The Taxation of Net Wealth
Author: Noboru Tanabe

AN ANNUAL TAX on net wealth has often been suggested by tax experts as a desirable supplement to the income tax. The basic reason for the suggestion is the belief that income is not a sufficient measure of taxable capacity, and that more effective personal taxation can be achieved by a supplemental tax on net wealth. It is also held that there is a strong case for such a tax on grounds of equity, economic effects, and administrative efficiency.

Abstract

AN ANNUAL TAX on net wealth has often been suggested by tax experts as a desirable supplement to the income tax. The basic reason for the suggestion is the belief that income is not a sufficient measure of taxable capacity, and that more effective personal taxation can be achieved by a supplemental tax on net wealth. It is also held that there is a strong case for such a tax on grounds of equity, economic effects, and administrative efficiency.

AN ANNUAL TAX on net wealth has often been suggested by tax experts as a desirable supplement to the income tax. The basic reason for the suggestion is the belief that income is not a sufficient measure of taxable capacity, and that more effective personal taxation can be achieved by a supplemental tax on net wealth. It is also held that there is a strong case for such a tax on grounds of equity, economic effects, and administrative efficiency.

Typical of the recent views are those expressed by Nicholas Kaldor in his reports to the Governments of India and Ceylon, which led to the adoption of net wealth taxes in those countries.1 Recently, the Santiago conference on fiscal policy for economic growth in Latin America and reports on taxation in Greece and Australia recommended the introduction of a net wealth tax as an integral part of the income tax system.2 Also, the EEC (European Economic Community) Fiscal and Financial Committee’s report on tax harmonization (the Neumark Committee’s report) proposed that methods of general taxation of wealth to complement personal income tax should be studied.3 In Italy the Five-Year Plan contemplates the adoption of a net wealth tax in order to maintain the present distinction between income from property and income from labor.4 These reports generally conclude that the ownership of property confers advantages which are distinct from and additional to the income derived from such property. The Santiago conference also asserted that the insufficiency of public revenue in Latin American countries is due, in part, to the failure of the tax system to impose effective levies on the wealthy classes, and that any major reform of the tax system should allocate a greater share of the burden to the wealthy classes. This subject has had fairly wide discussion.5

The term “net wealth tax” is usually defined as a tax annually imposed on the net value of all assets less liabilities of particular taxpayers—especially individuals. This definition distinguishes the net wealth tax from other types of taxation of net wealth, such as death duties and a capital levy; the former are imposed only at infrequent intervals—once a generation—while the latter is a one-time charge, usually with the primary purpose of redeeming a wartime national debt. The net wealth tax is really intended to tax the annual yield of capital rather than the principal itself as do death duties or a capital levy, even though it is levied on the value of the principal. Since it taxes net wealth, it also differs from property taxes imposed on the gross value of property—primarily real property—in a number of countries. The net wealth tax gives consideration to the taxpayer’s taxable capacity through the deduction of all outstanding liabilities and personal exemptions as well as through other devices, while the property tax generally does not take these factors into account. The net wealth tax is therefore deemed to be imposed on the person of the taxpayer, while the property tax is often deemed to be imposed on an object—the property itself.

Despite its possible advantages, the net wealth tax has been adopted in only a few countries because of certain limitations. Some believe that the net wealth tax is very difficult to administer, particularly as regards tracing the property owners and valuing assets. Also, the tax has limited revenue possibilities, its primary objective being greater equity. It may also have other questionable features, including problems for the taxpayer in finding resources with which to pay the tax.

This paper surveys the characteristics of an annual net wealth tax, mainly through an analysis of the experience in various countries, and attempts to evaluate its role in the tax structure, with special reference to developing countries.

I. Historical Survey

Annual taxation of net wealth is not new. Although its actual application has been limited, the net wealth tax has been in effect for a long time in some European countries. Swiss cantons have had a continuous experience with this form of tax, dating from the thirteenth century. Since the early 1900’s, the net wealth tax has been accepted in several other European countries. Sweden, Norway, and Denmark have employed it as a standard feature of their revenue systems for over a half century, and the Netherlands introduced it in 1914. In Germany the net wealth tax, which appeared in 1922, was originally modeled after the corresponding Prussian tax of 1819.

In contrast to its long European history, the net wealth tax is of very recent origin in the Far East. India adopted it in 1957 and Ceylon in 1959, following Kaldor’s recommendations. Pakistan introduced it more recently, in 1963, after the report of the Taxation Enquiry Committee. Japan adopted a net wealth tax in 1950, as recommended by the Shoup Mission, but repealed it in 1953.

In Latin America, the net wealth tax of Colombia has been regarded since its inception in 1935 as complementary to, and an integral part of, the general income tax. Uruguay introduced a net wealth tax applicable only for 1964, but later extended its application for the three years 1965–67. In 1939, Nicaragua adopted a tax similar to the net wealth tax (el impuesto directo sobre el capital) but replaced it in 1962 with two taxes—the real estate tax and the personal property tax. Chile’s patrimonial tax, introduced in 1965, was originally conceived as a net wealth tax but was converted to a tax on the presumptive income from capital equal to 8 per cent of taxpayers’ assets, net of directly related liabilities.

Adoption of a net wealth tax has been supported on several grounds, but mainly on those of equity. It is generally recognized that income alone is an inadequate measure of ability to pay, in terms of effective personal taxation. Although ability to pay or taxable capacity, of course, is not a quantity susceptible of measurement, the tax has been intended to reduce possible discriminatory effects of an income tax that does not fully take into account the benefits of property ownership. Other factors influencing the adoption of net wealth taxes have been the desire to curb undue concentration of wealth, encourage more productive use of capital, minimize the disincentive effects of net income taxation, and promote greater efficiency in income tax administration.

