Wealth Tax: Progressivity in Action in 4 European Countries - Essay Sample

Introduction

A wealth tax is the amount of money charged annually on all household wealth by the state as part of its tax collection deals. Levying this type of tax is usually on the global wealth of every household in a progressive manner because of the high concentration nature of wealth. Additionally, due to its progressivity nature, the application of this wealth is already successful in four countries in Europe. Besides, Senator Warren's proposal also speaks about the progressivity when she felt the exemption is applicable and sustainable at a net worth of $50million. This proposal means that this tax will only affect households with a net worth of above $50miilion, and this will, in turn, on 0.1% of the families. The exemptions will, in turn, raise to 1% of the country's Gross Domestic Product. The United States has a high concentration of wealth than the other countries that successfully implemented wealth taxation. Therefore, the focus is on issues surrounding wealth tax and whether it is an applicable idea to the neighboring country like Canada.

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However, much this idea of wealth tax looks profitable to many economies around the world; it is imperative to analyze issues surrounding it. The analysis will help find out whether it is a noble idea to implement it in any other country other than the US. The US wealth concentration is quite high than most of its neighbors.

Tax integrity is a value that the taxman wishes that every taxpayer obligated with a tax burden should possess, but this is not always the case. However, much the state would invest in public education on the importance of tax payment, tax avoidance, and evasion is one serious challenge that every economy faces. Specific to wealth tax, the issue of hiding wealth abroad may emerge because wealth households have their assets spread all over the world.

Other issues surrounding wealth tax may be challenges only the US solutions are expatriation, effects on economic inequalities, and effects in wealth inequalities. Furthermore, there is also an effect on capital stock, entrepreneurial innovations talent migration, structures of families, charity, forcing wealth tax, reporting information, and valuation. A good number of these issues have solutions in the US economy because the government has a sound system of governance, and so, wealth tax can work well here. However, there are differences in economic structure and strengths between Canada and the US economies. Therefore, it is essential to identify the issues and see if it is a noble idea to apply this kind of tax system in Canada.

Tax Avoidance and Tax Evasion

Tax avoidance and tax evasion involve the deliberate failure to pay taxes or to underpay taxes concerning wealth value. It can also include willful failure to adhere to other tax requirements according to the tax regulations of a state. Wealthy households are prominent victims of this criminal act to the state because it was more comfortable for them to underreport their worth. They also had to hide wealth in other countries, or decide to be expatriates.

Referring to the system in which Canada levy its taxes on property ownership and wealth, it is evident that most Canadians may avoid or evade this form of tax. 0.2% on the first million above 3million dollars and 0.4% on anything above that is what Canadian government levies on Citizen's wealth (Boadway & Pestieau, 2019). This kind of exemption is excessively high from what Senator Warren proposed for the US government even though; wealth concentration is high in the US than in Canada. The overburdening of the taxpayer by the Canadian government is a reason enough to make its citizens avoid paying taxes or evade it. In countries like Denmark and Sweden, the study shows that 1% of wealth tax levied on wealthy households reduced wealth declaration and reporting by 1%. Canada is already overburdening its taxpayers with a property ownership tax of 0.2% on $1million above $3million mark, encouraging these citizens to evade and avoid charges.

Ownership of Assets Oversees

Wealthy individuals can invest in property ownership in other countries and deliberately refused to inform the taxman in the countries where they are citizens. They might intentionally do this unlawful act to evade and avoid paying both income and wealth tax. Research shows that wealthy individuals from the offshore regions of Scandinavia and Colombia highly evaded taxes on their wealth (Alstadsaeter, Johannesen & Zucman, 2019). As earlier stated, such unlawful deliberate tax avoidance can be so rampant in Canada due to policies set up to overburden the taxpayer.

Expatriation

Expatriation is another way of avoiding taxes that is most common with wealthy people. In efforts to invest and work from overseas countries, they acquire wealth and establish them in those countries then avoid charges by acquiring dual citizenship. Furthermore, they permanently settle their families in those countries abandoning their mother countries.

US citizens cannot avoid taxes through this means because they are liable for US taxation. Any US citizen willing to be an expatriate will have to renounce his or her US citizenship failure to which they have to comply with the federal tax requirements (Kirsch, 2017). This provision does not apply to countries like Canada whose laws accept dual citizenship with no exemptions on tax payment regulations. Additionally, the US also has a unique exit tax set to discourage expatriation with over $2million worth, unlike Canada, that allows for dual citizenship but lack such regulations to control tax avoidance.

Effects on Economic Inequality

It is agreeable that if the avoidance of wealth tax will be difficult due to strict measures on tax evaders, it will have a more significant effect on the economy of a state. The progressive nature of this unique form of tax will automatically lead to the primary distribution of these effects on every level of a country's economy. Moreover, this issue will not just affect states with low exemptions or high wealth accumulation, but also countries like America with senior proper exceptions and high wealth accumulation.

Effect on Inequality in Wealth Distribution

The wealth tax will automatically reduce the concentration of wealth. The reduction comes when wealthy people have to pay the government for accumulating too much wealth; they find no reason to continue collecting more. They will then consider the substitution approach, where they will resort to spending more on their daily expenditure than what they save (Simon, 2019). They will automatically see it as a cheaper means to consume now rather than later because keeping the wealth for later use then comes with a price in the form of tax. This issue affects all economies regardless of how much wealth the economy accumulated or how best tax regulations are to manage tax systems.

Effect on Capital Stock

Capital investment experts will inform any economy that reducing vast fortunes may automatically reduce an entire economy's capital stock. The gross result of this effect is the reduction in per capita income, hence reducing the worker's productivity and profits (Leimbach, Kriegler, Roming & Schwanitz, 2017). However, the effect may not be significant for the case of the US because its more substantial fraction of investment is abroad while local investments financed by foreign savings. For this reason, the US may not feel its effects like Canada and other economies that are not open economies like the United States.

Recommendations

From the issues surrounding the wealth tax discussed above, Canada may not be in a position to implement this unique tax system effectively with the nature of her tax system. The main issue around wealth tax is tax evasion and avoidance, which in this discussion comes in two ways, i.e., expatriation and ownership of property abroad.

Wealth tax may also not increase vertical equity in Canada because the regulations already in place in wealth accumulation tax is already overburdening the wealthy people. Furthermore, charging 0.2% on $1million above an exemption of $3million is already discouraging citizens from accumulating more wealth in Canada. This initiative already kills the practicality of the wealth tax system.

Haig-Simon defines taxable income as consumption and change in total net worth, which includes all accumulated wealth. Therefore, this definition is consistent with the wealth tax. Canada should take note of this before she incurs such heavy duties on its citizens before implementing a wealth tax system. Overally, I would not support the introduction of such a tax system in Canada until more favorable and objective tax regulations are available.

References

Alstadsaeter, A., Johannesen, N., & Zucman, G. (2019). Tax evasion and inequality. American Economic Review, 109(6), 2073-2103.

Boadway, R., & Pestieau, P. (2019). Over the Top: Why an Annual Wealth Tax for Canada is Unnecessary. CD Howe Institute Commentary, 546.

Kirsch, M. S. (2017). Citizens Abroad and Social Cohesion at Home: Refocusing a Cross-Border Tax Policy Debate. Va. Tax Rev., 36, 205.

Leimbach, M., Kriegler, E., Roming, N., & Schwanitz, J. (2017). Future growth patterns of world regions-A GDP scenario approach. Global Environmental Change, 42, 215-225.

Simon, J. L. (2019). The economics of population growth (Vol. 5403). Princeton University Press.