Inequality and Fiscal Policy

Chapter 7. The Wealth of Nations: Stylized Facts and Options for Taxation

Benedict Clements, Ruud Mooij, Sanjeev Gupta, and Michael Keen
Published Date:
September 2015
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Luc Eyraud


This chapter analyzes trends in wealth inequality across advanced and developing economies and examines how wealth taxation can be used as a redistributive instrument.

That income inequality has increased in many economies since the 1970s is generally accepted, although it is less known that the wealth gap has been growing too (Piketty 2014). The rise in wealth inequality might have negative macroeconomic implications, an idea that has recently entered the arena of public debate. There is a growing sense that wealth inequality can be detrimental to growth because it fosters rent-seeking behaviors (by potentially reducing the work effort of the better off), generates political and economic instability that reduces investment, deprives the poor of their ability to accumulate human capital (when access to financial markets is limited and education needs to be partly funded from asset sales), and impedes the social consensus required to adjust to shocks (Alesina and Rodrik 1994; Deininger and Olinto 2000; Morck, Stangeland, and Yeung 2000; Bagchi and Svejnar 2013).

To contain the rise in wealth inequality, a number of fiscal instruments exist to affect capital accumulation and asset price dynamics. Both tax and spending policies can be used to alter the distribution of wealth. For example, the provision of social housing reduces home ownership and can dampen real estate prices. A range of wealth taxes, such as those levied on immovable property, can be a source of progressive taxation. In addition, instruments that reduce the inequality of disposable income have an indirect effect on wealth distribution through their impact on capital formation.

This chapter is structured as follows. The next section describes trends in the size and distribution of household wealth in the world during the past 30 years. The subsequent section discusses how wealth taxes can be used for redistributive purposes while minimizing efficiency costs.

Stylized Facts on Household Wealth in the World

Household wealth can be defined in different ways. In a broad sense, wealth encompasses any store of value—measured as the present value of all future income, including pension rights and human capital. Given data limitations, this chapter relies on the narrower concept of “net worth,” which is the value of assets held by households less the value of their liabilities. In general, statistical databases define nonfinancial assets as dwellings and land; financial wealth includes currency and deposits, securities, and net equity of households in life insurance and pension funds (Ynesta 2008).

Even this narrow concept is not without its measurement problems. Wealth estimates are derived from microeconomic studies (household survey and tax data) that are subject to significant sampling errors and underreporting at both tails of the distribution. In addition, data harmonization is still limited despite efforts to produce cross-country wealth databases and surveys. Mindful of these caveats, this section presents some stylized facts on trends in households’ net wealth across advanced and developing countries.1

Size and Evolution of Household Wealth

Advanced Economies

In most advanced economies, household net wealth is high and growing. After a steady decline throughout much of the twentieth century due to the adverse shocks of the two World Wars and the stock market crash of 1929, household wealth-income ratios have been rising rapidly since the early 1970s (Piketty 2014), with a swift acceleration during the new-economy boom of the 1990s (Tables 7.1 and 7.2). This increase has been particularly pronounced in Europe. In the United States, wealth has increased at a slower pace, marked by two significant corrections during the financial crises of 2002 and 2008. Japan has followed a more idiosyncratic path, with stronger wealth accumulation during the 1980s, followed by a decline in the early 1990s after the bursting of the asset price bubble. In most countries, the global financial crisis severely affected the net wealth of households, but after a steep decline in 2008, most wealth ratios bounced back to their previous levels.

Table 7.1Selected Advanced Economies: Households and Nonprofit Institutions Serving Households’ Net Financial Wealth(Percent of GDP, 1980–2012)
United KingdomNA135.0259.4164.2175.7190.4
United States205.4205.3292.3218.8273.6282.0
Sources: National data; Organisation for Economic Co-operation and Development; and IMF staff estimates and calculations.Note: NA = data not available.
Sources: National data; Organisation for Economic Co-operation and Development; and IMF staff estimates and calculations.Note: NA = data not available.
Table 7.2Selected Advanced Economies: Households’ Net Wealth (Financial and Nonfinancial)(Percent of GDP, 1995–2011)
United Kingdom359.7464.0422.2415.3480.4483.6
United States1381.8447.3401.4388.6423.6435.9
Sources: National data; Organisation for Economic Co-operation and Development; and IMF staff estimates and calculations.Note: NA = data not available.

Includes durable goods.

Sources: National data; Organisation for Economic Co-operation and Development; and IMF staff estimates and calculations.Note: NA = data not available.

Includes durable goods.

Today, households’ net wealth ranges between three and six times GDP in most advanced economies. These are high levels by historical standards. Based on long-term series constructed for four large advanced economies (France, Germany, the United Kingdom, and the United States), Piketty and Zucman (2014) show that wealth-to-income ratios are returning to the high values observed in Europe in the nineteenth century.

