SCHOOL OF BUSINESS AND MANAGEMENT

AACC502 TAXATION ASSIGNMENT

Introduction
According to Shakow and Shuldiner (2000:499) identify that an annual net wealth tax is mostly
acceptable on the basis that income from property is acquired with less effort and is usually
more permanent than income from work and that property itself confers advantages on
its owner independent of, and additional to, the income it yields. According to Tanabe
(1967:124)
argues that experts have recommended the introduction of net wealth tax, as they believe
it is a desirable manner in which to supplement the income tax. He identifies that, since
the early 1900s, net wealth tax has been acknowledged in numerous countries.

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There are 25 countries that have implemented net wealth tax and 14 are from Europe namely:
Switzerland, Denmark, Sweden, Norway, the Netherlands, Germany, Luxembourg, Spain,
France,
Italy, Finland, Iceland, Slovenia, and Ireland. Six are from Asia, namely: Japan, India,
Ceylon/Sri Lanka, Pakistan, Russia, and Indonesia. Four are from South America,
namely: Chile, Colombia, Argentina, and Uruguay—Nicaragua was the only country from
Central America to have implemented net wealth tax.
Of the 25 countries that have implemented net wealth tax in the past, three of them fell out of
scope. Although the 22 countries fell within the scope of the systematic literature review (SLR)
only 14 countries (Denmark, Sweden, Germany, Colombia, Nicaragua, Spain,
Pakistan, France, Switzerland, Argentina, Italy, Luxembourg, Japan and India) had the
information pertaining to their implementation available in the articles obtained from the
SLR.
The counties that have implemented the net wealth tax in the past have based their decisions on;

(1) Horizontal equity (2) reduction of inequality (3) efficiency (4) administrative control

Therefore, in this discussion there will be three key points that is going to be looked at;
1) Explain what wealth tax and different forms of wealth taxation is
2) Challenges with wealth taxation
3) Evaluate the current global practice in wealth taxation

I) Explain what wealth tax and different forms of wealth taxation is

A wealth tax, also called a (capital tax or equity tax), is a tax on an entity’s holdings of assets.
This includes the total value of personal assets, including cash, bank deposits, real estate, assets
in insurance and pension plans, pension plans, ownership of unincorporated businesses, financial
securities, and personal trusts. Typically, liabilities (primarily mortgages and other loans), are
deducted from an individual’s wealth sometimes called a net wealth tax. It can reduce income
inequality by reducing the accumulation of large amounts of wealth by individuals. A wealth tax

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can cause wealthy entrepreneurs and businesspeople to leave the country and move their wealth
to a more tax friendly nation.
There are two (2) major types of taxes are levied on wealth. Those applied sporadically or
periodically on a person’s wealth (net wealth taxes), and those applied a transfer of wealth
(transfer taxes). Net wealth taxes are typically assessed on the net value of the tax payer’s
taxable assets (i.e. value of assets minus any related liability) either sporadically often known as
“Capital Levies” or on an annual or other periodic basis. Transfer taxes which are typically
assessed on the net value of those levied on the transferor or her or his estate (more typical in
common law countries), and those levied on the recipient.
Transferor based taxes can be levied separately on inter vivos transfers (gift tax) and on transfer
at death, (estate tax), or together in single integrated tax. Recipient-based taxes can be levied on
inter vivos transfer (gift tax), on transfers at death in (heritance tax), and on an integrated basis
(accessions tax). Other taxes relating to the property and wealth that are not levied on a net
Generally, the tax base for taxes on wealth can include either the worldwide net assets owned by,
transferred to, received (depending on the type of tax) or given away by a taxpayer who has a
sufficient connection with the jurisdiction, or those assets situated in a jurisdiction regardless of
the taxpayer’s connection with it.
Taxes on wealth are in affect I most developed countries, although wealth transfer are more
common than net wealth taxes. A number of developing and transition countries also have either
a net wealth tax or a transfer tax, or both.

II) Challenges with wealth taxation

Over the past 25years a few countries, both developed and developing have repealed their wealth
transfer taxes. Other tax theorist has suggested that addressing the additional tax capacity
afforded by wealth could allow top marginal income tax rates to be reduced without sacrificing
overall progressivity.

