While there were differing views about the respective merits of net wealth taxes versus gift or estate and inheritance taxes and the need for specific exemptions from such taxes, participants generally agreed that it would be more efficient for tax systems to seek to treat capital income on a more equal footing with earned income and then, generally, either tax wealth transfers (through gift and inheritance tax) or apply an annual wealth tax at a low rate with a broad base.
On Tuesday 6 August the fifth roundtable in a series on potential tax policy responses coming out of COVID-19 was held. Sponsored by KPMG International and Jericho Chambers, a more detailed explanation of the program can be found here. Seventeen (A) stakeholders from a wide spectrum of backgrounds attended the virtual event, which focused on what potential measures governments might take in order to increase tax revenues – in particular through taxing wealth, gifts or inheritances. The discussion did not specifically deal with taxing land or other general tax raising measures as these are being covered by separate roundtables.
The event was held under the Chatham House rule and this note is a summary of the views expressed. The attendees are listed below1 but all opinions were anonymized and do not represent official views of any organization or any KPMG member firm. Where individuals are quoted, their express permission has been obtained.
Participants highlighted the need for clear policy aims before deciding how to tax wealth. Increasing tax on capital income may be more efficient where possible, but a net wealth tax with a low rate and broad base may be a fall-back where a capital income would otherwise not be taxed.
The argument for wealth tax
There was general agreement that in many countries income from capital was taxed more lightly than income from employment, and this needed to be addressed in some way to make the taxation of the different sources more equal. As the taxation of capital income was discussed in the roundtable on 28 July2 the details were not discussed further in this roundtable. There was also a general view that in most jurisdictions there was a need for some kind of tax on wealth, but there was a debate about whether a tax on the transfer of wealth through gift and inheritance taxes was more efficient than an annual tax on net wealth.
Participants agreed that, in considering the taxation of wealth, it is important to start by looking at the overall profile of a tax system and the specific policy reasons for taxing the holding or transfer of wealth. For example, was it because all capital income was not taxed within a regime - so a net wealth tax acted as a substitute tax; was it because there was a need to address significant inequality of wealth; or was it because there was a need to raise revenue and as a practical matter wealth was one available source?
One participant noted that, while net wealth taxes are often proposed as being "fair" they may in fact introduce distortions. A net wealth tax is basically a tax on a presumed return on assets if an asset is worth 100 and it is assumed that the normal return on that asset is 4%, a net wealth tax of 1% would be equal to taxing the normal return at 25% - either method raises revenue of 1. If a person earns less than the presumed normal return, the effective tax burden imposed by a net wealth tax therefore increases; whereas if they earn more than the normal return, the burden reduces. This suggests that where possible it is more equitable and efficient to tax returns to capital rather than to tax the value of assets.
It was noted that Switzerland is one of the few countries which has a broad-based net wealth tax and this raises an amount equivalent to about 1% of GDP. It starts at a low level of net wealth – generally around CHF 100,000 - and is charged at a rate between 0.1%-1% depending upon the relevant Canton. However, the Swiss Federal Tax system does not have capital gains tax on private movable assets and it has a limited inheritance tax and gifts tax regime. Therefore, the net wealth tax is in some ways a substitute for taxing other forms of capital income and wealth transfer. While it is a taxed favoured by the Cantonal Governments as it produces a stable revenue despite economic conditions, it can create a high effective rate of tax for individuals which makes it an un-popular tax.
Some participants’ thoughts pointed to arguments in some cases for a wealth tax aimed only at the richest members of society, possibly as a solidarity tax to address inequality.
It was noted that wealth taxes have been discussed in several countries and jurisdictions as a means of addressing growing inequality well before the COVID crisis emerged. The current situation has exacerbated the debate. Reference was made to a study by Oxfam in Latin America3, which shows that the richest members of society have significantly increased their wealth since the start of the pandemic even though economically the region has been set back by about 15 years. Increases in inequality may drive more calls for net wealth taxes. Another participant thought that extreme inequality may hold back economic development on the basis that the richest members of society may not have an incentive to use all their wealth productively. Introducing a wealth tax to address such issues would suggest that it should be set with a very high threshold so that it is only paid by the wealthiest.
Net wealth tax as a form of solidarity tax
One participant noted the possibility for net wealth taxes as a form of solidarity tax - perhaps to address the significant deficits which some governments are incurring as a result of addressing the COVID situation. In the past, some jurisdictions have used a one-off wealth tax as a mechanism to address particular needs, but these have usually not been successful. One problem is that if they are announced in advance, they may drive behaviour to avoid or mitigate them, for example by individuals migrating. On the other hand, if a so-called "temporary solidarity tax" was successful, there may be political pressure to make it permanent.
Whether or not a net wealth tax would be equitable and efficient also depends on factors such as the economic and cultural situation of a country and its wealth distribution profile.