Abstracting from country-specific developments, the sharp increase in wealth accumulation during the past 40 years was driven by a series of common factors (De Bonis, Fano, and Sbano 2013; ECB 2013). First, the growth slowdown following the 1973 oil shock raised the interest rate–growth differential, mechanically inflating the wealth-to-output ratio.2Figure 7.1 shows this differential and subsequent household financial wealth are strongly correlated in advanced economies. Second, valuation effects also played a major role. Asset prices grew rapidly during the period: the new economy boosted financial asset values in the 1990s, whereas the 2000s saw a sharp acceleration in real asset prices, reflecting in some cases the formation of property market bubbles (Figure 7.2). Finally, in some countries, private savings have increased over time as a result of structural factors, including population aging; the financial deregulation of the 1980s, which increased households’ participation in financial markets; and the development of funded pension systems.

Figure 7.1Selected Advanced Economies: Interest Rate–Growth Differential and Households and NPISH Net Financial Wealth

Sources: Organisation for Economic Co-operation and Development; and IMF staff estimates and calculations.

Note: NPISH = nonprofit institutions serving households. Data labels in the figure use International Organization for Standardization (ISO) country codes.

Figure 7.2Selected Advanced Economies: Housing and Stock Prices, 1990−2013

(Index, 1990 = 100, unweighted average)

Sources: IMF, International Financial Statistics; and Organisation for Economic Co-operation and Development Economic Outlook.

Global Trends

The availability of household balance sheet data is more limited for emerging markets and low-income countries. Credit Suisse (2013), which collects and reports data at a global level, finds that household wealth has increased in all regions of the world since the early 2000s. Global household net wealth rose by about 110 percent between 2000 and 2013, while net wealth per adult rose by 80 percent. Household wealth declined significantly during the financial crisis in 2007–08, but recovered subsequently and exceeded its precrisis level from 2012 onward.3 This trend was observed in all regions of the world and in most countries, with the exception of some European countries (Figure 7.3).

Figure 7.3Global Net Wealth by Region

Source: Credit Suisse (2013).

Note: “Asia” includes Asia and the Pacific, China, and India.

Today, wealth is unequally distributed across regions. Both North America and Europe account for about one-third of global wealth, while 20 percent is held in the Asia-Pacific region. The rest of the world (China, India, Latin America, and Africa) owns the remaining 16 percent of total household wealth despite hosting 60 percent of the adult population.

Wealth Composition

The composition of household portfolios varies widely across countries (Figure 7.4). In general, nonfinancial assets represent more than half of total wealth.4 Spain and New Zealand are among the advanced economies with the highest share of real assets (more than 70 percent of gross assets at the end of 2012). The United States is an outlier with financial assets representing about 70 percent of the total.

Figure 7.4Selected Advanced Economies: Composition of Net Wealth

(Percent of GDP, 2012)

Sources: National data; Organisation for Economic Co-operation and Development; and IMF staff estimates.

Note: Data labels in the figure use International Organization for Standardization (ISO) country codes.

Many factors can explain the cross-country differences in wealth composition (ECB 2013). In general, the share of financial assets is higher in countries with private pension systems, a large public housing sector (which discourages home ownership), a high level of financial development, and smaller households (large households tend to accumulate more real estate assets). Differences in risk tolerance, taxation, and valuation effects also influence the composition. For instance, the Swedish tax reform of 1991, which reduced capital income taxation with the introduction of a flat rate, had a lasting impact on the portfolio composition, increasing the share of financial assets (Klevmarken 2006).

In emerging market and low-income economies, household balance sheet data are generally not available. Based on survey data, it seems that the share of nonfinancial assets is even larger than in advanced economies. This share apparently exceeds 80 percent in some countries, such as India and Indonesia (Credit Suisse 2013).

Wealth Distribution

Wealth is very concentrated within countries (Davies and others 2010; Bonesmo Fredriksen 2012). Household wealth is much more unequally distributed than income. The Gini coefficient of wealth in a sample of 26 advanced and developing economies in the early 2000s was 0.68, compared with a Gini of 0.36 for disposable incomes (Figure 7.5). The main reason for this discrepancy is that high-income individuals have higher saving rates and thus accumulate wealth faster than do poorer households, and they generally hold riskier assets with higher yields.

Figure 7.5Inequality of Wealth and Income

Sources: Davies and others (2008); Luxembourg Income Study; Organisation for Economic Co-operation and Development; Socio-Economic Database for Latin America and the Caribbean (CEDLAC and the World Bank).

Note: Data labels in the figure use International Organization for Standardization (ISO) country codes.