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.

II. Tax and Rate Structure in Principal Countries

An annual tax on net wealth has been adopted as a supplement to the tax on income in about 14 countries, but its form differs widely. The net wealth tax has been levied as an integral part of, independently of, or in partial substitution for, the income tax. In other words, there are different types of the tax, depending on its primary function: for example, the combined income and wealth tax in Sweden; the separate net wealth tax, generally supplementary to the income tax, in most of the other countries having such a tax; and the independent tax as in Uruguay. The structure of a net wealth tax thus varies according to the intent of the tax and the general social philosophy of the government. Appendix II (p. 159) presents a summary of the main features of the net wealth tax in 14 countries: Sweden, Norway, Denmark, Finland, Germany, the Netherlands, Switzerland, Luxembourg, Japan, India, Ceylon, Pakistan, Colombia, and Uruguay. Although other countries have property-tax provisions that combine some elements of net wealth taxation, these are believed to be the only ones with net wealth taxes as defined in this study.

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

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

1963 unless otherwise specified.

1965.

1964.

1953, when law was repealed.

At 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

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1963 unless otherwise specified.

1964.

1953, when law was repealed.

1965; 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:

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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.

III. Evaluation of Net Wealth Taxation

The foregoing analysis of the objectives and structure of annual taxes on net wealth indicates that the tax has advantages not realized by the income tax alone, and suggests several possibilities for the role of the tax in modern revenue systems. This section evaluates the role of these taxes in the tax structure under four headings—equity considerations, economic effects (including problems of shifting), administrative efficiency, and revenue yield. Expect as noted, the theoretical treatment assumes complete coverage and effective administration of the tax. Also, this evaluation covers mainly the tax on individuals, with incidental reference to the tax on corporations.

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).

Limitations of design and administration

Advocates of a net wealth tax assume that the tax is well designed and effectively administered. In actual practice, however, the tax may involve various statutory exemptions (mentioned above), administrative ineffectiveness in discovering the true owner of certain types of assets—particularly intangibles—and unrealistic valuations of property, analyzed in the following section in detail. Unless these problems are solved, the introduction of a tax on net wealth produces new inequities.

One of the principal reasons for Japan’s repeal of the net wealth tax was the sharp imbalance of its burden between those who owned cash, jewelry, bank deposits, securities, and the like—which were very difficult for tax authorities to trace—and those with real property that was relatively easy to identify. The difficulty of discovering the true owners of intangibles was intensified by Japan’s policy of protecting private saving in the form of anonymous deposit accounts, bearer shares, and the like. A recent survey of the Japanese tax system stated: “The net worth tax proved inequitable because most of the burden fell on real property owners whose net worth is easily identified. Consequently, this tax was rescinded in 1953. The maximum income tax rate was accordingly raised from 55% to 65%.”35

Nicaragua’s experience in this respect is also relevant. The Nicaraguan net wealth tax (el impuesto directo sobre el capital) was replaced by two taxes in 1962—the real estate tax and the personal property tax—because of three problems: incomplete declaration of taxpayers, undervaluation of assets, and evasion of tax. In order to resolve these problems, the Fiscal Commission recommended that the real estate tax be separated from the personal property tax, and that first priority be given to a cadastral survey which could provide effective identification and realistic valuation of land, where most of the country’s wealth was concentrated.36

Payment problems

Taxation of net wealth is also likely to present a problem to many taxpayers who have property but little or no current income, forcing them to dispose of part of their assets in order to pay the tax. These taxpayers are not generally convinced of the merits of the argument that the ownership of wealth represents taxable capacity as such, quite apart from the money income which it may yield, and resist the tax because they lack funds for paying it. If the amount of wealth possessed is small, serious hardship can result; even owners of large estates may be penalized if they are compelled to sell property at depressed prices.

Norwegian tax statistics for 1950/51 show a low correlation between taxable net wealth and taxable income. About 40 per cent of the taxpayers with taxable net wealth of NKr 20,000–50,000 (US$2,000–7,000) reported no taxable income. A fairly large number of farmers owning their own land had very low incomes and some had no source of support besides their capital. Even if fully invested, more capital than this would be required to yield a taxable income.37 Some solution of these problems may be provided by appropriate minimum exemptions, moderate tax rates, and reasonable ceilings. However, the problem may still be serious for some property owners with little money income. An ad hoc committee on the Danish income and net wealth tax, which recommended increasing the exemption of the net wealth tax to support private saving, stated: “Even after an increase in the exemption has been introduced, there still exists a possibility for the tax administration to reduce the net wealth tax liability. There is a social interest to do this in cases where old or sick persons, widows, etc., have to live from a capital invested in low-yielding assets.”38

India’s chambers of commerce and industry were opposed to Kaldor’s recommendation of a net wealth tax for India, stating:

  • The tax on property is sought to be justified on grounds of equity. Yet in practice it can be a very inequitous tax. It is common knowledge that income from different kinds of property of the same value differs. If the tax is levied on the value of property, the person who has a larger income on his property will be in a better position to pay the tax than another whose investments yield little or no income. Productive enterprises have a long period of gestation and a person holding a share in a new enterprise may not receive any dividend for the first few years. He will nonetheless be liable to pay a tax based on the market value of his shares. He may thus be forced to consume his capital to be able to meet his tax liability.39

Japan faced the same problem of taxing holders of net wealth with little money income. Forests represented one of the largest sources of wealth subject to Japan’s net wealth tax. All agricultural land had been released by the land reform, and other wealth was still in an unsettled condition after the war. Since forests yielded little or no current income, the owners had insufficient funds to pay the tax unless the property was sold. They complained vigorously and resisted imposition of the tax as inequitable. Thus, some of the equity and economic advantages claimed for the tax by its proponents were not realized in Japan because conservation of forests was also important for the recovery of the damaged economy.40

Other equity considerations

An annual net wealth tax is generally justified on the basis that income from property is obtained with less effort and is usually more permanent than income from work, and that property itself confers advantages on its owner independent of and additional to the income it yields. The difference in taxable capacity between both types of incomes, however, may have narrowed in some countries where the active employment-promoting policy of the government, combined with extensive social insurance systems, favors wage and salary earners.

