VoxEU: Capital levies for debt redemption
15 August 2012
This column by Stefan Bach and Gert Wagner argues that one-off capital levies – taxes on the rich – is one way of financing debt reduction. This could be an important step towards deleveraging public budgets without severely damaging the economy.
One-off capital levies
The idea behind this is straightforward enough.
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Increased levels of public debt are accompanied by mounting private wealth, which is increasingly concentrated on the wealthy elite. In Germany, for example, two thirds of the national wealth belongs to the richest 10% of the adult population.
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According to the authors' analysis, a one-time capital levy of 10 per cent on personal net wealth exceeding €250,000 per taxpayer (€500,000 for couples) could raise revenue of just over 9 per cent of GDP. The wealthiest 8 per cent of the adult population would be liable to the levy. Even with higher allowances of, for instance, €500,000 and €1 million, the levy could raise revenue of about 6.8 per cent and 5.6 per cent of GDP respectively. The number of taxpayers would sink to 2.3 per cent and 0.6 per cent of the adult population.
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In the other eurozone crisis countries, it would presumably be possible to generate considerable amounts of money in the same way. For these countries, forced loans could be an additional source to secure public debt refinancing, without having to rely on external aid. This would also be a signal to donor countries and international community funds that every effort is being made to regain fiscal stability.
The main benefits of such one-off levies are that they induce no immediate adjustment of economic behaviour. There is only little risk of tax avoidance as long as the fiscal authorities are able to capture taxable assets. Insofar there are no 'excess burdens' in economic terms, unlike with an increase in conventional recurrent taxes, in particular those on higher income and wealth. This is a major concern with tax proposals such as the 50p income tax surcharge in the UK as of 2010, the hike in top income tax rates and wealth taxation recently announced by French president Hollande, similar proposals in Germany, or the ongoing struggle in the USA to continue the tax breaks to the rich.
The downside of exceptional wealth taxation is that prosperous people might feel they are being trapped by the government. However, the wealthy elite have been released from taxation over the past few decades in almost all countries in the developed world, and, at the same time, it is only the top incomes that have risen markedly. Moreover, national bankruptcies in the Mediterranean and a collapse of the eurozone would cause much more harm to the rich in northern Europe, not to mention the impact on the ordinary people. The same is true of financial repression as a result of creeping inflation and low interest rates, which seems to have become the favourable remedy in the UK or the US for fighting the debt crisis.
Finally, a sweeping deleverage of private and public debt overhangs is the prerequisite for a return to order in the capital markets and in public budgets, for which someone has to pay sooner or later. Not least, such levies are likely to increase the acceptance of labour market and social reforms or spending cuts in the crisis countries that mostly affect poorer people, leading to social tensions.
Imposing such levies is complex, however, since it involves valuation of assets and preventing tax evasion. If the wealthy elite expect such levies to be repeated, this could discourage investment and encourage capital flight. Therefore, it is essential to prevent future debt overhangs in the private, financial, and public sectors. The financial industry requires proper regulation. Governments should commit themselves to balanced budgets, which should be bound by constitutional rules as proposed by the European Fiscal Union. Thus, a capital levy would be a feasible instrument for financing debt redemption, in particular, in connection with a 'European Redemption Pact', endorsed by the German Council of Economic Experts.
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