## htnea2024001

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---

### Overview and purpose
- Tackling income and wealth inequality is a major contemporary policy challenge.
- The note discusses three approaches to taxing wealth:
  - Taxes on returns (capital income taxes, including capital gains).
  - Taxes on stocks (wealth taxes, including one-off capital levies).
  - Taxes on transfers (inheritance, estate, and gift taxes).
- Principal guidance: "Taxing actual returns is generally less distortive and more equitable than a wealth tax."
- Reform priorities emphasized:
  - Strengthen design of capital income taxes, notably capital gains.
  - Close loopholes and preferential treatments that allow wealthy taxpayers to reduce effective tax rates.
  - Harness technological advances in tax administration and cross-border information exchange to improve compliance.
  - Recognize the role of inheritance/estate taxes in addressing dynastic wealth concentration.

### Recent trends and salient facts
- Decline in wealth-related tax rates and use:
  - In 1990, 12 OECD members had wealth taxes; currently only 3 levy an explicit broad-based wealth tax (Switzerland, Spain, and Norway).
- Corporate and individual capital income tax trends:
  - Average corporate income tax rates have declined across country groups.
  - For OECD economies, individual-level capital income taxes on dividends and interest have declined; capital gains tax rates have increased slightly but remain largely restricted to realized gains.
- High-profile effective tax data at the top:
  - The wealthiest 25 individuals in the United States faced an effective average tax rate of 3.25 percent (Eisinger, Ernsthausen, and Kiel 2021).
  - The top 400 families in the United States faced an effective average tax rate of 9.4 percent (Yagan 2023).
  - In the United Kingdom, about 1/4 of those with annual remuneration of at least £3 million paid a tax of about 12 percent, which is 35 percentage points below the headline rate for employment.
- Example legislative proposal referenced:
  - A 2022 US bill suggested a minimum tax rate on income (including unrealized capital gains) for anyone owning more than $100 million in wealth.

### Why tax wealth? (Conceptual arguments)
- Comprehensive-income benchmark:
  - Schanz–Haig–Simons income = consumption + change in net worth; includes labor income and all capital income (including unrealized capital gains).
- Arguments for exempting capital income (taxing consumption only):
  - Avoids distorting savings decisions and can be horizontally equitable over lifetimes.
- Counterarguments favoring capital income taxation:
  - Zero capital taxation is optimal only under special circumstances; e.g., if intertemporal elasticity of substitution is smaller than one, Judd (1985) yields an optimal positive tax.
  - Reasons to tax capital income include income uncertainty, borrowing constraints, economic rents, endowments, past rents, avoidance/evasion, and criminal activity.
  - Mixed income (owner-managed business profits) complicates splitting capital and labor returns.
  - Capital income is much more unequally distributed than labor income.
  - The labor share of total income has been decreasing; AI adoption may strengthen this trend.

### Tax sensitivity of wealth and enforcement implications
- Common taxpayer responses:
  - Shifting capital income across assets or legal forms within a country.
  - Shifting capital income or residence across borders, using offshore accounts and complex structures (avoidance and evasion).
  - Real responses: investing or saving less, or cross-border migration.
- Key elasticity estimates and implications:
  - A 1-percent increase in the user cost of capital lowers investment by around 1 percent (Wen and Yilmaz 2020; Dwenger 2014).
  - Long-term real-response elasticity of taxable wealth with respect to the after-tax rate of return: −0.77 for the moderately wealthy and −1.15 for the very wealthy (Jakobsen and others 2020).
    - Interpretation: these elasticities imply that a reduction of the wealth tax rate by 1 percentage point raises the wealth stock at the end of life by 30 percent for moderately wealthy and by 65 percent for very wealthy people.
- Tax evasion and underreporting magnitudes:
  - 25 percent of income taxes owed by the wealthiest 0.01 percent in Scandinavia is evaded using offshore structures (Alstadsæter, Johannesen, and Zucman 2019).
  - 10 percent magnitude for the Netherlands (Leenders and others 2023).
  - 20 percent of true income is underreported by the top 1 percent in the United States; 7 percent underreporting at the bottom of the distribution (Guyton and others 2021).
  - In Colombia, lowering the net-of-wealth-tax rate by 1 percent lowers reported wealth by 2 percent (Londoño-Vélez and Ávila-Mahecha, forthcoming).
- Offshore hidden wealth and annual evaded tax estimates (pre-AEOI, back-of-envelope):
  - Global untaxed offshore hidden wealth estimated at 9–10 percent of GDP, or around 6–7 percent of total household financial assets (Zucman 2013).
  - Post-2016 AEOI estimates: 3.2 percent of GDP in 2022 (EU Tax Observatory 2023).
  - Annual offshore hidden income estimated at $550 billion.
  - Corresponding evaded income tax estimated at $150 billion per year. (Source assumptions: hidden wealth = 9.3 percent of GDP; hidden wealth earns a rate of return of 7 percent; would be taxed at 28 percent.)
- Advances and limits of AEOI and tax administration:
  - Offshore deposits in low-tax jurisdictions dropped post-information sharing; reported reductions include bank deposits down by 11–38 percent and portfolio investment down by 21–29 percent in low-tax jurisdictions.
  - Remaining loopholes: citizenship-by-investment programs; developing countries often face capacity constraints to use incoming information.
  - AEOI does not include real estate; work is under way to include crypto assets.
- Physical mobility elasticities for high-skilled movers:
  - Elasticity about one for foreign football players in Europe (Kleven, Landais, and Saez 2013).
  - Unitary elasticity for ‘superstar inventors’ and larger elasticity for inventors in multinational companies (Akcigit, Baslandze, and Stantcheva 2016).
  - Wealthy individuals within Spain are highly mobile in response to regional wealth tax differences (Agrawal, Foremny, and Martínez-Toledano 2020).
- Policy implication: mobility can materially undermine taxation at the top; strong anti-avoidance legislation and enforcement, and measures such as exit taxes, are needed.

