Income and Wealth Tax
Throughout history, taxation systems have been a crucial element used to promote economic growth and development as well as ensure sustainability of the commercial sector. Furthermore, failed taxation systems have led to major economic setbacks, such as inflation, low industrial growth rates, and economic stagnation. In this regard, taxation systems are sensitive tools in an economy which can either lead to its prosperity or collapse (Piketty, 2015). Notably, taxation is a wide and diverse system, which addresses all economic sectors in a country, monarchy, kingdom, or a trade union. One of the main influential sections of a taxation system is the income and wealth tax because it addresses matters concerning social welfare and personal development. From an economic perspective, wealth tax commonly referred to as capital or equity tax can be described as the total levy on the value of personal assets. Some of the commonly levied personal assets include real estate, bank deposits, and assets in insurance, ownership of unincorporated businesses, personal trusts, pension plans, and financial securities. On the contrary, income tax is defined as the total levy on the financial income generated by all entities within their jurisdiction. The law requires every enterprise as well as individuals to file their tax returns every financial year to determine whether they owe any taxes to the state or they are eligible for a tax refund.
Given that taxation is the main revenue collection approach that is used by governments to fund different projects, such as public service and enhance regional development, governments should develop realistic and tractable tax bills, which will lead to socially-optimal capital taxation. However, in the last two decades, the tractability of the taxation systems, especially in European Countries and the United States, taxation of wealth and income has been undermined by various objectives. Through literature review, this paper analyzes the constraints faced by current taxation systems as well as their implications for the society and the economy. From this analysis, conclusions and recommendations to improve and stabilize taxation systems will be offered (Chakrabarti, Chakraborti, Chakravarty, & Chatterjee, 2013). Notably, the objective of this paper is to evaluate and analyze the policy uncertainties involved in wealth and income tax bills and use economics principles to develop lasting solutions by developing a tractable and realistic taxation model.
Characteristics of Income and Wealth Tax
Income tax is mostly preferred by many individuals and business because it offers a series of deductions including the mortgage interest, healthcare bills, education expenses, as well as other welfare deductions such as insurance cover. There are several categories of income taxes including the business, state and local, and property and sales income tax. The business income tax are levied on the enterprises’ economic earnings and are deducted from the firm’s calculated profits. The state and local income tax are levied on the individual income statement or in other words the monthly salary. On the other hand, the property and sales tax is levied on assets and properties based on the auditor’s reports or the assessed values.
Wealth tax is the money levied on the wealth possessed on individuals in a given country. According to the wealth taxation model, the tax is imposed on the person’s net worth, which is accumulated on the net values of assets after deducting the liabilities owed (Stiglitz, 2015). However, in the recent years, most countries, especially in Europe and North America, have abolished the wealth tax and turned their interest on the income tax. For instance, the United States does not charge wealth tax but requires its citizens as well as local enterprises to file income and property taxes. Although the wealth income is seen as unjust means of taxation, it is the best model of enhancing equitable redistribution of resources in an economy.
Reasons for Supplementing Wealth Tax with Income Tax
One of the main reasons behind abolishment of wealth tax by countries such as the US, UK, Germany, Finland, Iceland, Sweden, Spain, and Luxemburg is the assumption of double counting in the calculations. Some scholars argue that charging the income tax alongside the wealth tax is double taxation because these assets are the contributors to the final income statements. Notably, this statement is true to a lesser extent because the wealth tax is only charged on the appreciation value or the attributed economic activities. In this regard, the wealth tax does not apply to unproductive or depreciating assets in the country (Piketty, 2015). On the other hand, abolishing the wealth tax gives the wealthy a chance to accumulate more un-taxable wealth through the appreciating value of the assets in the country. Moreover, the wealthy are motivated to own more assets, which are not turned into economically productive activities. As a result, the economic productivity in the country declines as well as the industrialization factor. Furthermore, the social welfare deteriorates due to inequitable redistribution of resources.