Also, it is suggested, wealth is a very incomplete index of taxable capacity because it excludes the economic resources of persons who depend on earnings from personal services:

  • Suppose that “A” is a doctor, a very successful one, whereas “B” occupies himself, or pretends to occupy himself, by dabbling about in his real estate business that barely pays its expenses. The larger income of “A” arises from his earnings as a doctor, not from any greater rate of return on his investments. “B” is simply incapable of earning any important sum by self-employment or by working for others. What is fair tax treatment of the two people in question (under wealth taxation)?41

Wealth, as usually defined, does not include the expectation of future income from personal effort or the capitalized earning power of people because the right to receive all such income connot be bought and sold. Thus, it is argued, wealth does not rival income as the primary index of ability to pay; it has a claim for consideration only as a supplementary index.42

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.

Problems of discovery

Major problems arise in the identification of property ownership. Cash, gold, jewelry, and other forms of property which do not usually bear owners’ names are very difficult to uncover. Also, the true ownership of securities and other properties is difficult to determine if the ownership is recorded under fictitious names and addresses. Bearer securities or numbered deposit accounts are always a source of trouble for tax administrators. The administration of the income tax, death duties, and gift tax already faces these difficulties, and the introduction of a net wealth tax may not raise formidable new problems. An annual net wealth tax does, however, place an additional premium on the concealment of property and may intensify efforts to evade tax. Therefore, if a net wealth tax is introduced under conditions of weak administrative capabilities, the tax may create new inequities.

We have seen how Japan failed in effectively taxing net wealth, mainly because of the identification problem, and how its tax discriminated against real property owners whose net wealth is easily identified, in favor of those with intangibles and other properties which are difficult to trace. In the United States also, administration of the general property tax has encountered great difficulties in discovering intangibles and household property. Thus, Goode concludes:

  • Granted that the federal government might be more efficient than local assessors, and that there would be advantages in linking wealth tax and income tax assessments, it still does not seem realistic to contemplate a wealth tax with low exemptions and broad coverage. A tax limited to a small number of rich persons might be feasible, and the tax could be extended to a somewhat larger group if it were thought to have great social and economic advantages. As an instrument for checking the concentration of wealth, an annual tax on net worth does not seem to have great advantages over an integrated system of income, estate, and gift taxes, and it might be easier to improve the existing income and transfer taxes than to introduce a new tax on wealth.50

Because of difficulties in discovery, as well as valuation, the Santiago conference on fiscal policy recognized that the net wealth tax requires a highly efficient tax administration, and that introduction of this tax in the near future may be advisable only in countries possessing these administrative prerequisites.51

A successful system for the discovery of property necessitates the administration of a net wealth tax on a national basis; many taxpayers, regardless of their residence, own properties throughout the country. It is also essential to tighten methods of registration and transfer of property ownership. A net wealth tax cannot be administered efficiently without the adoption of an improved system of property registration. The elimination of bearer securities and numbered deposit accounts is also essential for successful enforcement.

Problems of valuation

Any tax based on current value encounters more severe and troublesome problems of valuation than a tax based on income or receipts. Valuation is not difficult for property traded in the open market, such as stocks and bonds of larger corporations. Value can also be easily placed on cash, bank deposits, notes, and mortgages not in default, if discovered; but troublesome problems arise in the valuation of real estate, private businesses, and oil wells and other mineral rights, which are seldom sold.

Cadastral values are usually used in the valuation of real property. Colombia’s experience with the net wealth and real estate taxes, however, shows cadastral values to be incomplete and generally much below current values. As a result, owners of real property pay the tax on inadequate values, and much discrimination arises because of uneven valuation.52 The obvious remedy is to bring cadastral values up to date and make them uniform, but that remedy is costly and time consuming. This problem, of course, is not peculiar to the net wealth tax: the property and property-transfer taxes in many countries are also generally based on cadastral values. A net wealth tax, however, compounds the injustices of a property tax and other taxes based on inadequate valuation procedures.