### Capital Income Taxes — framing and policy trade-offs
- Two main approaches:
  - Comprehensive income taxation: tax capital and labor income together under a (usually progressive) personal income tax.
  - Dual income tax: progressive schedule for labor income and a separate, usually lower and flat, rate on capital income.
- Enforcement, information, and rationale for lower capital rates:
  - Administrative simplicity argument for lower, flat capital taxation is weakening due to digital third-party reporting and AEOI.
  - Tax sensitivity for capital income is high, exerting downward pressure on rates.
- Heterogeneity and complexity:
  - Rates differ across types of capital income (dividends, interest, capital gains); no pure systems exist.

### Profits — owner-run businesses versus corporations
- Owner-run small businesses:
  - Difficulty distinguishing wages from profits when ownership and management coincide; incentives to misclassify.
  - Policy responses: define a minimum wage to be paid as wages; fix profit as some return on invested capital with residual as wage income.
- Corporations where ownership and management are separate:
  - Corporate taxation ensures reinvested earnings are covered; it allows taxing profits where they arise; administrative advantages in collection.
  - Disadvantages: corporate profit taxation is subject to tax competition and profit shifting.
  - Recent global agreement on minimum taxes expected to reduce downward pressure on rates (IMF 2023).

### Interest
- Interest: deductible for payers; receipts taxable for recipients; taxed once in the hands of final recipient.
- Withholding taxes can ensure compliance; cross-border issues lead source countries to use withholding taxes.
- Related-party debt concerns and policy tools:
  - Transfer pricing rules; thin capitalization rules; example: EU Anti-Tax Avoidance Directive limits interest deductibility to 30 percent of profits (EBITDA).
  - G20-OECD BEPS Action 4 addresses limitation on interest deductions.

### Dividends
- Dividends are not deductible at the corporate level → taxed twice (corporate and personal), creating bias toward debt financing.
- Mitigation: imputation systems; lower personal tax rates on dividends.
- International complexity: effective tax burden depends on corporate tax, source-country withholding, and recipient-country taxes.
- Investment incentives:
  - Firms requiring new equity (new or rapidly expanding firms) are negatively affected by high dividend taxes.
  - Debate remains whether mature firms are affected; empirical evidence is mixed.

### Capital gains — features, drawbacks, and accrual taxation
- Capital gains are more difficult to tax because gains are unrealized or require historical cost basis.
- Policy practice: countries usually exempt unrealized gains; many tax gains only on realization; some exempt long-held gains.
- Numerical illustration (Figure 5 scenario):
  - Assumes gross rate of return of 10 percent and a tax rate of 30 percent.
  - No-tax scenario: after 20 years asset increases 6.7 times.
  - Taxing the capital gain on realization: after 20 years asset increases fivefold.
  - Distributing asset taxed annually (with net distributions reinvested at same remaining maturity): after 20 years increases 3.9 times.
- Drawbacks of preferential treatment of capital gains:
  - Incentive to convert income into capital gains; legislative and administrative complexity; horizontal and vertical equity concerns.
  - Examples:
    - Top 0.001 percent of US taxpayers earned 60 percent of their income as capital gains (IRS 2022).
    - Among the top 0.01 by income in the UK, almost 60 percent receive at least 90 percent of their remuneration in capital gains (Advani and Summers 2020).
  - Lock-in effect confirmed by empirical evidence (Jin 2006; Dai and others 2008; Dowd, McClelland, and Muthitacharoen 2015).
  - International avoidance: trading depository receipts offshore or using conduit jurisdictions; countries increasingly use rules against indirect transfers.
- Inflation:
  - Inflation effects significant over long periods; some countries allow inflation adjustment (example: India; previously the UK and Ireland). Inflation adjustment exacerbates the tax preference for capital gains.
- Accrual taxation challenges and mitigations:
  - Valuation challenges for privately held assets; liquidity challenges for illiquid or indivisible assets; wealthy investors can borrow to pay accrual taxes (example: Elon Musk pledged $58 billion of shares as collateral for personal loans).
  - Treatment of losses: allow capital losses to offset only capital gains to protect revenues.
- Owner-occupied housing:
  - Imputed rent is theoretically taxable; in practice rarely taxed (exceptions: Switzerland and the Netherlands). Excluding imputed rent while allowing mortgage interest deductions creates distortions.

