A wealth tax bolsters trust in the IRS

If revealed preference is anything to go by, most countries are extremely hesitant to introduce wealth taxes. But if ever there were a time that wealth taxes could help, it may be now.

First, we can agree now that inequality is out-of-hand. Studies in country after country identified similar trends. The very wealthy are getting far wealthier. The poor keep losing out; about 100 million people were pushed into poverty by COVID-19 during 2020 alone, with the number expected to rise to .

Second, the world is in a fiscal hole. Governments dipped deep to deliver health and frontline pandemic services while providing financial relief to individuals and businesses. Deficits are feeding record levels of debt, while spending needs are yet to subside and revenues have softened. . 

Third, the stock market has gone into a frenzy for stocks that offer a dependable and growing revenue bundle (). Rundles are typically associated with sources such as subscription income, especially among companies that have SAAS income (Subscription as a Service). Rundles reduce income volatility, even in highly volatile sectors.

Fourth, it is more difficult now for the superrich to stash their cash in far flung tax shelters. There have been high profile cases outing grand corruption and extreme tax minimization, (the Mossack Fonseca aka Panama Papers, Kleptopia etc), but the real story is the general trend. In country after country, BEPS measures (Base Erosion and Profit Shifting) are biting. Some 125 countries are now members of the BEPS steering body, the .

Fifth, the social contract is being tested. Polarization, radicalization, the creation of specialist social media feeding outlandish views and public policy failures in addressing the coronavirus have meant that in many countries, the social fabric is fraying. Trust is suffering. 

 This can help close the inequality gap, plug the fiscal hole and win back trust. According to forthcoming work at the World Bank, taxpayer compliance is bolstered by rebuilding trust; and an important element of that trust comes from the sense that taxes are fair.

New work from the UK wealth tax commission () suggests that  a proposal for wealth taxation can work. The commission reviewed proposals and evidence through five lenses: that the tax should raise substantial revenue; be efficient; be fair; be difficult to avoid; and it should achieve the first four objectives better than any alternative.

The commission considered a one-off wealth tax, reforming current taxation from the perspective of wealth and an annual recurring wealth tax. It liked the idea of reforming existing taxation which it described as seriously defective in taxing wealth, and acknowledged that an annual wealth tax would only be justified ‘if the aim was specifically to reduce inequality by redistributing wealth’. The commission appreciates the difficulties in administering such a tax but does so while also acknowledging ‘the public concern that the gap between rich and poor is too large’. 

It also acknowledges that while arguments to exempt certain assets will be rife, the evidence suggests that such exemptions could stimulate widespread ‘asset-shifting’. It notes the advisability of moving quickly as deliberation can be ambushed by lobbyists undermining important aspects of the proposal. It says that about seven percent of wealth taxpayers could be classed as ‘liquidity constrained’ (asset rich; income poor).

With the twin facets of observed declines in tax buoyancy through time for all countries and compressed overall , an annual wealth tax offers a potential fillip on the revenue side. Designed well, it could be a new tax rundle. 

 There may never be a more opportune time.