the imposition of an annual tax falling directly on wealth, a tax which would also automatically reach a substantial part of capital gains over a period of years.

This point of view was also reflected in the Shoup Mission report on Japanese taxation, which stated:

• A further advantage of a net worth tax over increasing the top rates of the income tax is that the net worth tax is a superior and more selective means of preventing the growth of undue concentration of economic power. Control over the economy is more nearly related to the ownership of wealth than to the receipt of income. Indeed, even very large incomes received as salary, or as royalties for a popular novel, or the like, do not represent the same danger to the preservation of democracy as would a comparable income derived from securities or other property. The taxpayer with the latter type of income will pay more, if the net worth tax is in effect, than the taxpayer with earned income. Hence the effect of the tax system will be concentrated where it is most needed.¹⁴

• … the accumulation of huge fortunes that threaten to concentrate the control of the economic system in the hands of a few wealthy individuals … is a danger of particular significance to Japan. Unless such accumulations are prevented by the tax system, they are almost certain to arise, sooner or later.¹⁵

• This was not the primary purpose of the net wealth tax recommended, as mentioned below, but was emphasized as one of the advantages of adopting a net wealth tax in Japan, the economy of which had long been controlled by a few families until their power was curbed, soon after the Second World War.

ENcouraging Risk of Capital and More Productive use of Wealth

It is also claimed that the use of a net wealth tax encourages greater risk taking and channels wealth into more productive use because the tax places the same burden on the same property value, without regard to its yield. In other words, a net wealth tax discourages the holding of unproductive properties, and stimulates productive investment for money income to meet tax payments.

Colombia introduced a net wealth tax with two declared purposes: (1) to impose a higher rate of tax on unearned income, as mentioned above, and (2) at the same time, to impose a burden upon landowners who withhold their property from use. The tax was intended to penalize wealthy people who fail to exploit their property to the fullest possible advantage in the national interest. It was expected to encourage risk taking and to induce owners to employ their wealth in more productive use. Pakistan and Japan also recognized this effect as one of the advantages of a net wealth tax.

Income taxation applies generally only to money income and does not reach the security and liquidity benefits of cash, gold, jewelry, uncultivated land, and the like. Even though a reform of the income tax could catch some of the imputed gains by arbitrary assessment, it could not catch the security and liquidity benefits as such. The net wealth tax imposes the same tax on any given value of property, whether held in money, jewelry, or uncultivated land, yielding no money income at all, or invested in safe securities or in risky industrial shares. It is maintained that the tax thereby provides greater equity among those who have different types of properties. In this regard, it is claimed that the net wealth tax tends to encourage economic development. By taxing net wealth, it is likely to push funds out of cash and out of no-income or low-income investments into higher yield investments. Thus, in reducing security and liquidity preference, it promotes risk taking and more productive use of wealth.¹⁶ This view is emphasized in a country such as Colombia, where substantial resources are not productively used.¹⁷

Effective Taxation of High-Income Groups

The primary purpose of the net wealth tax adopted in Japan was to supplement the progression of the personal income tax in the top income groups. A similar purpose was served in India. In both countries introduction of the tax was accompanied by a reduction in higher bracket income tax rates.

World War II produced in the Japanese economy a disastrous breakdown, which touched off an inflationary spiral. Under these conditions the highly progressive income tax rates and low personal exemptions stimulated widespread tax evasion and avoidance. Moreover, the entire tax service was disorganized and unable to cope with this evasion. Tax officials were young, inexperienced, and underpaid, and office procedures were inadequate. Thus, although the Japanese income tax system was nominally a very progressive one, individuals were effectively taxed at only a small part of their real liabilities. Wealthy taxpayers, in particular, legally escaped heavy taxation because of the exclusion of capital gains, extensive deductions for business expenses, and other devices.

The Shoup Mission believed that the then top income tax rates, ranging up to 85 per cent, were much too high in relation to standards of compliance and enforcement. Nevertheless, they also recognized the need for substantial progression:

• … we cannot be satisfied with the degree of high-level progression in the tax system that is reflected by nothing much more than an income tax that is limited to a 50 or 60 per cent top rate. Every progressive tax system worthy of the name must provide a substantial obstacle to the accumulation of huge fortunes.…¹⁸

The Mission therefore recommended the introduction of an annual low-rate tax on the net wealth of well-to-do individuals as the most satisfactory solution to the problem.