### Capital income taxes in practice — stylized facts
- Tax rates on capital income have generally declined over decades.
- Debt bias is common; allowance for corporate equity (ACE) can mitigate but few countries use ACE (examples: Malta; partially Italy and Türkiye).
- Dividend taxation relative to labor income (OECD, 2022):
  - Just over half of OECD members tax dividends (taking into account both corporate- and personal-level taxes) at a lower rate than labor income, three tax both at the same rate, and the remainder at a greater rate.
  - Cross-country differences: Greece offers an 18-percentage-point advantage for dividends, while Costa Rica has a 15-percentage-point preference for labor income.

### Wealth taxes — conceptual trade-offs and efficiency
- Fundamental distinction:
  - Capital income taxes apply to flows; wealth taxes apply to stocks (net wealth = assets minus liabilities), irrespective of return.
- Equivalence example (Figure 7 scenario):
  - Assumes a capital income tax rate of 25 percent and a wealth tax rate of 1.25 percent; they are equivalent for assets yielding a return of 5 percent.
  - Effective tax rates on returns decline as the return rises; they rise for very low returns, tending to infinity as returns approach zero.
- Efficiency considerations:
  - Capital income taxes are generally more efficient because they can target rents and leave normal returns lightly taxed; wealth taxes tax a fixed assumed return and can tax loss-making assets.
  - Wealth taxes typically provide more stable revenues over the cycle; capital income taxes strengthen automatic stabilizers more.
- Theoretical arguments for wealth taxation:
  - If entrepreneurs differ in ability and returns correlate with ability, wealth taxation can shift capital toward productive entrepreneurs (Guvenen and others 2023).
  - Empirical evidence (Fagereng and others 2020) suggests returns differ across investors with persistence and rise with wealth; counterpoints note returns may reflect financial sophistication, rent-seeking, or luck.
- Equity implications:
  - Capital income taxes are more equitable when measured as percent of income because they tax higher returns more.
  - Wealth taxes would require ex ante progressivity to capture rising shares of rents.

### Administrative and legal issues for wealth taxes
- Valuation difficulties affect both wealth taxes and capital income taxes; wealth tax volatility is typically smaller than capital gains volatility.
- Liquidity constraints:
  - Potential solutions: high thresholds; special treatment for primary residences and pension wealth.
  - Empirical finding: under a wealth tax with a 1 percent rate and a £500,000 threshold, about 18 percent of wealth taxpayers would face a tax bill exceeding 10 percent of their income and liquid assets; excluding pension wealth drops this to 3 percent (Loutzenhiser and Mann 2021).
- Wealth taxes can produce a total tax bill that exceeds all income and can be collected even if income is negative; some countries impose caps on total taxes as percent of income (France limited total taxes to 75 percent of income; Spain limit was 60 percent).