The greatest difficulties arise with individual business enterprises and closely held corporations with no public sales of shares. In Japan the proper valuation of shares of these enterprises was a major difficulty, since about 90 per cent of the total number of corporations are regarded as family corporations. In Latin America, the practice of converting individual properties into shares in companies gives rise to problems not only of valuation but also of tax jurisdiction and fiscal evasion.53

Several approaches to a solution of valuation problems have been suggested. Kaldor recommended to the Government of India that all property should be valued at the book value instead of at the current market value. This meant, in effect, that all items of property would be valued at the cost at which they entered the accounts; they would continue to be valued at that cost (subject to reduction for depreciation allowed by income tax authorities) until the property passed out of the account through sale, gift, or bequest. Property, therefore, would have to be valued (1) initially, only when the tax is introduced and the accounts are set up, and (2) subsequently, only when the property was transferred to a different owner other than by sale.54

Goode criticizes this book-value approach:

  • If items were assessed at book value or original cost until a transaction occurred, … the wealth tax would lose much of its advantage as a supplementary measure of economic capacity. Failure to take account of unrealized appreciation or decreases in the value of assets would be a more serious defect in a wealth tax than in an income tax. Any particular gain or loss affects wealth in all subsequent years but affects income of only one year; hence later actual or constructive realization will do more to make up for the earlier omission of accrued gains and losses under the income tax than under the wealth tax. A wealth tax on book value, like a tax on realized income, imposes an additional liability when appreciated assets are sold and hence may deter economically desirable switches of investments.55

Another approach is self-assessment of the property by the owners, coupled with a self-enforcing device. The law may entitle the government to buy any piece of property at the value placed on it by the taxpayer, or at a certain percentage above that value. Self-assessment at much less than true market value permits the government to buy the property and resell it at a profit. Fear of this action may prevent underassessment. Enforcing honesty through the threat of expropriation based on the self-assessed value is an ancient idea, and has often been suggested by various economists.56 These self-enforcing approaches, however, are very questionable and arbitrary procedures, which would of necessity be limited to real estate, and would create serious legal problems and problems of equity.

Most problems of discovery and valuation discussed above are encountered not only in the administration of the net wealth tax, but also in the administration of the income tax, death duties, the gift tax, the property tax, taxes on transfer of property, and other taxes. Additional effort to overcome these problems, therefore, may be worthwhile in order to promote efficiency and effectiveness of tax administration as a whole. Long experience with the net wealth tax in the Scandinavian countries, the Netherlands, Germany, and other countries suggests that these administrative difficulties are not insuperable.57

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.

IV. Conclusions

A net wealth tax, if well designed and effectively administered, can supplement a personal income tax and achieve greater equity in personal taxation. Such a tax has important attributes that cannot be realized by the taxation of money incomes alone: it falls directly on accumulated wealth, effectively distinguishes earned and unearned income, reaches a substantial part of unrealized capital gains and nonmonetary imputed income from property, places an equal burden on the same property value regardless of its yield, and makes possible greater progressivity, especially for higher income groups.

A net wealth tax in combination with an income tax could thus achieve a better distribution of taxes in accordance with individual capacity to pay. Moreover, the tax could also serve as an instrument of socioeconomic reform by redistributing wealth, curbing undue concentration of fortunes, and activating more productive use of assets. In these respects, taxation of net wealth would serve the national objectives of developing countries, which frequently wish to reduce extreme inequalities in wealth, income, and consumption.

To be effective, however, a net wealth tax requires highly skilled and costly administration. If its administrative prerequisites could not be met, the tax would not serve the purposes mentioned above; its adoption in these circumstances would be likely to introduce new inequities. Even the more basic income taxation itself plays a limited role in most developing countries and suffers from widespread evasion, and poor administration and enforcement. Moreover, existing property and inheritance taxes, which have many of the attributes of a net wealth tax, are poorly administered in most of these countries. It seems unrealistic for countries not possessing the necessary skills for effective administration of other direct taxes to attempt, in addition, a new tax on net wealth, especially considering its limited revenue possibilities. In other words, the social aspirations of developing countries may not always be adequately supported by the means of implementing them.

The promotion of social and economic development may take precedence over the objective of tax equity, and the policies of many governments in protecting certain types of properties such as bearer shares and numbered deposit accounts greatly limit the possibilities of progressive taxation of income and wealth. In practice, a net wealth tax often discriminates against owners of real estate, which cannot be concealed, and registered securities. Also, the net wealth tax may involve a payment problem, stemming from annual taxation of wealth yielding little or no money income. The result may be a serious burden on owners of real property which is not readily marketable.

A major part of what could be accomplished by a net wealth tax could be achieved by taxes on income, property, inheritances, and gifts, if these taxes are well designed and effectively administered. It might be easier to improve existing taxes than to introduce a new and complex tax. One of the first steps might be an improvement of the cadastre for the property tax system, as the Nicaraguan example indicates. A strengthened income tax administration would also serve part of the objectives of net wealth taxation, and might be easier to achieve or be even more desirable, as Japanese experience shows. Therefore, the socioeconomic requirement must be especially great and administrative capacity strong to warrant the adoption of a net wealth tax.

In any event, a net wealth tax should be considered as an addition to a system of comprehensive personal taxes—one intended particularly to supplement the basic income tax and to improve related property taxes. It should not be considered in isolation. Its cost, revenue, and merits should be evaluated in relation to personal taxation as a whole. The long history of the net wealth tax in some European countries and their fairly successful experience with it indicate that this tax can play a worthwhile part in a modern revenue system, provided that the administrative difficulties are overcome.

APPENDIX

I. Bibliography

1. General
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  • Due, John F.Net Worth Taxation,” Public Finance (The Hague), Vol. XV (1960), pp. 31021.

  • Due, John F. Government Finance: An Economic Analysis, rev. ed. (Homewood, Illinois, Richard D. Irwin, 1959), pp. 37684.

  • Goode, Richard. The Individual Income Tax, The Brookings Institution (Washington, 1964), pp. 1157.

  • Hansen, Bent.Aspects of Property Taxation: A General Report,” Public Finance (The Hague), Vol. XV (1960), pp. 199219.

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  • Vickrey, William. Agenda for Progressive Taxation (New York, The Ronald Press Co., 1947), pp. 1112 and 36266.