They believed that such a tax would fill the gap left by the reduction in the top rates of the income tax, and would not be subject to most of the difficulties that militated against high income tax rates. The combination of income tax and net wealth tax might have less effect on incentives than would an income tax with the same degree of progression standing alone. This is graphically illustrated by the fact that an income tax rate of 110 per cent would kill incentives, whereas the combination of a 50 per cent income tax and a 9 per cent net wealth tax (which would produce the same total tax assuming that the owner of the wealth earned 15 per cent on it) would still leave the individual with an incentive to increase his income, since he would be able to retain half of the increase.¹⁹

The net wealth taxes in both India and Ceylon followed Kaldor’s recommendation to base progressive taxation on several yardsticks of taxable capacity, such as total wealth, income, and expenditure, instead of a single measure such as income. The net wealth tax was therefore introduced not only because of the inherent merits claimed for it, but also because it was considered essential to a comprehensive system of personal taxation. Ceylon provided a net wealth tax in a single “Personal Tax Law” consisting of taxes on net wealth, expenditure, and gifts. India introduced it separately from other taxes on expenditure and gifts but combined with the reduction of top-bracket income tax rates. The Finance Minister of India stated in his budget speech for 1957/58:

• … I mentioned earlier the reliefs in income-tax at top levels of income which I am introducing this year. These reliefs are meant as an encouragement to larger effort and greater initiative on the basis of which alone a healthy and progressive economy can be built up. It is necessary at the same time to adopt other measures which are egalitarian in intent but which do not have a disincentive effect. The Tax on Wealth that I am now proposing is one such measure. . . . This will thus be a progressive tax which, together with the surcharges I have recommended in respect of income-tax on unearned incomes, will contribute towards a more effective taxation of the richer classes without diminishing incentives to earn in the process.²⁰

Promoting Efficiency of Income Tax Administration

Almost all relevant reports, recommendations, and speeches suggest that a supplementary tax on net wealth promotes the efficiency of income tax administration. They claim that investment income is a function of wealth and that assessment of taxes on both income and wealth by the same taxing authority improves the administrative efficiency of the system because these two taxes, administered together, provide a better check on evasion and concealment than a tax on either alone.

Effective administration of an income tax requires that, even in the absence of a net wealth tax, the net wealth of taxpayers be calculated every year as a check on the investment income declared. The net wealth approach is generally regarded as a useful tool for auditing income tax returns over a period of years. As a matter of practice, however, annual information on the net wealth of individuals—such as balance sheets—has not generally been demanded, even in countries with well-developed income taxes. The absence of requirements for this information has been singled out as one of the weakest links in the enforcement chain for the administration of taxes on incomes—especially large incomes.

India aimed, in a somewhat broader way, at the elimination of tax evasion through the institution of a comprehensive and evasion-proof system of taxation, based on Kaldor’s report. According to his theory, the five taxes—on income, capital gains, annual wealth, personal expenditure, and gifts—should all be assessed simultaneously, on the basis of a single comprehensive return provided by the taxpayer. They are self-checking in character, both in the sense that concealment or understatement of items in order to minimize liability to some of the taxes may involve an added liability with regard to others, and in the sense that the information furnished by a taxpayer in the interest of preventing overassessment of his own liabilities automatically brings to light the receipts and gains made by other taxpayers.²¹ Although India did not adopt a single comprehensive return as Kaldor recommended, it did coordinate the administration of the net wealth tax (and expenditures tax) closely with that of the income tax.

The administration of the net wealth tax, then, is usually integrated with that of the income tax. In general, the income tax authorities also serve as the net wealth tax authorities; administration and procedures governing the net wealth tax closely parallel those of the income tax. In Sweden, the Netherlands, and Colombia, taxpayers must report their assets and liabilities for the computation of net wealth on the same forms that are used for the income tax returns.

Taxpayers

The net wealth tax is generally payable by individuals, including nonresidents. Since the property of a wife and minor children is aggregated and taxed in the hands of the husband in most countries, the tax may be said to fall on families.²² As a tax on individuals, the net wealth tax of Sweden also applies effectively to unincorporated businesses and partnerships. Of the 14 countries, 9 do not impose the tax on corporations, the net wealth of which is taxed only on the shares of the individuals who own them; however, some countries (Sweden and India) impose it on nonresident companies, since the equity of resident shareholders is subject to tax.²³

Germany and four other countries (Finland, Luxembourg, Norway, and Uruguay) impose the tax on resident corporations. The net wealth tax in Germany (Prussia), originally imposed only on individuals, has been extended to corporations, in order to place the same tax burden on all businesses competing in the same market, regardless of their juridical form. On the whole, a net wealth tax on corporations does not serve the same purpose of securing equity in the distribution of the burden of taxation as a similar tax on individuals. Kaldor insisted that a net wealth tax on corporations could be designed as an alternative to a higher rate of profits taxation because it would have some favorable economic effects on corporations, such as penalizing firms which earn a low rate of profit on the capital which they employ, and favoring those firms having high earning power. For this reason, he suggested that more burden be put on corporations in the form of a net wealth tax, and less in the form of a profits tax—particularly in the present stages of developing countries, since it would be well worthwhile to offer special inducements to corporations which efficiently use the resources at their command.²⁴

