How to Tax Wealth

NOTE24/01 HOWTO NOTES HowtoTaxWealth ShafikHebous,AlexanderKlemm,GeertenMichielse,andCarolinaOsorio-Buitron ©2024InternationalMonetaryFund HowtoTaxWealth NOTE/2024/001 PreparedbyShafikHebous,AlexanderKlemm,GeertenMichielse,andCarolinaOsorio-Buitron Cataloging-in-PublicationDataIMFLibrary Names:Hebous,Shafik,author.|Klemm,Alexander,author.|Michielse,G.M.M.,1960-,author.|OsorioBuitron,Carolina,1979-,author.|InternationalMonetaryFund,publisher. Title:Howtotaxwealth/PreparedbyShafikHebous,AlexanderKlemm,GeertenMichielse,andCarolinaOsorio-Buitron. Othertitles:Howtonotes. Description:Washington,DC:InternationalMonetaryFund,2024.|Mar.2024.|NOTE/2024/001.|Includesbibliographicalreferences. Identifiers:ISBN: 9798400266881(paper) 9798400269035(ePub) 9798400269110(WebPDF) Subjects:LCSH:Wealthtax.|IncomeTax.|Taxation.Classification:LCCHJ4113.H42024 DISCLAIMER:HowtoNotesofferpracticaladvicefromIMFstaffmemberstopolicymakersonimportantissues.TheviewsexpressedinHowtoNotesarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. RECOMMENDEDCITATION:Hebous,Shafik,AlexanderKlemm,GeertenMichielse,andCarolinaOsorio-Buitron.2024.“HowtoTaxWealth.”IMFHowtoNote2024/001,InternationalMonetaryFund,Washington,DC. Publicationordersmaybeplacedonline,byfax,orthroughthemail:InternationalMonetaryFund,PublicationsServices P.O.Box92780,Washington,DC20090,USATel.:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgbookstore.IMF.orgelibrary.IMF.org TableofContents HowtoTaxWealth4Introduction4ShouldWealthBeTaxed?7TaxSensitivityofWealth9CapitalIncomeTaxes11Profits12 Interest13 Dividends13CapitalGains14Owner-OccupiedHousing16CapitalIncomeTaxesinPractice17WealthTaxes18IncomeversusWealthTaxes18EfficiencyofWealthTaxes19Equity20AdministrativeandLegalIssues20 AWealthTaxonthe“Superrich”21WealthTaxesinPractice22WealthTransferTaxes26Estate,Inheritance,andGiftTaxes26Efficiency27 Equity27TaxPlanningandAnti-AvoidanceMeasures29InheritanceandEstateTaxesinPractice29Conclusion32 References33 Boxes Box1.CapitalLevies(One-OffWealthTaxes)22 Box2.TaxesonSpecificTypesofWealth25 Figures Figure1.AverageCorporateIncomeTaxRates(inPercent)5 Figure2.TopIncomeTaxRates(OECDAveragesinPercent)6 Figure3.CapitalandLaborIncomeSharesforTopIncomes,2018orLatest8 Figure4.TheLaborShareofIncomeinGDPfrom1970to2019(inPercent)9 Figure5.GrowthofanAppreciatingandEquivalentDistributingAsset15 Figure6.OverallDividendComparedtoLaborIncomeTaxation,202218 Figure7.CapitalIncomeversusWealthTaxation19 Figure8.GrossWealthHeldinRealEstatebyPositioninWealthDistribution(inPercentofGrossAssets)25 Figure9.InheritanceandEstateTaxRatesandAllowances31 Figure10.InheritanceandEstateTaxRevenues31 Tables Table1.WealthTaxes24 Table2.ExamplesofPartialWealthTaxes26 Table3.ClassificationofEstateandInheritanceTaxes30 HowtoTaxWealth ShafikHebous,AlexanderKlemm,GeertenMichielse,andCarolinaOsorio-BuitronMarch2024 Tacklingincomeandwealthinequalityisatthetopofthepolicyagendainmanycountries.Thisnotediscussesthreeapproachesofwealthtaxation,basedon(1)returnswithacapitalincometax,(2)stockswithawealthtax,and(3)transfersofwealththroughaninheritance(orestate)tax.Taxingactualreturnsisgenerallylessdistortiveandmoreequitablethanawealthtax.Hence,ratherthanintroducingwealthtaxes,reformprioritiesshouldfocusonstrengtheningthedesignofcapitalincometaxes(notablycapitalgains)andclosingexistingloopholes,whileharnessingtechnologicaladvancesintaxadministration—includingcross-borderinformationsharing—tofostertaxcompliance.Theinheritancetaxisimportanttoaddressthebuildupofdynasticwealth. Introduction 1.Highincomeandwealthinequalityisoneofthemajorchallengesofourtime.1Theissueoftaxavoidanceandevasionattheverytopofthewealthdistributionissalientinthepubliceye,especiallywithprominentleakssuchastheSwissLeaksin2015andthePanamaPapersin2016.Inequalityandtaxingwealthhaverecentlyfeaturedprominentlyintheworkofinternationalorganizations,includinginIMFanalysesandflagshippublications.2 2.Taxpolicyisakeyfiscalpolicytooltoaddressinequality.Whereasspendingpoliciescanbeusedtoaddresspovertyandinequalityatthelowerregionsoftheincomedistribution,taxpolicycancovertheentireincomedistributionandreachthetopthroughprogressivetaxationofhighincomesandwealth.Whileinequalitystemmingfrommarketrigiditiesanduncompetitiveorcriminalbehaviorcanbeaddressedbytargetedresponses,suchaslabormarketreform,anti-trustlegislation,andstrongerlawenforcement,taxpolicycanaddressinequalityfromanysource.Itthusalsoallowsaddressinginequalityresultingfromdevelopmentsthathaveimportantbenefits.Forexample,internationaltradeandtechnologicalprogressoftenincreaseinequality—atleasttemporarilyandinsomelocations.Reducinginequalitybypreventingprogressandtradewouldbeaverycostlypolicy.Well-designedtaxpolicyallowsmitigatinganyresultingeffectoninequalityfromsuchotherwisebeneficialdevelopmentswhileminimizingnegativegrowtheffects. 3.Therearemanywaysinwhichtaxescanbeusedtocollectmorefromwealthyindividuals.Oneoptionthatisincreasinglybeingdiscussedistaxingthestockofne