However, there are important country differences. The share of wealth held by the top 10 percent ranges from slightly less than half in Chile, China, Italy, Japan, Spain, and the United Kingdom, to more than two-thirds in Indonesia, Norway, Sweden, Switzerland, and the United States. In Switzerland and the United States, where wealth is most unequally distributed, the top 1 percent alone holds more than one-third of total household wealth.

In most countries, the lowest 50 percent of households in the wealth distribution generally hold only a very small fraction of total net wealth (Figure 7.6). In Denmark, this share is even negative, reflecting few incentives for the middle and lower classes to accumulate assets in a country with strong social security and public housing programs.

Figure 7.6Shares of Net Wealth Held by Bottom 50 Percent and Top 10 Percent

Sources: Credit Suisse (2013); and Statistics Norway.

Note: Data labels in the figure use International Organization for Standardization (ISO) country codes.

From the beginning of the twentieth century until the 1970s, wealth inequality declined dramatically in most countries for which long time series of wealth distribution are available (Davies and others 2008). This trend has reversed in the past three decades, with wealth inequality rising in most advanced economies.5 For instance, between the mid-1980s and early 2000s, the growth of wealth in Canada and Sweden was all concentrated in the two upper deciles of the wealth distribution. During the same period, the Gini coefficients of wealth distribution in Finland and Italy rose from about 0.55 to greater than 0.6 (Ballarino and others 2012). In the United States, the Gini coefficient for wealth, after rising steeply between 1983 and 1989 from 0.80 to 0.83, remained stable until 2007, and then increased sharply to 0.87 during the financial crisis (Wolff 2014). Wealth inequality has risen for a number of reasons. The stock market boom of the 1990s was particularly beneficial to rich households who own higher proportions of stocks, bonds, and other financial products than poor households do. Tax reforms, including lower marginal tax rates on top incomes and lower taxes on all forms of capital, also played a role in the widening of wealth disparities during the period (Bonesmo Fredriksen 2012).

Taxing Wealth to Reduce Inequality

There are several quite different types of taxes on wealth. These taxes can be grouped into two broad categories: those that apply to wealth holdings—immovable property tax and net wealth tax (NWT)—and those that apply to wealth transfers, which is further divided into transaction taxes (levied when the asset is sold) and gift and inheritance taxes (levied when the asset is given). Their base is generally the gross value of assets but some taxes bear on net wealth (assets minus liabilities).

This section discusses the prospects of raising additional revenue and reducing inequality using the various types of wealth taxation. It explores how such policies could be designed, looking at taxes on residential property, inheritance, capital transactions, and net wealth.

General Considerations on Wealth Taxation and Inequality

Taxes levied on wealth, especially on immovable property, can be used for redistributive purposes. These taxes, of various kinds, target the same underlying base as capital income taxes, namely assets. Because wealth is concentrated among the better off, even a small proportional tax on the capital stock can increase progressivity. Wealth taxes can thus be considered a potential source of progressive taxation.

Recently these taxes have featured prominently in the public debate on fiscal policy. They are often perceived to be key policy instruments for spreading the burden of fiscal adjustment more equally among taxpayers. In many countries, wealth taxes are also politically more acceptable to the median voter (compared with other consolidation measures).

A natural question that arises is whether wealth taxes are redundant with capital income taxes since, at least for income-generating assets, an annual tax on the capital stock is roughly equivalent to taxing capital income from that wealth at a higher rate.6 However, the two forms of taxation are not strictly equivalent, and wealth taxes are likely to have stronger distributional effects in certain circumstances:

  • Comprehensiveness. A wealth tax may be more encompassing than a capital income tax because it also taxes assets that are not associated with monetary payoffs, such as works of art (while these assets increase their owners’ welfare). By the same token, the wealth tax is useful when only part of the periodic increase in wealth is taxed by the capital income tax, in particular if there are exemptions or if capital gains are not realized.
  • Difficulties in observing the base. Taxing net wealth may be more convenient for assets whose income is not readily observable. For example, taxing the value of owner-occupied housing (net of mortgage debt) is a way of taxing its imputed return, given that homeowners pay no tax on imputed rents.
  • Policy design constraints. Wealth taxation may be a supplement to capital income taxation if capital income taxation is constrained by policy design. For instance, in a dual income tax system in which capital income is taxed at a low flat rate, wealth taxation may be used to achieve redistributive objectives.7

The redistributive properties of wealth taxes come at a cost. Capital taxes, if too high, can have high efficiency costs because of their distortionary effects on savings and investment (see “A Menu of Options for Wealth Taxation” later in this chapter). Moreover, taxing capital can be administratively difficult in light of its mobility, with the risk of creating ample evasion and avoidance opportunities. Another issue is that the mobility of capital allows firms to shift a large share of the burden of these taxes onto labor or consumers, thereby affecting the distributional consequences. The following sections analyze these trade-offs for various types of wealth taxes.