A net wealth tax on corporations, however, would generally discriminate against shareholders if the securities of corporations are also subject to the tax. The EEC reports on tax harmonization consider it important to avoid double taxation by not applying the net wealth tax to legal entities:

• Such a regulation seems above all necessary in order to prevent distortions of competition of a tax origin, because the importance of a tax on wealth differs under conditions otherwise equal, according to whether the principal (or secondary) role is played in the country or in a branch of industry by businesses employing primarily capital or labor.²⁵

Pakistan, India, and Colombia once had a net wealth tax on corporations, but they rescinded it. Pakistan removed the net wealth tax on private companies because of certain anomalies created by the tax, especially as to shareholders belonging to the middle classes who are themselves not liable for the personal net wealth tax but, unlike the large shareholders, do not get a rebate for the tax paid by the private companies in which they hold shares. Pakistan also experienced administrative difficulties in correlating the assessment of the shareholders liable to the net wealth tax with the assessment of the corporation in which they hold shares. To compensate for the loss of revenue resulting from the abolition of the tax on private companies, the net wealth tax rate on individuals was raised.²⁶ One of the motives cited by the Colombian Government for rescinding the tax on corporations, in 1960, was the desire to attract foreign capital by eliminating international double taxation. Although the Colombian tax legislation considers the tax on net wealth an integral part of the income tax structure, the United States has not permitted taxpayers in the United States to credit this tax against their U.S. income tax. The U.S. Treasury ruled that the tax is a tax on capital, bearing no relationship to income and payable even when there is no taxable income.²⁷

Tax base

The net wealth tax is generally assessed on the taxpayer’s total net wealth, that is, all assets net of liabilities. Thus, taxable assets include not only real property such as land, buildings, and other improvements attached to land but also tangible personal property and intangibles such as machinery, animals, inventories of raw materials and goods for sale, farm and forest products, mineral rights, patents, and cars for business use; and jewelry, currency, bank deposits, notes, stocks, bonds, and mortgages.

For the sake of equity, it is important to cover all forms of property. The actual system of the net wealth tax in practice today, however, provides a variety of exclusions from the tax base for administrative, incentive, or constitutional reasons. Most countries exclude personal and household effects, life insurance policies, and pension rights. In addition, jewelry is exempt up to a prescribed amount in Germany, the Netherlands, and Ceylon; and assets used for scientific research in India and Ceylon. Switzerland excludes all livestock; Uruguay excludes all stocks of corporations and government securities. Colombia has a number of special exemptions as incentives for certain investments, while Sweden excludes certain assets, mostly because of the excessive administrative difficulties involved. India does not assess the tax on agricultural land, including trees and growing crops, because of constitutional limitations on the powers of the Central Government.

Residents are generally taxed on all their property, whether at home or abroad; nonresidents are usually liable to the tax only on property located in the taxing country. In almost all countries, the property of members of a family is aggregated and taxed in the hands of the husband, as stated above.

Exemption limit

Certain exemptions are always made for the value of small properties. Additional personal exemptions are allowed in several countries for dependents, including high limits for old people and invalids. The exemption limit, however, varies greatly among different countries (Table 1). In absolute terms, it ranges from as low as $2,000 or slightly more in Luxembourg, Colombia, and Switzerland to about $42,000 in India and Ceylon, and to nearly $84,000 in Pakistan.

Table 1.

Net Wealth Tax Exemptions for Single Persons in Relation to Per Capita Income

Sources: Appendix II and calculations based on data from International Financial Statistics, January 1966.

¹1963 unless otherwise specified.

²1965.

³1964.

⁴1953, when law was repealed.

⁵At 1963 exchange rate (US$1.00 = Rs 4.76).

Table 1.

