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Taxing wealth at the top

The premise of a wealth tax is to take a small portion of the large amount of money tied up in the fortunes of wealthy individuals and redirect it towards those less well-off via taxation. Governments can then use the revenue raised from the tax to close the wealth inequality gap by improving essential services like education, building more social housing, or increasing supplements for low-income households.

One method of doing this is through an annual net worth tax – a small recurrent financial charge imposed on the value of a person’s wealth (the sum of assets minus their liabilities). It differs from income tax, which is the levy charged on the money received from work or through investments, and arguably provides a more complete picture of their financial power.

A variation of a net worth tax called a billionaire’s tax works similarly in principle but is levied on the highest-net-worth individuals. The idea for a already has some support in principle from countries like Brazil, South Africa, and Germany.

Supporters of net wealth taxes argue it’s fair that the wealthiest have the means and should contribute more, Prof. Evans says. Critics say it unfairly punishes success, could discourage innovation, and lead the rich to move their investments to countries with more favourable tax laws.

“For Australia to introduce a net wealth tax, it would likely need to be either a progressive rate or very modest rate and have a very high threshold to hope to work,” Prof. Evans says. “So, it should probably be less than 1 per cent tax and only for those in the 99th percentile of wealth.

“But even so, it would still need to overcome some complexities to be administered.”

Challenges to implementing a net-worth tax

Implementing a net worth tax in practice is easier said than done. While net worth taxes were once commonplace in the OECD, most have abandoned them due to disclosure, valuation, and mobility challenges.

“Net wealth taxes tend to be very easily evaded as lots of assets are hard to identify or value,” Prof. Evans says. “For example, hiding assets like cryptocurrency is easy; property must be valued yearly, which is a significant undertaking; and many shares are held in private firms with no disclosed market value.”

Some assets are also difficult to convert into money quickly to pay for a new tax.

“Some forms of wealth are just not very liquid,” A/Prof. Bradbury says. “Some people may have one main asset like a valuable property but don’t have much by way of income, so they wouldn’t have a way to pay a net wealth tax.”

All these challenges are manageable, but they require more robust solutions. For example, Prof. Evans says insurance companies could tackle disclosure and valuation by revealing what assets are insured and for what value.

“It sounds like an intrusion, but we already do this with banks who disclose to the ATO the interest they’re paying out to people,” Prof. Evans says. “You can also use good proxies for valuation, such as whatever it costs, and adjust for inflation each year.”

Prof. Evans says wealthy individuals would still have access to the best accountants and asset managers to minimise their tax bills. Still, even if a net wealth tax wasn’t effective in raising revenue, it may send a message to wealthy individuals about the need to contribute a fair share.

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“The more non-compliance, the less valuable a tax becomes for raising revenues,” Prof. Evans says. “The few countries that have them now, like Spain, are only raising a small fraction of what they should be in theory.

“Even Switzerland, which has had a reasonably successful annual wealth tax in place in its cantons for many years, raises a relatively insignificant amount of its total tax by taxing wealth.”

Reforming other taxes on wealth

Wealth taxes could bring sufficient revenue to address inequality in a perfect world. But if they don’t work that way in practice, there are some alternatives.

Prof. Evans argues that the next best idea could be reintroducing an inheritance tax – a levy placed on the value of a person’s estate that would be payable at death.

“There is an argument that inheritance tax is fairer in some ways than a net wealth tax because the deceased no longer need their assets,” Prof. Evans says. “The way to tax it would be at a certain threshold, such as the increase on the value of the assets.”

An inheritance tax would also overcome some challenges plaguing the administration of net worth taxes.

“Because the beneficiaries want to know the assets and their value, the valuation and disclosure problems are gone,” Prof. Evans says. “Any liquidity problems are also solved because the assets are sold off as part of the process, or there could be exemptions for spouses or direct relatives with the family home.”

A/Prof. Bradbury says another alternative could be to reshape property taxation by reforming stamp duty to make it work like a tax on land value. It would be particularly effective for raising revenue in Australia, where a significant amount of personal wealth is tied up in real estate.

“A one-off stamp duty transfer levy when a property is purchased is inefficient because it discourages people from moving,” A/Prof. Bradbury says. “Instead, proper land valuations and property taxes paid annually rather than in one lump sum would raise more revenue over time.”

Likelihood of introducing a wealth tax

A/Prof. Bradbury says back home, changes to any tax regime targeting wealth will likely receive significant pushback from some quarters.

“The losers in any tax change tend to make more noise than the winners benefiting,” A/Prof. Bradbury says. “And in this case, the losers likely have significant political influence.”

Prof. Evans agrees, saying it would be a daring move for any government to pull off a form of wealth tax, at least in the short term.

“The public is becoming more receptive to it, but introducing a wealth tax of any kind is still not likely to be popular politically,” Prof. Evans says. “It would take a courageous government with a big majority to attempt it, and there would be big scare campaigns to shut it down.”

While no perfect solution exists, Prof. Evans says more action to tackle wealth inequality should be welcomed.

“As the problem of wealth inequality gets worse, solutions that once seemed pie in the sky may become more palatable and even necessary,” Prof. Evans says. “Ultimately, if there are reforms, I hope we end up with a fairer and more efficient taxation system for all as a result.”