Administrative challenges and low revenues doom wealth tax effectiveness – other countries prove.
Kose et al ‘22 [M. Ayhan Kose, Franziska L. Ohnsorge, Carmen M. Reinhart, Kenneth S. Rogoff; Centre for Economic Policy Research, London, United Kingdom, Brookings Institution, Center for Applied Macroeconomic Analysis, Crawford School of Public Policy, Australian National University, Canberra, Australia, World Bank; 5-13-2022; "The Aftermath of Debt Surges"; Annual Reviews; https://www-annualreviews-org.proxy.lib.umich.edu/doi/10.1146/annurev-economics-051420-015343; Accessed 6-24-2023; Bell-AT]
However, wealth taxes have been repealed in many OECD countries since the 1990s because of the practical challenges of administering these types of taxes and the limited gains in terms of revenues raised and redistribution achieved (OECD 2018). Administrative challenges were particularly severe for types of wealth that required self-reporting and were prone to underreporting, as found in the case of Sweden (Seim 2017), and for regimes that exempted specific types of assets, such as business assets (Saez & Zucman 2019). Even in the four OECD countries (France, Luxembourg, Norway, and Switzerland) that still maintain wealth taxes, they account for a small share of tax revenues—on average, 0.9% of GDP, compared with overall tax revenues of almost 40% of GDP.
In EMDEs, wealth taxes have also been advocated as a means of addressing inequality, such as in South Africa (Chatterjee et al. 2021). Wealth taxes in Argentina, Colombia, and Uruguay have typically generated even lower revenues relative to GDP than in advanced economies (Morgan & Carvalho 2021). In 2018, revenues from wealth taxes ranged from 0.05 (Colombia) to 0.98 (Uruguay) percent of GDP, compared with 0.08 (France) to 2.82 (Luxembourg) percent of GDP in advanced economies. Moldova and Bolivia introduced wealth taxes in 2016 and 2020, respectively; revenues from these taxes have been positively surprising in Bolivia but disappointing in Moldova (World Bank 2019b).
EMDEs face significant challenges in raising revenues through wealth taxes. Because a substantial fraction of the wealth of rich taxpayers is held offshore, their assets are often difficult to reach with wealth taxation, and the administrative challenges of tax collection are pronounced. Even in advanced economies, the taxation of wealthy individuals is often administered through specialized staff and units within tax administrations (Kangave et al. 2020). Where enforcement capacity is weaker, reported wealth tends to be more responsive to tax changes (Morgan & Carvalho 2021).