Net Wealth Tax Exemptions for Single Persons in Relation to Per Capita Income

	Exemptions1
	As stated	U.S. dollars	Per Capita Income in U.S. Dollars1	Ratio of Col. 2 to Col. 3
	(1)	(2)	(3)	(4)
Luxembourg	Lux F 100,000	2,000	1,301	1.5
Colombia	Col$20,000	2,222	261	8.5
Switzerland	Sw F 10,000	2,314	1,685	1.4
Norway	NKr 20,000	2,801	1,178	2.4
Finland	Fmk 12,500	3,906	1,046	3.7
Uruguay	Ur$250,0002	4,1742	5762	7.3
Germany	DM 20,000	5,000	1,250	4.0
Netherlands	f. 40,0003	11,0493	1,1303	9.8
Denmark	DKr 90,000	13,030	1,339	9.7
Japan	¥5,000,0004	13,8884	1804	77.2
Sweden	SKr 80,000	15,464	1,893	8.2
India	Rs 200,000	41,9995	785	538.45
Ceylon	Cey Rs 200,0003	42,1053	1243	339.6
Pakistan	PRs 400,0003	83,6823	783	1,072.8

Sources: Appendix II and calculations based on data from International Financial Statistics, January 1966.

¹1963 unless otherwise specified.

²1965.

³1964.

⁴1953, when law was repealed.

⁵At 1963 exchange rate (US$1.00 = Rs 4.76).

View Table

Table 1.

Net Wealth Tax Exemptions for Single Persons in Relation to Per Capita Income

	Exemptions1
	As stated	U.S. dollars	Per Capita Income in U.S. Dollars1	Ratio of Col. 2 to Col. 3
	(1)	(2)	(3)	(4)
Luxembourg	Lux F 100,000	2,000	1,301	1.5
Colombia	Col$20,000	2,222	261	8.5
Switzerland	Sw F 10,000	2,314	1,685	1.4
Norway	NKr 20,000	2,801	1,178	2.4
Finland	Fmk 12,500	3,906	1,046	3.7
Uruguay	Ur$250,0002	4,1742	5762	7.3
Germany	DM 20,000	5,000	1,250	4.0
Netherlands	f. 40,0003	11,0493	1,1303	9.8
Denmark	DKr 90,000	13,030	1,339	9.7
Japan	¥5,000,0004	13,8884	1804	77.2
Sweden	SKr 80,000	15,464	1,893	8.2
India	Rs 200,000	41,9995	785	538.45
Ceylon	Cey Rs 200,0003	42,1053	1243	339.6
Pakistan	PRs 400,0003	83,6823	783	1,072.8

Sources: Appendix II and calculations based on data from International Financial Statistics, January 1966.

¹1963 unless otherwise specified.

²1965.

³1964.

⁴1953, when law was repealed.

⁵At 1963 exchange rate (US$1.00 = Rs 4.76).

Compared with the per capita income in each country, the exemptions may be classified into three groups: the first group includes the lowest exemption limits—from about 1½ to 4 times the per capita income (Switzerland, Luxembourg, Norway, Finland, and Germany); the second group, limits of 7 to 10 times the per capita income (Colombia, Uruguay, the Netherlands, Denmark, and Sweden); and the third group, limits of 80 to 1,000 times the per capita income (Japan, India, Ceylon, and Pakistan). In general, the countries with higher per capita incomes provide relatively lower exemption limits, while those with lower per capita incomes provide higher exemption limits.²⁸

More important, the exemptions depend on the purpose of the tax, the rate of the tax, and the administrative considerations in each country. If the tax is designed primarily to lessen the undue concentration of wealth or to supplement the progression of the personal income tax on high-income groups, it provides high exemptions, as in Pakistan, India, Ceylon, and Japan. High exemptions may also be recommended for administrative convenience in order to limit the number of cases to be dealt with, rather than as a matter of principle. Norway’s increase in the exemption limit in 1952 reduced the number of persons liable to the net wealth tax from 350,000 to 160,000.²⁹

Some high-income earners own little property and would receive an unwarranted bonus from such a high exemption. Professor Due has suggested, therefore, that the exemption, if given, should more logically be related to both total net wealth held and income; persons with incomes below a certain figure would be exempt from tax on wealth up to a certain amount.³⁰ Until 1952/53, Norway had such an exemption related to income size, which was NKr 5,000 for those with taxable incomes and NKr 20,000 for those with incomes below the taxable level.³¹

As contrasted with the foregoing discussion, the tax may be conceived as one of widely varied applications, but with low exemptions. It may be a general supplement to the income tax, as in Luxembourg, Switzerland, and other European countries. Also, it may be possible to make it perform much the same function—of encouraging the productive use of the property—as the land tax or the property tax in many countries.³² As a reverse application of a minimum limit, Germany provides for the taxation of a presumptive minimum amount of net wealth. If the amount of their actual taxable net wealth is less than the applicable minimum, resident entities are subject to a minimum tax. The minimum amounts are DM 50,000 for corporations, partnerships limited by shares, and mining companies, and DM 20,000 for limited liability companies. Other entities are subject to the tax only if their total net wealth is greater than DM 10,000.

