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What are the advantages and disadvantages of a wealth tax?

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posted Jun 15 by Kavana Gowda

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Advantages

Some economists have suggested that there are definite advantages to wealth taxes. These advantages are usually related to the differences between income and wealth. While nearly all people earn some kind of income, most of the actual wealth in a country is often held by a relatively small fraction of the population. Income taxes, which are based on the amount of income someone makes in a year, are sometimes heavily criticized as hitting the middle and lower classes harder because they depend on that income more. High wealth individuals, however, earn proportionally less income, and thus tend to pay less income taxes. By taxing wealth instead, more of the tax burden would go to those who have a higher overall net worth.

Wealth, and by association power, tend to be concentrated in the hands of a very small elite, these critics argue. For some nations, this concentration of power may be seen as a threat to democracy. Focusing the levying of taxes on that small group with the most wealth could create more equality by reducing how much wealth is concentrated in so few hands, while also raising large amounts of money for the government.

Disadvantages

Critics of the wealth tax suggest that defining exactly what a taxpayer's net worth is can be very difficult. Assets like privately-held businesses and real estate are difficult to value in many cases, and may not always be valued the same by different assessors. Calculating a wealth tax also usually requires more complicated administrative work, and thus costs more to manage.

Wealth taxes can also be viewed as penalties levied on the wealthy, and they can act as a disincentive to accrue wealth and to invest or save wisely. An income tax only taxes a person's wealth once — when it's earned — whereas a wealth tax, it is argued, taxes that same value each tax year. Some suggest that a wealth tax encourages capital flight out of a nation, as wealthy individuals have a strong incentive to move their assets to places without a wealth tax.

answer Jun 15 by Babita Thawani
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