### A wealth tax on the “superrich”
- Practical differences when applied only to a small number:
  - Smaller taxpayer pool reduces administrative costs; liquidity concerns less relevant.
- Potential effects on entrepreneurship and innovation:
  - A wealth tax restricted to the very top would not affect most entrepreneurs given high thresholds, but entrepreneurial risk may be concentrated at the top.
- Rationale for reducing extreme wealth:
  - Wealth taxes can more easily reduce extreme wealth over time compared with income taxes that would require rates exceeding 100 percent of capital income.
  - Political economy constraint: evidence that the superrich influence political processes, potentially hindering progressive tax reforms.
- Definition issues: "superrich" lacks a common definition; often top 0.01 percent or other top fractions; sometimes billionaires or top few hundreds.
- Key statistics and illustrative estimates:
  - Global top 500 wealthy individuals had combined wealth of $7.7 trillion in 2023.
  - At assumed average return of 5–10 percent, this wealth generates annual income of $385–$770 billion.
  - EU Tax Observatory (2023): a wealth tax of 2 percent on the world’s top billionaires in 2023 (about 2,800 billionaires, 30 percent of whom are in the United States according to the report) can raise about $250 billion (or 0.2 percent of world GDP).
  - Saez and Zucman (2019) analysis of a Senator Warren proposal: revenue estimate of $49 billion from the top 400 families.
- Historical and recent capital levies:
  - Capital levies are theoretically nondistortionary if unanticipated and not expected again, but practical credibility is rare.
  - Recent examples: Ecuador (temporary wealth tax post-COVID-19); Iceland and Ireland levies after the global financial crisis (assessed over a few years, extended beyond initial horizon); Spain: wealth tax extended annually and became permanent in 2021; Colombia: wealth taxed 1935–1992; reestablished in 2002 as “temporary” and became permanent.
- Wealth taxes in practice:
  - Among OECD members, explicit wealth tax leviers declined from 12 in 1990 to only 3.
  - Switzerland: highest revenue yield globally at 1.4 percent of GDP over the 2018–20 period.
  - Wealth tax generates 0.35 percent of GDP on average in developing countries; historically it has rarely exceeded 0.1 percent of GDP.
  - Al-Zakat: typical rate 2.5 percent of net wealth above a threshold.

### Taxes on specific types of wealth and partial taxes
- Real property taxes:
  - Cover only one asset type; do not allow deduction of debts; immobile, visible, easier to enforce; can be progressive; serve local finance purposes.
- Limitations of partial wealth taxes:
  - Many exclude nonfinancial assets (household items, art), contributing to low revenues and declining use.

### Estate, inheritance, and gift taxes — objectives, efficiency, and practice
- Forms:
  - Inheritance tax: levied on recipient (recipient based).
  - Estate tax: levied on transferor or estate (transferor based).
- Efficiency:
  - Gifts and inheritances are lump sums for recipients and mainly have income effects likely to reduce labor supply.
  - Transferors’ behavior depends on whether bequests are accidental or purposeful; empirical evidence on long-run behavioral effects is inconclusive.
- Equity:
  - Empirical inherited wealth share estimates:
    - Davies and Shorrocks (2000): 35–45 percent.
    - Piketty and Zucman (2015): in 2010 inherited wealth shares ranged from just over 50 percent in Germany to close to 60 percent in the United Kingdom.
    - Acciari and Morelli (2020): inheritances in Italy increased from 8.4 to 15.1 percent of GDP between 1995 and 2016.
    - UBS (2023): new billionaires acquired greater wealth through inheritance than entrepreneurship.
- Design considerations:
  - Inheritance tax preferable for equity because linked to post-transfer distribution.
  - Optimal inheritance tax higher when bequests are inelastic, concentrated, and preferences for redistribution strong; calibrations for the United States and France indicate optimal tax rates could be 50–60 percent, and even higher for top bequests (Piketty and Saez 2013).
- Avoidance routes and anti-avoidance measures:
  - Inter vivos gifts; trusts; usufruct constructions; preferential treatment for business assets; policy responses include taxing transfers to trusts, treating transfers to trusts as bequests, limiting preferential rates to business-use thresholds, and taxing accrual toward full ownership value.
- In practice:
  - About two-thirds of OECD members have a tax on wealth transfers, yielding on average about 0.2 percent of GDP (0.5 percent of total tax revenue) in 2020.
  - Use of wealth transfer taxes has been declining; nine OECD members abolished such taxes since the 1970s.
  - Top rates are at or below 10 percent in more than half of countries, but can reach a maximum of 55 percent (Japan).
  - Exemptions vary widely; median around $20,000; US exemption noted as $12.9 million (figure truncated in source).

### Policy recommendations and implications (priorities)
- Distinguish “how much” to tax from “how” to tax: returns to capital generally should be taxed for equity and possibly efficiency reasons; country-specific choices determine levels.
- Prioritization:
  - Improve capital income taxation before considering net wealth taxes; improving capital income taxes tends to be both more equitable and more efficient.
- Strengthening capital income taxes involves more than rate increases:
  - Consider higher tax rates where capital income tax rates are relatively low.
  - Where administrative capacity permits, adopt a comprehensive approach to taxing labor and capital income.
  - Address loopholes, notably undertaxation of capital gains:
    - Remove reduced tax rates, exemptions, or downward adjustments for capital gains.
    - Ensure wealth transfers are treated as capital gain realizations.
    - Consider moving toward taxation on accrual, with safeguards for liquidity constraints and valuation difficulties.
- Complementary roles of wealth and transfer taxes:
  - Targeted net wealth taxes can address deferral of realizations and discourage accumulation beyond some level; feasibility depends on constitution and administrative capacity.
  - Taxing capital transfers (gifts and inheritance) provides another opportunity to address wealth inequality; efficiency costs are modest but avoidance is a key challenge.
- Enforcement and technology:
  - Continue progress in information sharing and tackle international tax avoidance and remaining loopholes irrespective of chosen tool.
  - Authorities need to keep up with technological advances such as crypto assets and artificial intelligence that could introduce new avoidance and evasion opportunities.