2. Regional
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  • Detiger, J.G.Taxes on Property—Rapport néerlandais,” Public Finance (The Hague), Vol. XV (1960), pp. 288309.

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  • Federation of Indian Chambers of Commerce and Industry, Kaldor’s Report on Indian Tax Reform (New Delhi, 1957), pp. 1418.

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  • Gulati, I.S. Capital Taxation in a Developing Economy (India) (Bombay, Oriental Longmans, 1957), pp. 3358.

  • Harberger, Arnold C.Issues of Tax Reformation for Latin America,” in Fiscal Policy for Economic Growth in Latin America, papers and proceedings of a conference held in Santiago, Chile, December 1962, and issued by the Organization of American States, Inter-American Development Bank, and Economic Commission for Latin America (Baltimore, 1965), pp. 11934.

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  • Harvard Law School. World Tax Series: Taxation in Colombia (Chicago, Commerce Clearing House, Inc., 1964), pp. 43660.

  • Harvard Law School. World Tax Series: Taxation in the Federal Republic of Germany (Chicago, Commerce Clearing House, Inc., 1963), pp. 15266 and 699742.

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  • Harvard Law School. World Tax Series: Taxation in India (Boston, Little, Brown & Co., 1960), pp. 40021.

  • Harvard Law School. World Tax Series: Taxation in Sweden (Boston, Little, Brown & Co., 1959), pp. 61752.

  • Hirschman, Albert O. Journeys Toward Progress: Studies of Economic Policy-Making in Latin America, Twentieth Century Fund (New York, 1963), pp. 11783.

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  • India, Ministry of Finance. Budget, 1957–58: Finance Minister’s Speech (New Delhi, 1957), p. 12.

  • Japan, Tax Bureau, Ministry of Finance. An Outline of Japanese Taxes, 1964 (Tokyo, 1964), p. 8.

  • Japan, Tax Enquiry Committee. Zeisei Chosakai Toshin (1961) [Report of the Tax Enquiry Committee] (Tokyo, 1960), pp. 5256.

  • Jarach, Dino.Taxes on Net Wealth, Inheritances, and Gifts,” in Fiscal Policy for Economic Growth in Latin America, papers and proceedings of a conference held in Santiago, Chile, December 1962, and issued by the Joint Tax Program of the Organization of American States, Inter-American Development Bank, and Economic Commission for Latin America (Baltimore, 1965), pp. 197233.

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  • Kaldor, Nicholas. Indian Tax Reform, Department of Economic Affairs (New Delhi, Government of India, 1956), pp. 1928.

  • Kaldor, Nicholas. Suggestions for a Comprehensive Reform of Direct Taxation (Colombo, Government of Ceylon, 1960), pp. 1314.

  • Kaldor, Nicholas.Tax Reform in India,” Economic Weekly, tenth annual number, Vol. XI (Bombay, 1959), pp. 19598.

  • Nicaragua, La Comisión Fiscal. Informe de la Comisión Fiscal, Consideraciones Relativas a la Situación Fiscal de Nicaragua y la Necesidad de su Reforma (Managua, 1961), pp. 4558 and 6769.

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  • Organization of American States—Inter-American Development Bank Joint Tax Program. Fiscal Survey of Colombia (Baltimore, 1964), pp. 3740 and 54.

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  • Pakistan, Minister of Finance. Budget Speech for Fiscal Year 1964/65 (Karachi, 1964), pp. 1920.

  • Pakistan, Taxation Enquiry Committee. Interim Report (Central Taxation) (Karachi, 1959), p. 72.

  • “Report of the Conference,” Fiscal Policy for Economic Growth in Latin America, papers and proceedings of a conference held in Santiago, Chile, December 1962, and issued by the Joint Tax Program of the Organization of American States, Inter-American Development Bank, and Economic Commission for Latin America (Baltimore, 1965), pp. 40224.

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  • Skattedepartementet (Inland Revenue Department of Denmark). Summary of Current Danish Legislation Concerning Taxation of Income and Capital (Copenhagen, 1963), pp. 2428.

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  • Skattelovskommissionen. Skattelovskommissionens Betaenkning [Report of the Commission for Taxation], II Del. (Copenhagen, J.H. Schultz A/S, 1950), pp. 9798.

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  • Thurston, H. The EEC Reports on Tax Harmonization (Amsterdam, International Bureau of Fiscal Documentation, 1963), pp. 12728 and 155.

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  • U.S. Tax Mission to Japan. Report on Japanese Taxation by the Shoup Mission, General Headquarters, Supreme Commander for the Allied Powers, Vol. I (Tokyo, 1949), pp. 7788.

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  • Watanabe, Kikuzo. Zei no Riron to Zissai [Theory and Practice of Taxation] (Tokyo, Nihon Keizai Shimbun Sha, 1959), pp. 24647.

II. Net Wealth Tax in Principal Countries1

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Source: Appendix I.

Information as of 1963 unless otherwise specified.

1964.

Zürich Canton.

1953, when law was repealed.

1965.

Impôt sur la fortune nette

Résumé

Cet article expose les caractéristiques d’un impôt annuel sur la fortune (nette), basé sur une analyse du fonctionnement de cet impôt dans quatorze pays, et en évalue le rôle dans le système d’imposition, en se référant plus particulièrement aux pays en voie de développement.