Revenues from Wealth Taxes

Although wealth taxes can, in themselves, contribute to achieving redistributive goals, an important contribution of wealth taxation to the pursuit of equity goals is through the financing of spending measures. Therefore, a key question is how much wealth can taxes generate. In this regard, there seems to be room to raise additional revenue from them.

For governments in search of fiscal space, household wealth is a buoyant tax base that is still relatively untapped despite its rapid accumulation since the 1990s. During recent decades, revenue from wealth taxes has not kept up with the surge in wealth as a share of GDP and, as a result, the effective tax rate on wealth has dropped from an average of about 0.9 percent in 1970 to approximately 0.5 percent today in advanced economies. This is not a new phenomenon: wealth taxes were a major source of revenues in the nineteenth century, but have trended downward ever since.

Today, wealth taxes yield little revenue in most countries (Figure 7.7). On average, they amount to slightly less than 2 percent of GDP in the Organisation for Economic Co-operation and Development (OECD)—of which about half comes from taxes on immovable property and one-fourth from transaction taxes. Other types of wealth taxes generate negligible revenue, except the wealth tax in Luxembourg. Somewhat surprisingly, Anglo-Saxon countries show the highest burdens from wealth taxes, while Scandinavian countries are in the lower ranks.

Figure 7.7Taxes on Wealth in Organisation for Economic Co-operation and Development Countries, 2000–12

(Percent of GDP)

Source: Organisation for Economic Co-operation and Development Revenue Statistics.

Note: Data labels in the figure use International Organization for Standardization (ISO) country codes.

Nonetheless, the long-term declining trend of wealth taxes may have come to a halt. Since the onset of the financial crisis, there have been numerous reform initiatives to raise more revenues from real estate in both advanced and emerging market economies (Norregaard 2013). Governments also eye the stock of financial assets held by the private sector. Recent examples include the haircut of uninsured bank deposits in Cyprus in 2013 and the plan to introduce a financial transaction tax in 10 European countries. Comprehensive taxes on wealth are returning as well. Although many countries repealed their NWT in the past 20 years, both Iceland and Spain reintroduced it as a temporary measure during the crisis.

A Menu of Options for Wealth Taxation

The prospect of raising additional revenue from the various types of wealth taxation and their role in reducing inequality is summarized in the following discussion.

Taxes on Residential Property

Property taxes in the form of recurrent taxes levied on land and buildings are widely seen as an attractive revenue source (Norregaard 2013). These taxes are generally considered to be more efficient than others, primarily because the tax base is less mobile and hard to hide, resulting in fewer adverse effects on resource allocation. These efficiency properties are enhanced when the tax—mainly borne by residents—functions as a “benefit tax”8 financing local government services: if perceived as payment for services, the tax should be fully neutral with respect to labor supply, investment, and savings decisions. In addition, to the extent that increases in property taxes are fully capitalized in property prices, with resulting one-off losses for present owners, the tax increase should not affect the rate of return for new owners and could therefore be neutral to investment behavior.

For these reasons, property taxes are considered to be a potentially stable revenue source and—by requiring little international tax coordination—attractive to economies that are otherwise exposed to tax competition for mobile tax bases. At the macroeconomic level, studies on the growth hierarchy of taxes have generally found taxation of immovable property to be more benign for economic growth than are other forms of taxation, in particular compared with direct taxes (Arnold 2008).

The equity implications of property taxation are a contentious issue. Norregaard (2013) reviews the main elements of the debate. Some evidence indicates that the burden of property taxes is borne by the owners of capital and land. Because these owners are predominantly higher-income individuals, property taxation is generally found to be progressive. It is important that property taxes can be made more progressive through a basic allowance or by varying the rate with the value of the property. The use of market values (as opposed to taxation based on square footage) is also likely to maximize fairness of the property tax because market values broadly reflect the capitalized benefits provided by local services that are financed by the tax.

Turning to revenue potential, property taxes are widely seen to be an underexploited revenue source. The average yield of property taxes in 65 economies (for which data are available) in the 2000s was about 1 percent of GDP, but in developing economies it averaged only half that (Table 7.3). Especially outside Anglo-Saxon countries, scope to raise more revenue is readily evident, though effective implementation of a property tax requires sizable up-front investment in administrative infrastructure, particularly in emerging market economies.

Table 7.3Property Tax Revenues(Percent of GDP, except where noted otherwise)
OECD countries1.241.311.442.12
(number of countries)(16)(18)(16)(18)
Developing countries0.420.360.420.60
(number of countries)(20)(27)(23)(29)
Transition countries0.340.590.540.68
(number of countries)(1)(4)(20)(18)
All countries0.770.730.751.04
(number of countries)(37)(49)(59)(65)

Taxes on Inheritances and Gifts

Taxes on estates, inheritances, and gifts9 (IGT) can play a useful role in limiting the intergenerational transmission of inequality, which is high in many economies (Boadway, Chamberlain, and Emmerson 2010). IGT can also reduce inequality by enhancing the progressivity of the tax system, given that these taxes are only paid by the better off. Some also take the view that correcting for advantages or disadvantages arising from circumstances beyond an individual’s control—such as being born into a wealthy family—is a proper function of the tax system. In this regard, IGT can equalize opportunities.

