A wealth tax is a tax which is levied on the wealth held by a person or entity. The tax rate is typically a percentage of the taxpayer's calculated net worth, but it can vary depending on total net worth and the taxing nation's specific laws. Several countries use this form of taxation to raise funds for the government, though arguments for and against this approach certainly exist.
Net Worth
Most wealth taxes around the world are based on net worth, which is typically found by totaling the taxpayer's assets, and then subtracting debts, such as loans and mortgages. Assets include cash deposits, real estate holdings, investments, trusts, and shares in businesses. Since wealth taxes mean that a nation's wealthiest taxpayers have to pay a proportionately higher amount in taxes than their poorer counterparts, it is considered a type of progressive tax.
Variations
In some areas of the world, a blend of wealth and income taxes can be found. In the United States, for example, taxpayers pay income taxes rather than federal wealth taxes; however, they may also be subject to other types of taxation like property taxes, which are taxes on the value of real estate, a type of wealth. As property tax revenues in many areas show, a wealth tax can be a very effective way to raise money, as people who hold valuable real estate investments can owe substantial property taxes annually.
Advantages
Some economists have suggested that there are definite advantages to wealth taxes. These advantages are usually related to the differences between income and wealth. While nearly all people earn some kind of income, most of the actual wealth in a country is often held by a relatively small fraction of the population. Income taxes, which are based on the amount of income someone makes in a year, are sometimes heavily criticized as hitting the middle and lower classes harder because they depend on that income more. High wealth individuals, however, earn proportionally less income, and thus tend to pay less income taxes. By taxing wealth instead, more of the tax burden would go to those who have a higher overall net worth.
Wealth, and by association power, tend to be concentrated in the hands of a very small elite, these critics argue. For some nations, this concentration of power may be seen as a threat to democracy. Focusing the levying of taxes on that small group with the most wealth could create more equality by reducing how much wealth is concentrated in so few hands, while also raising large amounts of money for the government.
Disadvantages
Critics of the wealth tax suggest that defining exactly what a taxpayer's net worth is can be very difficult. Assets like privately-held businesses and real estate are difficult to value in many cases, and may not always be valued the same by different assessors. Calculating a wealth tax also usually requires more complicated administrative work, and thus costs more to manage.
Wealth taxes can also be viewed as penalties levied on the wealthy, and they can act as a disincentive to accrue wealth and to invest or save wisely. An income tax only taxes a person's wealth once — when it's earned — whereas a wealth tax, it is argued, taxes that same value each tax year. Some suggest that a wealth tax encourages capital flight out of a nation, as wealthy individuals have a strong incentive to move their assets to places without a wealth tax.