Un impôt sur la fortune peut compléter utilement un impôt sur le revenu des personnes physiques de manière à répartir plus équitablement la charge fiscale qui grève ces personnes et d’atteindre certains objectifs économiques et sociaux. Cet impôt frappe directement la fortune acquise; il établit une distinction entre revenus de travail et autres revenus; il frappe les gains de capitaux non réalisés et les revenus imputés du patrimoine; il fait peser une charge égale sur la valeur identique des biens meubles et immeubles quel qu’en soit le rendement; et il permet une progressivité plus grande. On pourrait également utiliser un impôt sur la fortune comme instrument de réforme pour redistribuer la fortune, en éviter une concentration excessive, et faciliter un emploi plus productif des biens.

Malgré les avantages que présente l’impôt sur la fortune, les pays qui l’ont adopté sont relativement rares. En effet, pour être efficace, un impôt sur la fortune exige un appareil administratif extrêmement coûteux et spécialisé en l’absence duquel il n’atteindrait pas ses objectifs. Son introduction dans un pays où cet appareil ferait défaut entraînerait de nouvelles injustices et créerait d’autres problèmes. Etant donné que la plupart des objectifs qu’un impôt sur la fortune se proposerait d’atteindre peuvent l’être également par l’imposition des revenus et du patrimoine, les pays en voie de développement auraient peut-être intérêt à améliorer leurs systèmes d’imposition des revenus des personnes physiques plutôt que d’introduire un impôt nouveau et complexe à faible rendement.

Quoi qu’il en soit, il ne faudrait pas considérer un impôt sur la fortune isolément mais plutôt comme supplément d’un système d’imposition globale des personnes physiques adopté plus spécialement en vue de compléter l’impôt de base qu’est l’impôt sur le revenu et d’améliorer les impôts sur le patrimoine. L’expérience de certains pays européens en matière d’impôt sur la fortune prouve que cet impôt est susceptible de jouer un rôle important dans un système fiscal moderne, à condition que les difficultés administratives qu’il soulève soient résolues.

Impuesto Sobre la Riqueza Neta

Resumen

En este artículo se describen las características de un impuesto anual sobre la riqueza neta, y basándose en el análisis de los resultados obtenidos en 14 países, se evalúa su función dentro de la estructura tributaria, particularmente en lo que se refiere a los países en desarrollo.

El impuesto sobre la riqueza neta puede ser útil para complementar el impuesto sobre la renta individual, a fin de lograr una mayor equidad en la tributación personal y alcanzar ciertos objetivos sociales y económicos. Dicho impuesto recae directamente sobre la riqueza acumulada; establece una distinción entre los ingresos provenientes del trabajo y los de las inversiones; grava también las ganancias eventuales de capital y la renta imputada de la propiedad; establece una carga igual sobre bienes de idéntico valor, independientemente de su rendimiento; y permite que haya un escalonamiento más progresivo de la tributación. El impuesto sobre la riqueza neta podría servir también como instrumento de reforma para redistribuir la riqueza, evitar la concentración indebida de fortunas, y dar impulso al uso más productivo de los bienes.

A pesar de sus posibles ventajas, los países que han adoptado el impuesto sobre la riqueza neta son relativamente pocos. Para que dicho impuesto sea eficaz, se requiere una estructura administrativa altamente especializada y costosa; de no existir este requisito no se podrán alcanzar los objetivos que con él se persiguen; si se adoptara en esas circunstancias traería probablemente consigo nuevas inequidades y otros problemas. Como gran parte de lo que podría conseguirse mediante un impuesto sobre la riqueza neta puede también obtenerse mediante impuestos sobre los ingresos y sobre los bienes, para los países en desarrollo sería quizá más fácil y más realista mejorar sus actuales sistemas de tributación personal en vez de introducir un impuesto nuevo y complicado cuyo rendimiento es relativamente pequeño.

De todas maneras, el impuesto sobre la riqueza neta no debe considerarse aisladamente, sino como complemento del sistema general de tributación personal, y especialmente del impuesto básico sobre la renta, y como una forma de mejorar el sistema de impuestos conexos sobre los bienes. La experiencia de algunos países europeos con el impuesto sobre la riqueza neta indica que si se pueden superar las dificultades administrativas que entraña puede desempeñar una función importante en un sistema fiscal moderno.

*

Mr. Tanabe, economist in the Fiscal Affairs Department, is a graduate of the Tokyo University of Commerce (now Hitotsubashi University, Tokyo), and studied under the International Program in Taxation at Harvard Law School. He was formerly a member of the staff of the Tax Bureau and other bureaus of the Ministry of Finance, Japan.

1

Nicholas Kaldor, Indian Tax Reform, Department of Economic Affairs (New Delhi, 1956), pp. 19–28, and Suggestions for a Comprehensive Reform of Direct Taxation, Government of Ceylon (Colombo, 1960), pp. 13–14.

2

“Report of the Conference,” in Fiscal Policy for Economic Growth in Latin America, papers and proceedings of a conference held in Santiago, Chile, December 1962, and issued by the Joint Tax Program of the Organization of American States, Inter-American Development Bank, and Economic Commission for Latin America (Baltimore, 1965), p. 421; George F. Break and Ralph Turvey, Studies in Greek Taxation, Center of Planning and Economic Research (Athens, 1964), pp. 162–80; and R.I. Downing and others, Taxation in Australia (Melbourne, 1964), pp. 109–18.

3

H. Thurston, The EEC Reports on Tax Harmonization (Amsterdam, 1963), pp. 127–28 and 155.

4

Cesare Cosciani, “The Tax Reform as Contemplated in the Five-Year Plan,” Review of the Economic Conditions in Italy, Banco di Roma (1965), Vol. XIX, p. 137.