According to Kayrouz, and Atala (2015), the main objective of wealth and income tax bills is to promote equity, and equality in the society. As such, the tax bills are supposed to be forms of redistribution of wealth in the economy, where every region receives equitable development. However, recent development such as replacement of gift, income, and estate taxes with the progressive wealth tax does not promote equitable wealth distribution. In most cases, economists measure economic inequality by mainly focusing on the income statistics (Scarnicci, 2013). Through such understanding, the progressive wealth tax bill becomes the best metric for enhancing equitable development. However, charging the wealth tax on income is a shallow approach because not all wealth will be harbored in an income statement. In this regard, the progressive tax bill does not comprehensively enhance equitable distribution of resources because the income statement is not an efficient mode of measuring the equality in an economic region. In economics perspective, wealth is a measure of accumulated assets; hence, the tax bill should focus mainly on the overall assets accumulation but not the returns inspired by the asset accumulation. According to (), a person may have a high-income statement but a low accumulation of assets while another individual might have a high accumulation of assets but a lower income statement. In this regard, using the progressive tax bill to tax the two individuals will result in inequitable wealth distribution because the wealthy will be favored. Therefore, eliminating estate and gift taxes will widen the gap between the poor and the rich in the economy, which will result in low living standards and deteriorating social welfare. Markedly, Trump administration’s tax bill abolished the gift and estate taxes by placing them under the income tax. In the short run, there will be a short deviation on economic progress but in the long run, the economy will suffer from inequitable distribution of resources due to the progressively increasing gap between the wealthy and the poor.
A research conducted by Vermeulen, (2017) shows that some of the tax systems are greatly influenced by the national public debt. For instance, in 2013, the IMF introduced a 10% tax levy in the European countries in the attempt of reducing their public debt. Notably, increasing the tax levy on enterprises and individuals to repay the national debt makes the country to lag behind in terms of development. According to Marxist theory, the revenue collected from taxation should be used mainly for development and promotion of social welfare. Therefore, the funds should to support systems such as education and healthcare. Evidently, stabilizing the health sector increases the economic productivity of a country due to the resulting sustainable labor force. The increased productivity enables the country to experience a favorable balance of trade; hence, the total revenue collected by the federal government increases. On the other hand, investing on education enables the country to become innovative and creative, especially in the industrial sector. As a result, the country experiences high industrialization rate, which raises the number of exports in the country. Karl Marx argued that the revenue collected on increase in productivity, especially the custom duty charged on the export and imports should be used partially to supplement the budget deficit while the rest should repay the national debt. In this regard, the country will experience a sustainable growth rate. However, using the wealth and income tax to repay the national debt directly will destabilize the economy by reducing the economic productivity and growth rate in the short-run. In the long-term, the economy will be rendered stagnant or contract a depression due to low production rate and high government expenditure.
Roxana-Manuela, and Daniela-Neonila (2014), argues that optimal tax on capital income can be improved and perfected by introduction of capital market imperfection in models with or without relative economic inheritance. One of the main factors that makes the optimal capital income positive is its efficient mode of redistribution of wealth from the owners of capital to non-owners of capital. The optimal capital model shows that income taxation is only positive when the consumption is positively correlated with savings. However, computing the numerical values for optimal capital tax rates leads to imbalance wealth distribution in the society. With regard to these metrics, the optimal capital model taxes the old highly, while the young are taxed at a considerably lower rate. Thus, the model cannot be used as reliable and responsive metric towards wealth distribution because it bases its focus not on the economic activities but on the age group. Notably, old age does not necessarily translate to wealth or young to poverty; hence, basing the model’s argument on age brackets does not solve the equality and equity problems.
In his research Gatt (2014), found that wealth tax is the best means of promoting equity in regional development because it is the most efficient way of reducing the gap between the wealthy and the poor. By charging taxes on the assets held, will enable the government to turn most of the unutilized resources in the country into productive economic factors. For instance, charging tax on the huge amount of land owned by the wealthy people in a country will inspire them to start economic activities on these assets rather than leaving them idle. According to Milton Freidman, a United States economist, abolishing the wealth tax in the country has motivated the rich people to transform their cash into long-term assets such as land and other real estate assets (Venkataraman, 2014). However, this transformation of current assets into long-term assets reduces the country’s economic power since these resources are not engaged in economic production. However, the owners benefit from the consistent appreciating value of the assets. Therefore, the state is left to suffer as the wealthy continues to accumulate wealth in a more consistent manner. The poor on the other hand, do not have many assets and most of their income is derives from the salaries, wages, rents, and commissions, which are all liable to income tax deductions. In this regard, abolishing the wealth tax gives the wealthy a chance to evade taxes while the poor continue to suffer the wrath of high taxation bills.