Not all bequests on death are accidental; therefore, taxes on inherited wealth are likely to affect the saving decisions of both the donee and the donor, which may create an efficiency cost. Inheriting may reduce the effort of the donee to both save and work (the “Carnegie effect”). The effect of the tax on the donor’s savings, which depends on the donor’s motives for giving, is more ambiguous.10 The tax may discourage savings because the cost of making a net bequest (the foregone consumption) increases; but greater savings are required to achieve any net target. The empirical evidence is mixed, suggesting that the overall effect on the donor’s savings may be negative but small (Mirrlees and others 2011).11

IGT currently raise little revenues. Where the taxes exist, rates are generally low, exemptions and special arrangements widespread, and revenue yields small (Figure 7.8). In the OECD, revenue has been declining over time from 0.35 percent of GDP in 1970 to less than 0.15 percent today. These taxes may have the potential to raise more revenue, as illustrated by, for example, France and Belgium, where revenue yields are, respectively, 0.5 percent and 0.6 percent of GDP. In addition, the potential tax base is large. Although there is little consensus on the relative importance of inherited versus life-cycle wealth, survey-based evidence suggests that inherited wealth could account for at least 20 percent of total wealth in the United States (Davies and Shorrocks 2000; Wolff and Gittleman 2011), equivalent to more than 100 percent of GDP. By comparison, the present value of IGT revenues over 30 years is less than 10 percent of GDP.12 In addition, the share of inherited wealth is likely to rise in the future because the baby boomers are reaching the inheritance-giving age group.

Figure 7.8Effective Inheritance Tax Rates in Europe, 2012

(Percent of GDP)

Sources: AGN International–Europe (2013); and Organisation for Economic Co-operation and Development.

Note: Effective tax rates are based on taxes paid by the estate of a married individual who died on January 1, 2013, leaving a spouse and two children. The gross value of the estate is assumed to be €2.6 million. Data labels in the figure use International Organization for Standardization (ISO) country codes.

Box 7.1Real Estate Transaction Taxes

By discouraging transactions on the real estate market, transaction taxes have far-reaching consequences:

  • The reduced market liquidity may increase price volatility, although both theory and empirical evidence are mixed (Andrews 2010).
  • Transaction costs are likely to raise the elasticity of demand with respect to pretax prices, which may inflate housing prices and mitigate their response to supply shocks.1
  • Transaction costs create incentives for buyers and sellers to collude and partly evade the tax by arranging a lower price for the property and a corresponding separate payment, either informal or formal (for the fixtures and fittings); this eases the distortions but undermines habits of tax compliance.
  • Finally—and perhaps most important—theoretical and empirical studies show that transaction costs create lock-in effects2 in the housing market and have negative effects on residential and job mobility, thereby impeding labor market matching and increasing structural unemployment (Oswald 1996, 1999; van Ommeren and van Leuvensteijn 2005; Caldera Sánchez and Andrews 2011).

1This result holds under the assumption that supply and demand functions are linear and the tax is ad valorem. The demand function can be written as Yd=-αP(1+t)+β, with P denoting the pretax price and t the ad valorem tax paid by the buyer. By definition, t raises the elasticity of Yd to P. Increasing the slope of the demand curve (in absolute terms) raises the equilibrium price. Another implication is that a translation of the supply curve (due to new construction) results in a smaller decline in pretax prices.

2The “lock-in effect” describes a reduction in the frequency of house sales.

Transaction Taxes

Transaction taxes—primarily on the sale of real estate and financial instruments—typically account for one-quarter of wealth tax revenues in the OECD. They are administratively appealing, since transactions can often be fairly easily observed (stamp duty on the sale of shares in the United Kingdom, for instance, is one of the cheapest, per pound collected, of all taxes), and there are strong incentives for compliance when legal title is contingent on payment. Changes in ownership happen relatively infrequently and can be fairly easy for tax administrations to keep track of—especially when the purchaser has clear interest in ensuring that the necessary legal requirements reflecting the ownership change are completed (Thuronyi 1996). In some low-income and emerging market economies with constraints on the ability to administer taxes, transaction taxes have distinct practical advantages.

It may also be argued that those taxes are user charges to finance the costs to the state of maintaining ownership records and of regulating transactions and asset markets. The revenues raised, however, do not seem to outweigh their efficiency costs. Transaction taxes are inherently inefficient, in that they impede otherwise mutually beneficial trades and thereby hinder the efficient allocation of assets.