*Source: IMF | How to Note NOTE/2024/001 — How to Tax Wealth (content unit: htnea2024001).*

### Introduction ____________________________________________________________________ 4

### htnea2024001 - Introduction

### Overview and purpose
- Tackling income and wealth inequality is a major contemporary policy challenge.
- The note discusses three approaches to taxing wealth:
  - Taxes on returns (capital income taxes, including capital gains).
  - Taxes on stocks (wealth taxes, including one-off capital levies).
  - Taxes on transfers (inheritance, estate, and gift taxes).
- Principal guidance: "Taxing actual returns is generally less distortive and more equitable than a wealth tax." Policy priorities should focus on strengthening capital income tax design (notably capital gains), closing loopholes, and improving enforcement—including cross-border information sharing—while recognizing the role of inheritance taxes in addressing dynastic wealth.

### Recent trends and salient facts
- Decline in wealth-related tax rates and use:
  - In 1990, 12 OECD members had wealth taxes; currently only 3 levy an explicit broad-based wealth tax (Switzerland, Spain, and Norway).
- Corporate and individual capital income tax trends:
  - Average corporate income tax rates have declined across country groups (see Figure 1).
  - For OECD economies, individual-level capital income taxes on dividends and interest have declined (see Figure 2); capital gains tax rates have increased slightly but remain largely restricted to realized gains.
- High-profile data on effective taxation at the top:
  - The wealthiest 25 individuals in the United States faced an effective average tax rate of 3.25 percent (Eisinger, Ernsthausen, and Kiel 2021).
  - The top 400 families in the United States faced an effective average tax rate of 9.4 percent (Yagan 2023).
  - In the United Kingdom, about 1/4 of those with annual remuneration of at least £3 million paid a tax of about 12 percent, which is 35 percentage points below the headline rate for employment.
- Example legislative proposal referenced:
  - A 2022 US bill suggested a minimum tax rate on income (including unrealized capital gains) for anyone owning more than $100 million in wealth.

### Why tax wealth? (Conceptual arguments)
- Comprehensive-income benchmark:
  - Schanz–Haig–Simons income = consumption + change in net worth; it includes labor income and all capital income (including unrealized capital gains) and serves as a benchmark for taxing ability to pay.
- Arguments for exempting capital income (taxing consumption only):
  - Exempting savings avoids distorting savings decisions and is horizontally equitable over lifetimes.
  - Taxing only labor income can be equivalent to consumption taxation in net present value terms.
- Counterarguments favoring capital income taxation:
  - Theoretical updates (Straub and Werning 2020) show zero capital taxation is optimal only under special circumstances; e.g., if the intertemporal elasticity of substitution is smaller than one, Judd (1985) yields an optimal positive tax.
  - Banks and Diamond (2010) discuss reasons to tax capital income, including income uncertainty and borrowing constraints.
  - Returns often contain economic rents and excess returns that can be taxed without distorting efficient savings decisions.
  - Large shares of wealth arise from endowments, past rents, avoidance/evasion, or criminal activity; very high incomes may never be consumed, so consumption taxation can leave substantial untaxed resources.
  - Mixed income (owner-managed business profits) complicates splitting capital and labor returns, requiring complex rules to avoid misclassification and tax avoidance.
  - Capital income is much more unequally distributed than labor income (see Figure 3), making it important for redistribution.
  - The labor share of total income has been decreasing (Figure 4), and AI adoption may strengthen this trend; relying primarily on labor taxation risks lower tax-to-GDP ratios or rising labor tax rates.

### Tax sensitivity of wealth and enforcement implications
- Wealthy taxpayers are highly sensitive to taxation; common responses include:
  - Shifting capital income across assets or legal forms within a country to exploit nonneutral tax treatment.
  - Shifting capital income or residence across borders to exploit tax differences, including use of offshore accounts and complex structures (avoidance and evasion).
  - Real responses: investing or saving less, or cross-border migration.
- Consequences:
  - Increasing statutory rates alone may be ineffective without better enforcement and tax design.
  - Technological advances and cross-border automatic exchange of information (AEOI) expand enforcement possibilities that were previously unavailable.