Valuation

Most countries adopt the fair market value as a basic criterion of value. However, many specific rules for certain classes of assets are provided in elaborate measures, for example, going concern value, capitalized value, yield value, cadastral value, or special assessed value. In any case, both the fair market value and other specific values are quite separate from the book value used for income tax purposes. Norway uses the book value, in principle, but it does not allow any deduction for statutory or free reserve. Moreover, the book values of certain assets (such as real estate and investments) may be revised by the authorities where such book values are lower than the estimated sales value of the assets.

The valuation rule for the net wealth tax is closely related to that for the real property tax, the inheritance tax, the gift tax, and other taxes which require the valuation of property for tax purposes. Colombia uses a cadastral value both for purposes of the net wealth tax and the real property tax. Japan designed its net wealth tax valuation to correspond with the valuation rule provided in the inheritance and gift tax laws. For individuals, Uruguay’s valuation also follows the inheritance tax laws but differs for corporations. Germany has a unified federal valuation law which applies to the net wealth tax, the real property tax, the inheritance tax, the gift tax, the trade tax on business capital, income tax, and Equalization of Burdens Law, notwithstanding the fact that they are administered by different authorities—federal, state, and municipal.

Tax rates

In most countries the rate structure of net wealth taxes applicable to individuals is progressive. Exceptions are Germany, the Netherlands, Luxembourg, and Uruguay, where proportional tax rates are provided for individuals. The choice between progressive and proportional tax rates also depends on the intended use of the levy, the relationship to the income tax rate, and other considerations of the government.

If a primary purpose of the tax is to break up large fortunes or to supplement the progression of the income tax on high incomes, progression is indicated. Progression may be justified on the basis of the same arguments as those which support it for income taxation. However, progressive taxation of wealth tends to spread ownership of property among various members of the family and other interested parties to even a greater extent than progressive taxation of income does. This tendency results in troublesome questions relating to the definition of the taxable unit. Therefore, if the tax is intended only as a general supplement to the income tax rather than as the primary means of ensuring a progressive tax structure, a proportional rate structure may be suitable. Also, a proportional rate may be appropriate for corporations if they are taxed—as in a number of countries, not only countries applying a proportional rate to individuals (Germany, the Netherlands, Luxembourg, and Uruguay), but also those applying progressive tax rates to individuals (Norway and Finland).

Whether the tax is progressive or proportional, all countries keep the rate schedule low enough for the tax to be payable out of income. A tax of 2 per cent on net wealth, for example, would be equivalent to a tax of 40 per cent on income derived from net wealth on which the yield is 5 per cent. Basic tax rates for individuals in the 14 countries, ranging from 0.2 per cent to 3.0 per cent, are shown below.³³

¹1963 unless otherwise specified.

²1964.

³1953, when law was repealed.

⁴1965; in addition, Uruguay imposes a 1 per cent substitute inheritance tax on the net capital of corporations.

	Progressive Rates1
	Per cent		Per cent
Switzerland	0.2–0.6	Ceylon2	0.5–2.0
Colombia	0.1–1.5	India	1.0–2.0
Norway	0.6–1.7	Pakistan 2	1.0–2.0
Sweden	0.5–1.8	Denmark	1.2–2.3
Finland	0.4–2.0	Japan3	0.5–3.0
	Proportional Rates1
Netherlands2	0.5	Uruguay4	1.0
Luxembourg	0.5	Germany	1.0

¹1963 unless otherwise specified.

²1964.

³1953, when law was repealed.

⁴1965; in addition, Uruguay imposes a 1 per cent substitute inheritance tax on the net capital of corporations.

View Table

	Progressive Rates1
	Per cent		Per cent
Switzerland	0.2–0.6	Ceylon2	0.5–2.0
Colombia	0.1–1.5	India	1.0–2.0
Norway	0.6–1.7	Pakistan 2	1.0–2.0
Sweden	0.5–1.8	Denmark	1.2–2.3
Finland	0.4–2.0	Japan3	0.5–3.0
	Proportional Rates1
Netherlands2	0.5	Uruguay4	1.0
Luxembourg	0.5	Germany	1.0

¹1963 unless otherwise specified.

²1964.

³1953, when law was repealed.

⁴1965; in addition, Uruguay imposes a 1 per cent substitute inheritance tax on the net capital of corporations.

CEILING

Some countries provide a ceiling to ensure that the average or marginal rate of joint income and wealth tax does not exceed a certain maximum percentage of income. Sweden has two kinds of rules for ceilings—the “80 per cent” rule and the “30 times income” rule. The total of the national income tax, the local income tax, and the national tax on net wealth assessed against a taxpayer for an income year may not exceed 80 per cent of the taxpayer’s combined net reported income from all sources. Also, the amount of taxable wealth may in no case exceed a sum which is 30 times the taxpayer’s income. In neither case, however, may these ceilings reduce the tax on wealth by more than 50 per cent below the tax which would have been payable without ceilings. Similar systems are provided in Denmark, the Netherlands, and Ceylon.