As discussed in Box 7.1, taxes on real estate transactions, for example, have been shown to impact labor mobility adversely and to raise unemployment (van Ommeren and van Leuvensteijn 2005). Although some argue that transaction taxes can help reduce asset price volatility, the effect is uncertain in both principle and practice (because the tax leads to a thinner market).

Financial transaction taxes (FTT) have been much discussed recently, including in the European Union where 10 member states have plans to introduce a broad-based FTT. Yet, FTTs can have significant social costs because of their cascading effects (tax levied on tax), and can increase the cost of capital, encourage avoidance schemes, and potentially impede socially worthwhile transactions. Moreover, their distributional impact is unclear given that the incidence may be shifted onto consumers (Matheson 2012).

Recurrent Taxes on Net Wealth

Few advanced economies today have recurrent taxes on broad measures of net wealth (assets less liabilities) and, where they exist, revenue is typically low.13 They have been declining in Europe since the mid-1990s (repealers include Austria, Denmark, Finland, Germany, the Netherlands, and Sweden). Within Europe, only France, Iceland, Norway, Spain, and Switzerland still have recurrent NWTs. But this may be changing: Iceland and Spain reintroduced the tax during the financial crisis, and it is now being actively discussed elsewhere. The top marginal rate of current NWTs is generally less than 2 percent, while revenues are less than 1 percent of GDP (except for Luxembourg and Switzerland, where the wealth tax yields 1.5–2.0 percent of GDP a year).

The renewed interest in NWTs in the public debate arises primarily from the potential revenue they could generate. Even with large allowances, gains may be substantial (although subject to considerable uncertainty related, for instance, to the valuation of assets) because private wealth is very large and concentrated. In the sample of advanced economies for which balance sheet data are available, net wealth of households amount, on average, to 400 percent of GDP, with the top 10 percent wealthiest households owning about half of total net wealth. A 1 percent tax on these households’ net wealth could, theoretically, raise up to 2 percent of GDP per year—thereby doubling the amount of revenue from all wealth taxes.

Based on household-level data, Table 7.4 presents some simulations using the Eurosystem’s Household Finance and Consumption Survey (Household Finance and Consumption Network 2013). In a sample of 15 European economies, a 1 percent progressive tax on the net wealth of the top 10 percent of households could raise about 1 percent of GDP per year.14 Calculations using the Luxembourg Wealth Study database point to broadly similar numbers (IMF 2013).15

Table 7.4Potential Revenues from Recurrent Net Wealth Taxes(Percent of GDP)
Survey Year1 Percent Tax

on Wealthiest

10 Percent of

Progressive Tax

Rate Schedule:

1 Percent on Top

10 Percent and

Additional 1 Percent

on Top 5 Percent2
Slovak Republic20100.30.4
Unweighted Average0.71.2
Sources: Household Finance and Consumption Network (2013); and IMF staff estimates.Note: Tax base excludes private pensions and business equity.

Tax applies only to portion of wealth that is above the 90th percentile.

The 1 percent (2 percent) tax applies only to net wealth above the 90th (95th) percentile.

Sources: Household Finance and Consumption Network (2013); and IMF staff estimates.Note: Tax base excludes private pensions and business equity.

Tax applies only to portion of wealth that is above the 90th percentile.

The 1 percent (2 percent) tax applies only to net wealth above the 90th (95th) percentile.

Some efficiency arguments also favor an NWT. A modest tax may induce individuals to reallocate their assets from less to more productive uses, to offset the additional tax (for instance, by turning idle land into productive income-yielding uses). The large tax base would also ensure that rates are low. In addition, wealth taxes may raise revenues from appreciated assets, in light of the fact that very often capital gains are either not taxed until assets are sold or even not taxed at all (including at the time of the owners’ death as in the United States).

However, the scope for higher NWTs is limited by three major constraints: The first is that the revenue potential of NWTs may be difficult to realize. The modern history of recurrent wealth taxes is not encouraging. NWTs have high administration costs. Practical problems arise in ascertaining wealth ownership, assigning it to particular taxpayers, and valuing ownership interests. Relief and exemptions—for land, for instance, and family-owned businesses—creep in, creating avoidance opportunities, as do complex aspects of the legalities (in dealing with trusts, for instance). Financial wealth is mobile, and so, ultimately, are people, thus generating tax competition that largely explains the erosion of these taxes.