### Policy focus and structure of the note
- Reform priorities emphasized:
  - Strengthen design of capital income taxes, notably capital gains.
  - Close loopholes and preferential treatments that allow wealthy taxpayers to reduce effective tax rates.
  - Harness technological advances in tax administration and cross-border information exchange to improve compliance.
  - Recognize the role of inheritance/estate taxes in addressing dynastic wealth concentration.
- Structure of the rest of the note (as presented):
  - Conceptual reasons for taxing wealth.
  - Sensitivity of wealth to taxation.
  - Detailed consideration of (1) capital income taxes, (2) wealth taxes, (3) inheritance and gift taxes.
  - Conclusion with policy options.

*IMF | How to Note NOTE/2024/001 — How to Tax Wealth (Introduction, pp. 4–9)*

### 20.      Taxing wealth—directly or through the income generated by the wealth stock—triggers

### Taxing wealth—directly or through the income generated by the wealth stock—triggers behavioral responses

### Behavioral responses and elasticities
- Taxing wealth or its return induces responses: reducing investment, shifting toward tax-favored assets, moving assets or residences across jurisdictions, and under-declaring (tax evasion).
- Elasticity concept: percentage change in real or reported wealth resulting from a 1-percentage point increase in the tax rate.
- Empirical estimates capturing real effects of capital taxes:
  - A 1-percent increase in the user cost of capital lowers investment by around 1 percent (Wen and Yilmaz 2020; Dwenger 2014).
  - Long-term real-response elasticity of taxable wealth with respect to the after-tax rate of return: −0.77 for the moderately wealthy and −1.15 for the very wealthy (Jakobsen and others 2020).
    - Interpretation note from the source: these elasticities imply that a reduction of the wealth tax rate by 1 percentage point raises the wealth stock at the end of life by 30 percent for moderately wealthy and by 65 percent for very wealthy people.

### Tax evasion and underreporting by top groups
- Offshore and underreporting magnitudes in studies:
  - 25 percent of income taxes owed by the wealthiest 0.01 percent of people in Scandinavia is evaded using offshore structures (Alstadsæter, Johannesen, and Zucman 2019).
  - 10 percent magnitude for the Netherlands (Leenders and others 2023).
  - 20 percent of true income is underreported by the top 1 percent in the United States; 7 percent underreporting at the bottom of the distribution (Guyton and others 2021).
  - In Colombia, lowering the net-of-wealth-tax rate by 1 percent lowers reported wealth by 2 percent, with evidence pointing to evasion via undervaluation or offshore entities (Londoño-Vélez and Ávila-Mahecha, forthcoming).
- Consequences: costly revenue losses and weakened progressivity.

### Offshore hidden wealth and annual evaded tax estimates
- Stock estimates:
  - Global untaxed offshore hidden wealth estimated at 9–10 percent of GDP, or around 6–7 percent of total household financial assets (Zucman 2013).
  - Post-2016 AEOI estimates: 3.2 percent of GDP in 2022 (EU Tax Observatory 2023).
- Back-of-envelope annual income and tax evasion calculation (pre-AEOI):
  - Annual offshore hidden income estimated at $550 billion.
  - Corresponding evaded income tax estimated at $150 billion per year.
  - (Source assumptions listed in the original: hidden wealth = 9.3 percent of GDP; hidden wealth earns a rate of return of 7 percent; would be taxed at 28 percent. The estimate reflects income taxation only.)

### Advances and limits of AEOI and tax administration
- Evidence of AEOI and information sharing reducing offshore holdings:
  - Offshore deposits in low-tax jurisdictions dropped post-information sharing (Casi, Spengel, and Stage 2020).
  - Reported reductions: bank deposits down by 11–38 percent, portfolio investment down by 21–29 percent in low-tax jurisdictions (Menkhoff and Miethe 2019).
- Remaining loopholes and constraints:
  - Citizenship-by-investment programs can circumvent information reporting (Langenmayr and Zyska 2023).
  - Developing countries often not effectively receiving or using information for tax enforcement due to capacity constraints in data analytics and knowledge management.
  - Digitalization of tax administration and units specialized in high-net-worth individuals are correlated with use of information received from abroad in compliance risk analysis (IMF 2022).
  - AEOI does not include real estate; work is under way to include crypto assets.

### Physical mobility and residence responses
- Residency choice is an important margin; mobility reflects avoidance and real effects.
- Elasticities for high-skilled, high-income movers:
  - Elasticity about one for foreign football players in Europe (Kleven, Landais, and Saez 2013).
  - Unitary elasticity for ‘superstar inventors’ and larger elasticity for inventors in multinational companies (Akcigit, Baslandze, and Stantcheva 2016).
  - Wealthy individuals within Spain are highly mobile in response to regional wealth tax differences (Agrawal, Foremny, and Martínez-Toledano 2020).
- Policy implication: mobility can materially undermine taxation at the top.

### Policy implications for taxing those at the top
- Any measure to increase tax payments by top earners must address avoidance and evasion:
  - Strong anti-avoidance legislation and enforcement are needed.
  - Measures such as exit taxes to prevent avoidance by moving across borders are needed.