As shown above, a net wealth tax aims at effective taxation of net wealth, which itself has several economic and social advantages, apart from its yield of money income. Moreover, one of the roles of the tax is to penalize low-yield or no-yield investors who withhold their property from productive use, and to make them put it to productive use. As a matter of fact, problems might arise from the serious burden placed upon persons who have wealth but little or no current income (see below). These problems suggest the need for an appropriate exemption and for a relatively low rate, as well as for a certain ceiling on net wealth tax liability.

Administration

Reflecting one of its roles, the administration of the net wealth tax is usually link with that of the income tax. A typical example of administrative integration is shown in Sweden: one form of return and one collection system cover the net wealth tax and two income taxes—national and local. Assessment, valuation, review, and appeal are handled by the same officers and agencies who deal with the income taxes. The preliminary taxes required to be paid by each taxpayer under the pay-as-you-earn system are designed to cover the amount due under the net wealth tax, as well as amounts due under the national and local income taxes. The tax authorities may use one tax as a check on the other. A taxpayer with large increases in net wealth, and who has reported only small amounts of income, may invite special scrutiny from the tax authorities.³⁴

In Japan the net wealth tax was administered by net wealth tax officers, and not by those who administered the income tax. An exchange of information was intended to achieve a functional coordination of both taxes. However, the result was far below expectations, and this contributed to the repeal of the net wealth tax after a few years’ experience.

Since a net wealth tax presents great difficulties of administration—especially in discovering the true owners of property and in valuing net wealth—several devices have been incorporated into its administration. To meet the problem of discovery, India tightened methods of registration and transfer of property ownership. Under Indian law, gifts and non-testamentary transfers exceeding Rs 100 in value are not effective unless registered. Transfer of nonagricultural property valued at more than Rs 100,000 may not be registered without a certificate from a wealth tax officer permitting such registration.

To simplify the valuation procedure, Sweden and Germany usually revise the valuation of real properties and other assets at intervals of several years. The wealth tax officer in India and Pakistan determines the value of the net wealth; however, any decision he makes may be appealed.

The net wealth tax is usually a national tax levied by the central government. The problem of finding all property, especially intangibles, the necessity of unifying the valuation rule, and the role of the tax virtually preclude the use of the tax below the national level. Germany meets these requirements to the extent that a unified valuation law is provided; however, local authorities in some countries (Norway, Germany, and Switzerland) have their own net wealth taxes.

Contribution to Revenue

Net wealth taxes contribute only a small part of total tax revenue in almost all countries, as shown by the available data below:

Contribution of Net Wealth Taxes to Total National Tax Revenue
	Per cent		Per cent
Japan (1952/53)	0.3	India (1959/60)	1.8
Pakistan (1964/65)	0.8	Ceylon (1964/65)	2.0
Netherlands (1960)	1.5	Norway (1962/63)	2.4
Sweden (1958/59)	1.5	Denmark (1958/59)	2.5
		Uruguay (1965)	2.6
Contribution of Net Wealth Taxes to Aggregate Government Revenue at All Levels
Germany (1960)	1.6	Colombia (1961)	4.4

View Table

Contribution of Net Wealth Taxes to Total National Tax Revenue
	Per cent		Per cent
Japan (1952/53)	0.3	India (1959/60)	1.8
Pakistan (1964/65)	0.8	Ceylon (1964/65)	2.0
Netherlands (1960)	1.5	Norway (1962/63)	2.4
Sweden (1958/59)	1.5	Denmark (1958/59)	2.5
		Uruguay (1965)	2.6
Contribution of Net Wealth Taxes to Aggregate Government Revenue at All Levels
Germany (1960)	1.6	Colombia (1961)	4.4

In most countries, net wealth taxes account for 1.5 per cent to 2.6 per cent of the total national tax revenue (the Netherlands, Sweden, India, Ceylon, Norway, Denmark, and Uruguay). In Germany its share is little higher—1.6 per cent of aggregate revenue at all government levels. Only in Colombia does the tax occupy a relatively important position—over 4 per cent of aggregate government revenue. In Japan the yield was very minor—only 0.3 per cent of total national tax revenue, and in Pakistan it was less than 1 per cent of the total. It is significant that the higher ratios were in countries which assessed corporations as well as individuals.