Evaluation and Economic Analysis
Admittedly, imposing wealth tax is one of the most influential means of promoting the efficient allocation of resources in the country. One of the main factors that enhance the efficient allocation and redistribution of wealth is contributed by the increased revenue collected. By levying a tax on the property, assets, and gifts, the government will acquire more revenue, which will be used to supplement budget deficit and promote economic growth rate (Saez, & Zucman, 2016). Moreover, the government will have more resources at its disposal, which will lower its public borrowing rates. In this regard, the economy will be sustainable because most of its revenue will be invested in long-term projects such as education and healthcare. Therefore, the wealth tax will not only solve the economic constraints in the short run but also enhance economic sustainability in the long run.
Apart from enhancing efficient allocation of resources, the wealth tax will also enable the country to increase its productivity because taxing property owned such as on the real estate will motivate the wealthy to turn their assets into productive activities such as building rental houses or starting ranches or firms (Roine, & Waldenström, 2015). In this regard, the country will experience an upsurge in economic activities, which enhance high growth rate in the industrial sector. Moreover, more job opportunities will be created due to the rising demand for labor in the real estate assets. In general, turning the idle assets into productive activities will enable the economy to grow and acquire sustainability in the both short- and long-term basis.
On the topic of redistribution of wealth and reduction of the wealthy and poor gap, the wealth tax will serve as an efficient and responsive platform. Markedly, the revenue collected from the wealth tax will reduce the budget deficit, which will relieve the pressure mounted on the income tax (Jones, 2015). Therefore, by charging the wealth tax, the economy will realize friendly and manageable income taxes, which will enable the poor to start saving for investments. On the other hand, the wealthy will not have an easy way out of conserving their wealth and will be pushed towards generating more wealth through avenues such as industrialization. Therefore, the economic activities in the country will increase at a high rate, which will lead to more revenue collection. Furthermore, the increased amount of savings will enable the citizens to engage in investment activities such as entrepreneurship and stock exchange markets. In this regard, the social welfare will be promoted as the standard of living in the country raises. In the long run, the country will experience economic prosperity and high bargaining power in the international markets.
Although wealth tax suffers some limitations, abolishing it does not lead to economic stability in a nation but inspires more development constraints and inequitable distribution of resources. In this regard, economists should devise a more inclusive model that will harbor both income and wealth tax concurrently to not only enhance efficient allocation of resources but also reduce the poverty rates in the world. Notably, endorsing the income tax alone as the main form of wealth distribution does not benefit the poor because they are mainly dependent on the salaries and wages. On the other hand, the wealthy can evade taxes by investing in the real estate businesses, where they buy a huge chunk of land, and leave them unattended. Given that the land will appreciate in value, the wealthy are assured of a consistent form of untaxable income while the poor are left to suffer the wrath of the income tax.
It is the mandate of the federal government to raise revenue through taxation systems, which will be used to supplement budget deficits and finance projects such as healthcare, infrastructure building, and education. Therefore, the government should use a comprehensive and inclusive means of raising the taxes without favoring any group in the economy. In this regard, the wealth tax should be imposed on all the assets owned in the state regardless of whether there are economic activities going on or not. This will motivate the asset holders to transform them into productive entities. However, the taxation policies should avoid the problem of double counting when charging both the income and wealth tax on individuals and enterprises. In this regard, the country will experience a swift and sustainable economic growth in both short and long run.
For any economy to function sustainably, an efficient, responsive, and equitable taxation system must be developed and implemented effectively. The main characteristics of an efficient and responsive taxation system include equitable distribution of resources, inclusivism, equality in levying mechanism, and sustainable on the cost. Moreover, the metrics used to charge the taxes must be comprehensible and easy to understand. In this regard, the government should charge affordable income taxes to all the employed citizens to enable the state to raise enough revenue. On the other hand, the assets, gifts, and property owner should also be liable to taxation. For instance, charging the tax real estate appreciation value will enable the government to accumulate more revenue. Moreover, appreciation levy will encourage the asset owners to convert their assets into economic production forms such as building rentals. Incorporating the wealth and income tax in the national taxation system will reduce the pressure mounted on the income tax, which will enable the poor to save due to the low rates of taxation. As a result, the poor will start investing in entrepreneurship or stock market avenues, which will reduce the gap between them and the rich in the long run.
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