---

### Capital Income Taxes

### Conceptual framing
- Taxing wealth through its income flows (capital income taxes) is one approach; taxing wealth stocks is considered in the following section of the source.
- Taxes to consider at all levels:
  - Personal income tax on capital income (dividends, interest, capital gains).
  - Corporate income tax: remitted at corporate level but ultimately a mechanism to collect capital income tax from stockholders (including nonresidents); corporate-level tax must be accounted for when considering flows from corporations.

### Two main approaches to taxing capital income
- Comprehensive income taxation:
  - Tax capital and labor income together under a (usually progressive) personal income tax.
- Dual income tax:
  - Progressive schedule for labor income and a separate, usually lower and flat, rate on capital income.
  - Rationale: compromises between arguments for and against capital income taxation by applying a reduced rate to capital income.

### Enforcement, information, and changing rationale for lower capital rates
- Administrative simplicity argument for lower, flat capital taxation is weakening due to technological and legal developments:
  - Final withholding and flat rates are simple, but digital third-party reporting enables aggregating flows by individual to detect underreporting.
  - AEOI and other international agreements improve detection of international tax evasion.
- Tax sensitivity for capital income is high, exerting downward pressure on rates.

### Heterogeneity of capital income types and practical complexity
- In practice, dual income systems are complex: rates differ across types of capital income (dividends, interest, capital gains).
- Subsequent subsections in the source examine taxes on profits, interest, dividends, and capital gains and the specific issues for each.

---

### Profits (owner-run businesses versus corporations)

### Owner-run (small) businesses
- Difficulty distinguishing wages (labor returns) from profits (investment returns) when ownership and management coincide.
- In dual systems, incentives exist to characterize income as wages up to allowances/low rates, then as profit once labor tax reaches capital flat rate.
- Policy responses to limit tax planning:
  - Define a minimum wage that must be paid out as wages; residual treated as profit.
  - Fix profit as some return on invested capital with residual as wage income.
- Smallest sole proprietorships: profits usually taxed once; no dividends issue.
- For separate legal entities with pass-through rules, income may still be taxed only once at owners’ level.

### Corporations where ownership and management are separate
- Corporations typically taxed at corporate level for multiple reasons:
  - Ensures reinvested earnings are covered (since personal-level taxation may not capture reinvested earnings).
  - Allows taxing profits earned where they arise when owners may be nonresidents.
  - Administrative advantage: easier collection from corporations than many owners.
  - In developing countries, corporate income taxes are a significant share of total tax revenues.
  - Arguments citing corporations’ legal person status and receipt of public benefits are noted but not quantitatively linked to tax liability; corporations cannot bear incidence.

### Disadvantages of corporate-level profit taxation
- Corporate profit taxation is subject to tax competition and profit shifting.
- Recent global agreement on minimum taxes is expected to reduce downward pressure on rates (IMF 2023).

---

### Interest

- Interest generally:
  - Deductible expense for payers; receipts taxable for recipients.
  - Results in taxation once, in the hands of the final recipient.
- Withholding taxes can ensure compliance; in flat-rate systems withholding can be final, while under progressive regimes withholding should be creditable and refundable.
- Cross-border interest complexities:
  - Interest lowers tax payments in debtor’s country and raises them in creditor’s country; source countries use withholding taxes to retain revenue.
  - Double taxation treaties often limit withholding rates; treaty negotiations matter for source countries.
- Related-party debt concerns:
  - Incentive to highly leverage affiliates in high-tax countries and hold debt in low-tax jurisdictions.
  - Policy tools to prevent profit shifting via debt:
    - Transfer pricing rules to prevent excessive interest rates.
    - Thin capitalization rules limiting interest deductibility if debt-equity ratio or interest-to-profits thresholds are exceeded.
    - Example: EU Anti-Tax Avoidance Directive limits interest deductibility to 30 percent of profits (EBITDA).
  - G20-OECD BEPS Action 4 deals with limitation on interest deductions (not a minimum standard).
  - Modern interest limitation rules often do not distinguish related-party versus arm’s-length debt to keep rules simple.