One participant pointed out that net wealth taxes may have very different effects in different countries. For example, in a country with a very small percentage of very wealthy individuals and a large population of very poor people, a net wealth tax with a very high threshold may raise very little - particularly if wealthy individuals had political influence and were able to argue for various exemptions. By contrast if the base was widened and the starting threshold was lower, the tax could adversely affect much poorer members of society.**
Some participants thought there should be various exemptions from wealth taxes driven by specific policy considerations, whilst others argued they should be all-encompassing and as simple as possible.
Exemptions in wealth tax
There were conflicting views about the need for various exemptions in a wealth tax. Some argued that it should not be applied to pension savings as governments should be encouraging provisions for retirement and potentially reducing a future burden on the state. However, another person pointed out that there are many forms of retirement savings - for example the income from the family business. With such conflicting points to consider it would not make coherent policy to exempt some forms and not others. The problem with having exemptions is that they complicate the system, potentially change behaviour, and can lead to the need to increase the rate if the amount of tax collected is significantly impacted.
Another area of disagreement was around the treatment of individuals who move to a country which currently has exemptions for people who come to live on a non-permanent basis. Should they be charged to wealth tax - on their entire worldwide wealth - or should an exemption be given on the basis that such individuals are bringing wealth and spending power into a country? One participant suggested that many might be prepared to pay a relatively low level of annual net wealth tax and a greater concern would be exposure to a significant inheritance/estate tax charges on death. It was also important to look at how various capital taxes interact. An annual net wealth tax may be acceptable, but not combined with an additional inheritance tax the death.
It was recognized that net wealth taxes could give rise to liquidity issues and a number of ways to potentially address this were discussed.
There were mixed views about whether there should be an overall cap so that a taxpayer would not have to pay more than a specified percent of their income for a year in tax - including any net wealth tax. One participant pointed out that this really depends upon the policy behind any net wealth tax. If it was introduced because it was thought appropriate to tax very wealthy individuals who had significant assets, but low levels of income, this would suggest there should be no cap or a very high one. Nevertheless, it was recognized that there could be issues with liquidity and the ability to pay and it may be necessary to address these with mechanisms allowing deferral of payments.**
Participants noted the benefits of international cooperation both to avoid tax competition and to prevent double taxation.
The need for a coordinated international effort
Several participants referred to the desirability of some kind of international coordination so that countries were not competing with each other to attract wealthy individuals. It was noted that in Spain there are large variations between different regions in the rates of wealth tax - with Madrid being a nil rate - this appears to be driven by interregional competition.
Where wealth or inheritance taxes are charged on worldwide assets, the possibility of double taxation arising was noted and it was suggested this issue needs to be dealt with via double tax agreements.
There was no conclusion on whether wealth transfer taxes should be charged on the donor or the donee, but it was thought that the former is administratively simpler.
There was no overall agreement on whether it is preferable to tax transfers of wealth on the donor or the donee. One participant pointed out that this largely depends upon the policy reasons for the tax. If there is an equity concern that an individual receiving a gift or inheritance should pay tax on that in the same way as a person receiving income from other sources, this points to a need for designing the system taxing the donee. However, it was recognized that it may be simple to tax transfers on the transferor.**
Common issues between inheritence and transfer taxes as net wealth tax
There are a number of similar issues in designing a net wealth tax and gift or inheritance taxes and participants were divided over whether it was more efficient and convenient to tax the transfer of wealth or to apply an annual levy.
A number of participants noted that inheritance and transfer taxes have the same issues as net wealth taxes when it comes to exemptions - e.g. for business assets. It was also noted that if the policy desire is to keep exemptions to a minimum and charge the tax on business assets, a net wealth tax may be preferable to a tax on transfer (by gift or on death). As the annual tax would be at a much lower level than say an inheritance tax charge, it would be easier for the business owner to be able to raise the cash required for each payment than it would be for the new owner to make a much larger payment on inheritance. It was also noted that there are mechanisms for deferring payments until the point of realization that can be built into both net wealth taxes and inheritance and gift taxes.
One participant also thought an annual tax could have less of a distorting effect on business decisions than a transfer-based tax. However, another participant pointed out that the Davis Tax Committee in South Africa, which has recently completed an in depth study on wealth taxes, proposed – as one of its conclusions – that there should be more focus on making the existing estate duties and transfer taxes work properly and also it would be necessary to ascertain the amount of wealth in the country before looking further at a net wealth tax.
by Chris Morgan
Chris became Head of Tax Policy for KPMG UK in 2011. In this role he was a regular commentator in the press, as well as on radio and TV, led discussions on various representations with HMRC/HMT. In 2014 Chris spearheaded KPMG UK’s Responsible Tax for the Common Good initiative. In September 2016 Chris took on the role of Head of...