The net wealth tax, however, may have greater significance for revenue than these figures suggest if it helps improve compliance with the income tax. Income taxes on individuals and corporations together contribute some 50 per cent of total national tax revenues in Sweden, Colombia, and Japan; 30 per cent in Denmark and India; and 20 per cent in Norway and Pakistan.

Equity Considerations

The main argument on equity grounds for a net wealth tax is that income, taken by itself, is an inadequate yardstick of taxable capacity. As mentioned above, taxation based on income alone tends to discriminate against persons who have not yet accumulated wealth. In practice, the income tax never reaches capital gains until they are realized; even when realized, the gains usually receive favorable treatment relative to other income. It also taxes more heavily the holders of high-yield securities and risky investments, thereby favoring holders of low-yield and no-yield investments, who enjoy greater security and may also benefit from liquidity. Some of these equity problems can be met under an income tax by placing a heavier burden on property income, by including imputed rental value of homes and capital gains in taxable income, and by closing other legislative loopholes. However, these income tax approaches encounter numerous administrative problems. Moreover, they cannot touch most property producing no income and cannot adjust the tax burden between gains from security or liquidity and those from risk taking.

A net wealth tax supplement to the income tax places a heavier overall burden on persons having accumulated wealth or receiving property incomes, on the principle that the ownership of property is a separate measure of taxable capacity. Such a tax reaches a substantial part of capital appreciation over a period of years. It also treats with greater equity those who hold various types of securities and investments, through equal taxation on the same property value, whether risky industrial shares or safe securities, cash, or gold yielding no money income at all.

When income tax rates are high, equitable taxation usually suffers from inefficiency of administration. Beyond a certain level of compliance and enforcement, unusually high marginal rates of income taxation encourage evasion and avoidance, and yield little revenue. A net wealth tax, by making acceptable a reduction in top marginal rates of income tax, permits greater over-all progression in the tax structure than is possible with income taxation alone. The administrative cross-checks thereby provided serve to prevent evasion without serious adverse economic effects on incentives or on production and investment (see below).

Economic Effects

Several economic advantages and disadvantages are claimed for the net wealth tax as a partial substitute for the income tax on property income. Some of its advantages reinforce the equity case for the tax; but on the whole, the actual effect is not always certain because so many considerations—in addition to the form of taxation—influence economic behavior. The economic effects of a net wealth tax are sometimes exaggerated: no measurable effects on total investment, saving, and the like can be expected because of the very limited burden of the tax on the economy as a whole.⁴³

The adverse effects of a net wealth tax on investment are probably less per unit of revenue than those of an income tax on property income since the former rests directly on the total sum accumulated by the person, regardless of the gain from it. As shown above, in principle, it is imposed equally on the same property value whether the property is held in cash, gold, or jewelry yielding no income at all, or is invested in industrial shares with high returns. On the other hand, the income tax discriminates against high-income investments by taxing additional gains from risk bearing, while not taxing at all the liquidity gains from cash or near-cash investment. Also, the net wealth tax liability is increased only if the income from investment is added to net wealth, whereas income tax liability is assessed on income from any successful investment, whether it is consumed or saved. Even if all yields of investment are added to net wealth, under certain conditions the net gain from investing is greater under the net wealth tax than under the income tax.⁴⁴ These advantages may be still greater if the income tax is progressive.

The difference between the net wealth tax and the income tax in restricting risk taking can be narrowed by allowing loss offsets under the income tax. Indeed, with complete loss offsets, the income tax may actually stimulate risk taking in the economy.⁴⁵ In practice, however, loss offsets are incomplete in all income taxes. Furthermore, the reward for risk taking is only part of the necessary returns on investment.

Advocates of the net wealth tax often claim that the tax tends to push investments out of cash and other low-income assets into more productive use, generally with higher yields, by making it more expensive to hoard money or gold and to hold inactive properties. In order to avoid paying the tax out of capital, the owners of such properties may be forced to use them in more profitable ways; owners of unused land, for example, are induced to cultivate it. Any such relative shift toward more risky ventures stimulates economic development.

Taxation of net wealth seems likely to be less favorable to private saving than taxation of income because the tax falls on accumulated savings.⁴⁶ The net wealth tax cannot be avoided simply by holding the saving in cash form, as can the income tax. Since all savings give rise to annual additional tax liability, the net wealth tax may have greater effect than an income tax raising the same amount of revenue. In addition, the tax is more likely to be paid out of capital than an income tax, because persons who have no current income incur some liability for the tax. Thus, it may check the potential rate of capital formation more than an income tax. However, it is also argued that to the extent to which corporate income is saved to provide funds for business expansion, the more favorable treatment given to equity investment by the tax may tend to result in greater savings. Likewise, psychologically, the wealth tax with lower rates, spread over the entire accumulation, may have a less deterrent effect than an income tax with highly progressive rates concentrated on the earnings from additional saving. On the whole, the net effect on saving is unpredictable.⁴⁷