5

In England, an annual taxation of wealth has been recently proposed by The Economist, January 15–21, 1966, pp. 217–19. In the United States there has been little discussion of a net wealth tax partly because of its uncertain constitutionality at the federal level. See William Vickrey, Agenda for Progressive Taxation (New York, 1947), p. 12; and Richard Goode, The Individual Income Tax, The Brookings Institution (Washington, 1964), p. 13. A selected bibliography on the subject is given in Appendix I, p. 156.

6

Harvard Law School, World Tax Series: Taxation in Sweden (Boston, 1959), hereafter cited as Taxation in Sweden, p. 619.

7

Harvard Law School, World Tax Series: Taxation in Colombia (Chicago, 1964), hereafter cited as Taxation in Colombia, pp. 436–37.

8

Preferential taxation of earned income may be achieved even under the income tax system by application of a separate rate schedule (the schedular income tax system) or by exclusion of part of earned income from the taxable income. It is believed, however, that these devices only partially meet the equity problem because they cannot reach most wealth yielding no money income, as discussed below.

9

Kaldor (1956), op. cit., pp. 20–21; John F. Due, “Net Worth Taxation,” Public Finance (The Hague), Vol. XV (1960), p. 315.

10

Ceylon, Ministry of Finance, Budget Speech, 1958–1959 (Colombo, 1958), p. 37.

11

Pakistan, Taxation Enquiry Committee, Interim Report (Central Taxation) (Karachi, 1959), p. 72.

12

Kaldor pointed out the failure of progressive taxation to attain its objectives in advanced countries: “Thus in the United Kingdom, though the combined income and surtax rates for the last 15 years have exceeded 90% in the top brackets, and estate duties reached a maximum of 80%, vast new fortunes are still being made, and the degree of concentration in the ownership of wealth—as measured, e.g., by the percentage of persons owning one-third of the national wealth, etc.—has not been reduced. The same is true, I believe, of the United States and other Western countries” (Kaldor (1956), op. cit., p. 8).

13

Pakistan, Taxation Enquiry Committee, loc. cit., pp. 9–10, 16, and 72–75.

14

U.S. Tax, Mission to Japan, Report on Japanese Taxation by the Shoup Mission, General Headquarters, Supreme Commander for the Allied Powers, Vol. I (Tokyo, 1949), hereafter cited as the Shoup Mission Report, p. 83. The Mission consisted of Carl S. Shoup, Director; Howard R. Bowen; Jerome B. Cohen; Rolland F. Hatfield; Stanley S. Surrey; William Vickrey, and William C. Warren.

15

Ibid., p. 81.

16

Due (1960), op. cit., p. 318. Dino Jarach suggests that the taxation of wealth fulfills the “productivist” principle for the reason that it falls upon potential rather than actual income—see “Taxes on Net Wealth, Inheritances, and Gifts,” in Fiscal Policy for Economic Growth in Latin America (cited in fn. 2), p. 202; and Cesare Cosciani, Istituzioni de Scienza delle Finanza (Turin, 1961), pp. 210–48.

17

See Albert O, Hirschman, Journeys Toward Progress: Studies of Economic Policy-Making in Latin America, Twentieth Century Fund (New York, 1963), pp. 117–38.

18

Shoup Mission Report, p. 81.

19

Ibid., pp. 77–89. The same idea of a net wealth tax as a capstone to the progressive system is discussed by Vickrey (a member of the Shoup Mission), op. cit., pp. 362–63: “Thus, practical considerations may impose limits on the degree of progression obtainable with income, spending, and succession taxes alone. If still steeper progression is desired, a tax on net worth may provide a possible method of topping off the tax structure. Such a net worth tax would not be considered an important element in the revenue system, but rather a means of achieving a redistribution of wealth at the top of the scale more rapidly than is possible with the other taxes alone. . . . Such a net worth tax would be an acceptable substitute for the continuation of the graduation in the upper ranges of income, spending, or succession taxes.” See also Ursula K. Hicks, Public Finance (London, 1964), p. 213.

20

India, Ministry of Finance, Budget, 1957–58: Finance Minister’s Speech (New Delhi, 1957), p. 12.

21

Kaldor (1956), op. cit., pp. 13–16.

22

India and Pakistan do not provide for aggregation of a family’s property, in principle, but have provisions to limit avoidance by inordinate transfer of property to dependents or other persons.

23

Recently, Ceylon adopted a special additional levy of 10 per cent of income in lieu of the net wealth tax on nonresident companies which own immovable property situated in Ceylon.

24

Nicholas Kaldor, “Tax Reform in India,” The Economic Weekly, tenth annual number, Vol. XI (Bombay, 1959), pp. 195–98. In some Latin American countries a similar tax on corporations was designed as a substitute for an inheritance tax on individuals, principally because of the widespread evasion as to corporate shares—especially those in bearer form. In Uruguay, such a tax on corporations has been in effect since 1910—long before the adoption of its net wealth tax. A similar tax was enacted in Argentina in 1951. This substitute tax might have some advantage in that it makes larger tax collections possible and is relatively easy to administer. See Jarach, op. cit., p. 208.

25

H. Thurston, op. cit., p. 128.

26

Pakistan, Finance Minister, Budget Speech for Fiscal Year 1964/65 (Karachi, 1964), pp. 19–20.

27

Taxation in Colombia, p. 438.

28

The Spearman coefficient of the rank correlation between the per capita income and the exemption limit of the tax is 0.46, covering all 14 countries shown in Table 1. It rises, however, to 0.78, if only countries with lower per capita income (Uruguay, Colombia, Japan, Ceylon, India, and Pakistan) are considered.

29

Janet A. Fisher, “Taxation of Personal Incomes and Net Worth in Norway,” National Tax Journal, Vol. XI (1958), p. 90.