Substantial progress likely requires enhanced international cooperation to make it harder for the very well-off to evade taxation by placing funds elsewhere and simply failing to report as their own tax authorities in principle require. Curbing the practice of relocating assets to avoid taxation requires that countries be able and willing to exchange information about the incomes and assets of one another’s residents. Significant progress has been made since the G20 reinvigorated efforts in this area, led by the OECD’s Global Forum on Transparency and Information Exchange for Tax Purposes, to the point that 1,000 or so information exchange agreements are now in place. And automatic exchange of information, rather than simply on request, is now becoming the global standard. Unilateral measures offering reciprocal exchange of information are also proceeding, notably the U.S. Foreign Account Tax Compliance Act of 2010; these measures, unlike work to date in the Global Forum, envisage penalties for noncompliance. Although these initiatives face difficulties that should not be underestimated, over the longer term they have the potential to make much fairer tax systems.

The second major issue with NWTs is the risk of discouraging capital accumulation. The layering of the NWT on top of the existing capital income tax could indeed result in high effective marginal rates, particularly at lower real rates of return and at higher inflation rates (Figure 7.9).16 In advanced economies, withholding taxes on dividends and interest are, on average, levied at 20 percent. For an investor earning a 5 percent real return on assets, a 1 percent NWT effectively doubles the 20 percent capital income tax to 40 percent; in the presence of 2 percent inflation, the tax on the real return would rise to 67 percent in the short term (if inflation is not anticipated, and the pretax real rate of return declines) and 48 percent in the medium term (once nominal pretax rates of return have adjusted). Facing lower returns, investors may shift from savings to consumption, which would negatively affect domestic investment and growth. They may also look for opportunities abroad and expatriate.17 In addition, assets with low returns (and, even more so, assets that do not generate income) would effectively be taxed at rates exceeding 100 percent, possibly infringing property rights.

Figure 7.9Impact of a 1 Percent Wealth Tax on the Taxation of Real Returns of Investors

Source: Author’s calculation.

1 Ex ante = before negative effect of unanticipated inflation on the real rate of return.

2 Tax on real return combines the capital income tax (t = 20 percent) and the wealth tax (T = 1 percent). Inflation is assumed to be 2 percent per year.

Third, if a taxpayer’s assets do not generate recurrent income (for instance, land and businesses that do not pay dividends), the NWT can also create illiquidity problems—an effect compounded by the fact that assets without cash flow are difficult to borrow against. Forcing taxpayers to sell assets to pay a wealth tax is, in most cases, unfair and not desirable. Liquidity concerns are particularly acute in low-income countries, where the population may not have sufficient cash or access to financial institutions to pay recurrent wealth taxes.18 Nonetheless, liquidity problems can be mitigated by making payment more flexible, for instance, by allowing the tax to be paid over several years.


Household wealth is very unequally distributed—even more so than income: in advanced economies, the top 10 percent own, on average, more than half of the wealth. Arguably, household wealth is a better indicator of ability to pay than annual income—and indeed taxes on wealth and transfers have historically been a major source of revenue. Now, however, they yield very little—less than 2 percent of GDP, on average, in the OECD.

This chapter shows that wealth tax instruments have substantial untapped revenue potential and can strengthen the progressivity of the tax system, since wealth is concentrated among the better off. There are, in fact, several types of taxes on wealth with quite different trade-offs between efficiency and equity:

  • Recurrent taxes on residential property, which account for about one-half of wealth tax totals, are widely seen as an attractive and underexploited revenue source: the base is fairly immobile and hard to hide, the tax comes at the top of the hierarchy of long-term growth friendliness, and it can be made progressive through a basic allowance or by varying the rate with the value of the property.
  • Taxes on wealth transfers—on estates, inheritances, and gifts—raise very little: rates are low, and exemptions and special arrangements create multiple avoidance opportunities. The primary appeal of inheritance taxes is in limiting the intergenerational transmission of inequality and perhaps also in equalizing opportunities. In revenue terms, the yield in the countries with the highest returns, about half a percent of GDP, suggests some potential.
  • Transaction taxes—primarily on the sale of real estate and financial instruments—typically account for one-quarter of the wealth tax revenue. They are administratively appealing, since transactions can often be fairly easily observed, and the incentives for compliance are strong when legal title is contingent on payment. But transaction taxes are inherently inefficient, in that they impede otherwise mutually beneficial trades; those on real estate transactions, for example, have been shown to adversely affect labor mobility.
  • Recurrent taxes on net wealth (assets less liabilities) have been declining in Europe since the mid-1990s. But this may be changing: Iceland and Spain reintroduced the tax during the financial crisis, and it is now being actively discussed elsewhere. The revenue potential is subject to considerable uncertainty but is in principle sizable. Little hard evidence is available on the likely behavioral impact, a primary risk being that of discouraging capital accumulation. In addition, financial wealth is mobile, and so, ultimately, are people—generating tax competition and evasion that largely explains the erosion of these taxes. Substantial progress will likely require enhanced international cooperation to make it harder for the very well-off to evade taxation by placing funds elsewhere and simply failing to report to their own tax authorities as required.