Some insist that the net wealth tax affects the relative desirability of various forms of consumption expenditures.⁴⁸ Since the purchase of durable consumables increases tax liability, taxpayers may be induced to buy more nondurables and fewer durables. In particular, heavy expenditures on housing and the like are discouraged. If the discouraging effect on homes is widespread, as is likely under the general property tax, it is usually regarded as objectionable because of the social desirability of housing. Rather than shift expenditures from durable to nondurable forms, however, a net wealth tax might generally induce more hiding of cash, gold, or jewelry, as discussed in the following section.

A net wealth tax has no direct effect on earnings from personal effort, and presumably little, if any, on the degree of effort. On the other hand, an income tax clearly reduces the reward for work—particularly under progressivity. Nevertheless, we cannot be sure whether the net wealth tax causes more or less willingness to work than an income tax because of the uncertain influence of income taxation itself on work.

As for shifting, the usual view is that a net wealth tax on individuals is not shifted to others because of its general and personal character, particularly if the net wealth consists exclusively of residential real property and personal intangibles or of tangibles unrelated to any business purpose.

Another view, however, is that the tax may be partly shifted. Due insists that some direct shifting may occur in three circumstances:

• The market for new real estate mortgages is highly imperfect, and lenders might be able to pass the tax on in the form of higher interest rates. On rental housing, shifting would be possible under conditions of scarce supply, and perhaps over a longer period through the effects on the construction of new rental housing. Small business firms might seek to shift, but competition, particularly with large corporations, would make price increases difficult.⁴⁹

The first circumstance seems to assume that net wealth taxpayers are real-estate mortgage lenders rather than owners of real estate, but this assumption is not warranted. In general practice, the tax is imposed on the owners of real property, and its taxable base is the net value of the real property, excluding such related liability as existing mortgages. In the other two circumstances the shifting would interfere somewhat with the desired distribution of burden, but a very limited amount of shifting is not of great significance and should not seriously reduce the general equity of the tax, as Due himself states.

Administrative Efficiency

It is strongly argued that a net wealth tax promotes efficiency in income tax administration. A supplementary tax on net wealth can help reduce evasion of the income tax by providing information for crosschecks. An examination of a man’s property ownership (if disclosed) usually leads to the discovery of concealed income just as an examination of his income receipts (if disclosed) leads to the discovery of concealed property. A tax on both property and income, therefore, should improve the administrative efficiency of the system and provide a better check on evasion and concealment than a tax on either alone. In order to realize this advantage, the administration of the net wealth tax is usually integrated with that of the income tax, as noted above.

The possibilities of such administrative improvement, however, are limited and cannot be attained without considerable effort and cost. For instance, cross checking does not cover all income and property; it cannot cover income earned from professional or vocational activities, or certain properties which do not yield any income. Also, it is not easy for tax officers to cross-check personal income and related property because of the difficulty of determining a reasonable relationship between personal and household consumption, and changes in accrued income and assets and liabilities. Personal and household expenditures vary greatly with many factors other than income, and any arbitrary determination is subject to prolonged controversy, especially where records are inadequate.

Japan’s difficulties in administering the net wealth tax contributed to the abolition of this tax after a few years’ experience. However, other countries, especially in Europe, have found the net wealth tax a useful adjunct to the enforcement of the income tax.

An annual net wealth tax presents special problems of assessment on account of difficulties in discovering the true owners of the property and in valuation.

Revenue Yield

In all the countries that have employed a net wealth tax, the yield has been small. The primary objective has been not to raise additional revenue from the net wealth tax itself but to supplement the income tax. The assignment of the major role to the income tax rather than the net wealth tax is advisable because the income tax generally is based on a more satisfactory index of taxable capacity, is better correlated with the availability of the funds for its payment, and is almost always easier to assess. There seems to be no reason, therefore, for attempting to collect any large amount of revenue by means of a net wealth tax.

As noted above, however, amounts collected in the form of net wealth tax may understate its revenue significance. In addition to the small direct yield of the net wealth tax, there may be a considerable contribution in the form of greater income tax revenue. Moreover, the substantial administrative costs of the net wealth tax should not be considered alone, but in conjunction with the cost of the income tax, death duties, the gift tax, the property tax, and other taxes, the administration of which is related to that of the net wealth tax. Assessment, valuation, review, and other aspects of administration of the net wealth tax give valuable information and opportunities for cross-checks on the taxation of capital gains, estates, gifts, property, and other forms of wealth.