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 In the alternative a wealth tax may add to the overall progressivity of an income tax without
having to increase marginal rates. A wealth tax base separate from an income tax can help ensure
that taxes not the latter because of avoidance or evasion, might be collected on the farmer. This
might be particularly true with regard to income from asset appreciation that has accrued but that
is not taxed owing to the “realization event” nature of most income tax system.
While a net wealth tax would by no means be an equal substitute for accrual-based system of
income taxation. It might at least help capture some additional revenues from appreciated assets.
Wealth taxes can be equivalent to extremely high-income tax rates. Moreover, the wealth tax
would be imposed in addition to the income tax, making total tax rates even higher whether or
not such high rates are viewed as desirable. The fact that wealth tax payment, unlike income tax
payments, would be the same fraction of wealth for investors with high returns and those with
low returns has several implications.
Direct wealth taxes have been repealed in several countries over the past few decades, partly
because they tend to scare off wealthy people and hinder foreign investment. Illiquid assets
present another issue for a wealth tax. Owners of significant illiquid assets may lack ready cash
to pay their wealth tax liability.

III) Evaluate the current global practice in wealth taxation

This creates a problem for people who have low incomes and low liquid savings but own a high-
value, illiquid asset, such as a home. Similarly, a farmer who earns little but owns land with a
high value may have trouble coming up with the money to pay a wealth tax.

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Wealth taxes would also force the owners of private companies to sell their companies earlier
than they normally would in order to pay taxes the own. Many successful entrepreneur’s own
companies that are not public traded, especially in the critical early growth years. A significant
wealth tax would stick them with a large tax liability based on a national estimate of their wealth
that is based on a national estimate of their company’s value, which is by definition illiquid.
Paying this liability would force some to sell equity earlier often to private equity investors who
may be more short-term oriented to the extent that entrepreneurial talent is important to success a
wealth tax can damage innovation and job creation.
All taxes alter people’s behavior, and the distortions they create can be harmful. Capital does not
go toward its more productive uses and distorting the returns from risk often yields unintended
consequences. Income and consumption-tax rates have to be quite high in order to discourage
work or spending because it is hard to avoid these taxes. Wealth taxes, however are considered to
introduce more distortion than any others. Even at low rates they discourage saving and
investment because they lower the return on these activities.

Conclusion

A tax or taxes on net wealth transfer to must take into account the counters political, social and
administrative circumstances. The principal policy goals behind a wealth tax might include a
modest reduction in current concentrations of substantially great wealth. In addition, if the

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reduction of the concentration of similar wealth in the future the social and political will be
achieved the general raising of tax revenues in our country.
Unlike taxes such as the value added tax and income tax which very few countries can do
without developing and transition countries can generally get along without taxes on wealth
without serious consequences for either revenue or progressivity. Reforms of the income tax can
often bring more revenue from the wealth than is brought by wealth taxes. However, on the basis
of the above factors a decision is made a wealth tax enforcement the timing should be decided
upon as not to distract from the collection of revenues from other taxes. Care should be taken to
design the tax so that it will apply in an eventuated manner, and adequate time should be allowed
for the law so that the tax can be effective.
Taxes and wealth have never been as poplar or widespread as taxes on the other two (2) major
tax bases-income and expenditure. Virtually every country the world uses income taxes and most
also use expenditure taxes.

Reference

Mofokeng. MO (2018) Wealth tax: A systematic literature review. Available at;

http://repository.nwu.ac.za/bitstream/handle/10394/31635/Mofokeng_MO.pdf?sequence=1
(Accessed; 16/03/23)

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The role and design of net wealth taxes in the OECD (2018). Available at: https://www.oecd-
ilibrary.org (Accessed: 12/03/2023)

Scott, MP, (updated 31 July 2022) Wealth Tax: Definition, Examples, Pros & Cons. Available at:
https://www.investopedia.com(Accessed; 12/3/23)

Rebecca S. Rudnick and Richard K. Gordon, (1996) Taxation of wealth. Available at:
https://www.imf.org/external/pubs/nft/1998/tlaw/eng/ch10.pdf (Accessed; 12/3/23)

Josephson. A (Jan 28, 2016) what is a tax levy? Available at; https://smartasset.com/taxes/what-
is-a-tax-levy (Accessed; 12/3/23)