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In this chapter, wealth data are extracted from household balance sheets produced by national statistics institutes and central banks. If data are incomplete (in particular regarding nonfinancial assets), household surveys are sometimes used to fill in the gaps. For countries with both balance sheet and survey data, precedence is given to balance sheet data, which generally take into account broader data sources, including tax registers.


Slower growth affects both the numerator and the denominator of the wealth-to-income ratio, but the effect on the stock of wealth is smaller than on the flow of income (see discussion in Piketty 2014).


The overall picture is nonetheless distorted by valuing wealth in U.S. dollars, given that the dollar depreciated against most major currencies during the period, accounting for part of the rise in dollar-denominated wealth. Holding exchange rates constant, the rise in global wealth would be less significant. Under this assumption, Credit Suisse (2013) estimates that net wealth per adult increased by about 50 percent during the period.


This section’s findings are based on national account (administrative) data, but it is noteworthy that survey data generally report an even higher share of nonfinancial assets. This result may be due to several factors, including differences in asset coverage; difficulties in self-assessing financial assets (leading individuals to underestimate their value in surveys); low response rate and underreporting, which are more pronounced for financial assets; and accounting rules (in particular regarding the reporting of self-employed business assets).


There are very few emerging markets with wealth distribution series allowing comparison over time. Among those is China, where wealth inequality has risen at a strong pace.


If A is the asset value at the beginning of the year and i is the nominal return on this asset (taking the form of dividends, interest, or capital gains), the capital income on the asset will be iA. Imposing a tax rate t on capital income each year is equivalent to imposing an annual tax rate of T=it/(1+i) on the asset itself (note that the formula discounts the capital income by [1+ i] to value the receipts of both taxes at the same point in time). This equivalence also shows that a wealth tax implicitly imposes a lower tax on the returns of high-yield assets, at least in the short term, compared with a capital income tax. Indeed, the tax rate on returns is T(1+i)/i (which declines when i increases), with the equivalence being the two taxes written as ((Ai)/(1+i))× (T(1+i)/i)=A×T.


A counterargument is that the rationale for a low uniform tax rate on capital income is to reduce tax evasion and avoidance by wealthy taxpayers. It is likely that a wealth tax would also be subject to similar design constraints.


According to the “benefit principle” of taxation, people should be taxed in proportion to the marginal benefits they receive from government goods and services.


An estate tax is one levied on the value of assets at death; an inheritance tax is levied on the recipients.


There will be no impact, for instance, on the behavior of donors who accumulate wealth simply for their own enjoyment and, failing to annuitize it, die before they have spent it all, or on the accumulation of wealth in excess of a normal rate of return.


Kopczuk (2013) reviews the evidence, which is more informative about shorter-term responses to incentives—one macabre distortion being to the timing of death (Kopzcuk and Slemrod 2003)—than it is about longer-term effects on capital accumulation. Theoretical results on optimal bequest taxation differ widely. Fahri and Werning (2010) find that it is optimal to subsidize bequests (because donors do not take full account of the social benefit to the recipients). In a different setting, Piketty and Saez (2012) find the optimal rate to be positive, and in some cases, substantial. For a general discussion, with an eye to practicalities of implementation, see Boadway, Chamberlain, and Emmerson (2010).


Based on annual revenues of 0.13 percent of GDP (corresponding to the OECD average, as well as the 2011 U.S. revenues) and a nominal discount rate of 5 percent.


Recurrent taxes on net wealth are different from one-off “capital levies.” The latter come along with significant risks of economic distortions and have almost never successfully raised revenue (Eichengreen 1989; Keen 2013).


The simulations are based on a progressive tax schedule: households with net wealth above the 90th percentile benefit from an exemption amounting to the threshold value (i.e., the tax is levied on the portion of net wealth exceeding this value).


The Luxembourg Wealth Study sample includes Canada, Germany, Italy, Japan, the United Kingdom, and the United States.


Suppose that an asset of value A is subject to a wealth tax at rate T and generates a nominal rate of return of i=r+π (where r is the real rate of return and π the inflation rate) that is taxed at rate t. Total tax paid is then TA+t(r+π)A. (To simplify the calculations, the formula does not include the present value of the capital income tax.) Therefore, the effective tax rate on real returns is, on the horizontal axis in Figure 7.9: τ≡t+ (T/r)+ (tπ/r). With zero inflation, τ≡t+ (T/i).


This problem is less severe when the initial level of capital income taxation is low or if the NWT is progressive with a generous allowance. Households below the threshold do not face a disincentive to save. And the NWT does not discourage innovation and risk taking in the early phase of wealth accumulation. Only wealthy households with high saving rates would face disincentives to accumulate wealth.


In these countries, transaction taxes and inheritance taxes present some advantages because the transfer of assets generates revenues that provide the basis for taxation.

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