30

Due (1960), op. cit., p. 311.

31

Fisher, op. cit., p. 90.

32

Kaldor (1960), op. cit., p. 13.

33

In some countries (Germany and Denmark) the effective burden of the net wealth tax on individuals is less than that based on nominal rates, because the taxpayer can deduct the net wealth tax in computing taxable income for income tax purposes.

34

Taxation in Sweden, pp. 643–44.

35

Japan, Tax Bureau, Ministry of Finance, An Outline of Japanese Taxes, 1964 (Tokyo, 1964), p. 8.

36

Nicaragua, La Comisión Fiscal, Informe de la Comisión Fiscal, Consideraciones Relativas a la Situación Fiscal de Nicaragua y la Necesidad de su Reforma (Managua, 1961), pp. 45–48 and 67–69.

37

Fisher, op. cit., p. 88.

38

Skattelovskommissionen, Skattelovskommissionens Betaenkning [Report of the Committee for Taxation], II Del (Copenhagen, 1950), pp. 97–98.

39

Federation of Indian Chambers of Commerce and Industry, Kaldor’s Report on Indian Tax Reform—An Analysis (New Delhi, 1957), p. 16.

40

There were perhaps six reasons leading to the abolition of the net wealth tax in Japan, including the first two, mentioned above:

  • (1) The tax presented difficulties in discovering, intangibles, resulting in a discriminatory burden on real property owners.

  • (2) A serious burden was placed on holders of wealth, particularly owners of forests, with little or no current income.

  • (3) The valuation of assets and liabilities also presented difficulties for tax administration. Since there are many individual business enterprises and closely held corporations (about 90 per cent of the total number of corporations) in Japan, valuation of quotas and shares of these enterprises with no public sales was a serious administrative problem.

  • (4) Coordination of the income tax and the net wealth tax was incomplete because the net wealth tax was administered by the net wealth tax officers in a different manner from that in which the income tax was administered. Also, the cross checking between personal income and related property through the use of additional information provided by taxpayers was not easy for tax officers because of arbitrary personal and household expenditures which disturbed a reasonable relationship between personal consumption and changes in accrued income and property.

  • (5) Although the tax aimed at encouraging wealth to shift to more productive use, the result was quite beyond that expected because such a shift required so many considerations in addition to the form of taxation, and the tax was adopted under unsatisfactory conditions for investment after the war.

  • (6) The tax produced only a small part of total tax revenue, compared with its costly administration.

  • See Kikuzo Watanabe, Zei no Riron to Zissai [Theory and Practice of Taxation] (Tokyo, 1955), pp. 246–47.

41

Earl R. Rolph and George F. Break, Public Finance (New York, 1961), p. 196. See also Break and Turvey, op. cit., pp. 175–77.

42

Goode, op. cit., pp. 21–22. While Rolph and Break suggest that human capital should be included in the base of a net wealth tax, Goode does not agree with their suggestion because of the infeasibility of measuring human capital with a degree of accuracy, and of dangers of infringement on personal liberties in applying a tax on the present value of potential earnings.

43

Goode, op. cit., pp. 38–57, compares the economic effects of the income tax with those of the net wealth tax and the expenditure tax. See also Due (1960), op. cit., pp. 312–13 and 316–19.

44

Goode, op. cit., p. 47, illustrates this gain by the following example, assuming that the net worth tax accrues at the end of the year on the capital plus earnings during the year:

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45

Richard A. Musgrave, The Theory of Public Finance (New York, 1959), pp. 325–27.

46

Kaldor suggested the introduction of an expenditure tax that would reach so-called spending power as a measure of taxable capacity of individuals, and thereby avoid possible disincentive effects of net wealth and income taxes on savings. See Nicholas Kaldor, An Expenditure Tax (London, 1955), pp. 79–101.

47

Due (1960), op. cit., p. 318.

48

Ibid., p. 319.

49

Ibid., p. 313. See also John F. Due, Government Finance: An Economic Analysis, rev. ed. (Homewood, Illinois, 1959), pp. 379–80.

50

Goode, op. cit., p. 32.

51

Fiscal Policy for Economic Growth in Latin America (cited in fn. 2), p. 421.

52

See Hirschman, op. cit., pp. 117–38.

53

See Jarach, op. cit., p. 200.

54

Kaldor (1956), op. cit., p. 25. However, India did not accept his suggestion, and provided annual valuation based on the current market value of the property.

55

Goode, op. cit., p. 32.

56

Among various suggestions, Hirschman, op. cit., pp. 117–38, refers to those made to Colombia by several foreign experts, while Kaldor (1956), op. cit., pp. 25–26, proposed a similar device to the Indian Government. A more sophisticated device would require that self-assessed values be placed on public record, and any individual or enterprise would be free to make a bona fide bid to purchase the property. In the event that such a bid exceeded the owner’s declared value by a significant amount, the owner, if he chose not to sell, would be required to revalue his property up to the amount which had been bid. See Arnold C. Harberger, “Issues of Tax Reform for Latin America,” and discussion, pp. 119–34, and “Report of the Conference,” pp. 405–18 and 420, in Fiscal Policy for Economic Growth in Latin America (cited in fn. 2). For a more thorough and systematic treatment see John Strasma, “Market-Enforced Self-Assessment for Real Estate Taxes-I, II” Bulletin for International Fiscal Documentation (Amsterdam), Vol. XIX (1965), pp. 353–63 and 397–414.

57

Break and Turvey, op. cit., pp. 165–80, concentrate their discussion of a net wealth tax on problems of administration.