---

### Dividends

- Tax treatment:
  - Dividends are not deductible at the corporate level → taxed twice: corporate level and personal level.
  - This creates a bias favoring debt financing over equity (interest deductible vs dividends nondeductible).
- Mitigating double taxation:
  - Imputation systems: credit for corporation tax paid (less common with globalization due to cross-border crediting limits).
  - Lower personal tax rates on dividends relative to other capital income.
- International complexity:
  - The effective tax burden on dividends depends on corporate tax, source-country withholding, and recipient-country taxes.
  - Typically, lower taxation of dividends is insufficient to offset corporate-level taxation; debt is often effectively taxed less than equity internationally.
- Investment incentives and debate:
  - Consensus: firms that require new equity (new or rapidly expanding firms) are negatively affected by high dividend taxes.
  - Debate unresolved on whether mature firms are affected; “new” or “trapped equity” view suggests mature firms use retained earnings or debt until marginal return equals marginal cost, paying residual as dividends (so dividend tax may not affect payout).
  - Empirical evidence on the new view is mixed; uncertainty implies policymakers cannot be fully assured that dividend taxation has no effect on mature firms. Overtaxation will affect new and rapidly expanding firms.

---

*Source: IMF | How to Note (content unit: Taxing wealth—directly or through the income generated by the wealth stock—triggers), htnea2024001*

### 40.      Capital gains—the difference between the current and original purchase values of an asset—are

### 40.      Capital gains—the difference between the current and original purchase values of an asset—are

### Taxation of capital gains
- Capital gains are more difficult to tax than other capital income because:
  - Interest and dividends comprise observable flows, while capital gains either have no observable flow if unrealized or require netting the (possibly old) original cost from gross proceeds.
- Policy practice:
  - Countries usually exempt unrealized gains from capital gains taxes except under specific circumstances (for example, financial assets held in the banking books of financial institutions).
  - Some countries do not tax realized capital gains at the personal level if an asset is held for more than a specific period (ranging from several months to several years, depending on the country).
  - Inheritance can avoid realization (example provided for the United States), and basis is stepped up at inheritance in such cases.
- Implication of taxing only realized gains:
  - When assets are held for more than one year, capital gains are effectively taxed less than other capital income because gains compound untaxed until realization.
  - Numerical illustration (Figure 5 scenario):
    - Assumes a gross rate of return of 10 percent and a tax rate of 30 percent.
    - No-tax scenario: after 20 years, asset increases 6.7 times in value.
    - Taxing the capital gain on realization: after 20 years, asset increases fivefold.
    - Distributing asset taxed annually (with all net distributions reinvested at same remaining maturity): after 20 years, increases 3.9 times.
    - Difference is negligible for short horizons (none for a one-year investment).

### Drawbacks of the tax preference for capital gains
- Tax avoidance incentives:
  - Incentive to convert income into capital gains to benefit from lower taxation (e.g., investment funds reinvesting rather than distributing; bonds designed to increase in value rather than pay interest).
- Increased legislative and administrative complexity:
  - Need to address loopholes (example: zero-coupon bonds are often taxed on implied interest).
- Horizontal equity concerns:
  - Similarly profitable investments are taxed differently depending on income form.
- Vertical equity concerns:
  - Share of income earned as capital gains rises with wealth and income.
  - Examples:
    - In the United States, the top 0.001 percent of taxpayers earned 60 percent of their income as capital gains (IRS 2022).
    - In the United Kingdom, among the top 0.01 by income, almost 60 percent receive at least 90 percent of their remuneration in capital gains (Advani and Summers 2020).
- Lock-in effect and inefficient capital allocation:
  - Investors prefer to hold assets to avoid realizing gains, creating inefficiency.
  - Empirical evidence confirms a lock-in effect (Jin 2006; Dai and others 2008; Dowd, McClelland, and Muthitacharoen 2015).
  - Some countries tax long-term gains at lower rates to reduce lock-in, which exacerbates undertaxation.
- International avoidance and evasion:
  - Even on realized gains, investors can trade depository receipts in offshore markets or trade stocks/companies registered in conduit countries to avoid taxation.
  - Revenue loss can be significant for high-value assets such as natural resources.
  - Countries increasingly use rules against indirect transfers of interests despite technical and administrative challenges (IMF and others 2020).

### Inflation and capital gains
- Inflation effects are significant over long periods.
- Some countries (for example, India and previously the United Kingdom and Ireland) allow inflation adjustment to capital gains.
  - Such adjustments exacerbate the tax preference for capital gains because other returns (interest and dividends) are also affected by inflation but typically do not receive similar adjustments.
- Even without inflation adjustment, inflation increases the tax preference for capital gains (Beer, Griffiths, and Klemm 2023).

### Accrual taxation of capital gains — challenges and mitigations
- Valuation challenges:
  - Absence of transaction value complicates determining accrued gains, especially for privately held stocks, works of art, and collectibles.
  - For many assets, difficulty is minor: publicly traded securities have readily available prices; real property may have regularly updated valuations in countries with market value–based property taxes.
- Liquidity challenges:
  - Accrual taxation creates problems for liquidity-constrained owners, particularly indivisible high-value assets (for example, residential real estate).
  - Financial securities in liquid markets pose no such difficulty; many investors are not liquidity constrained and benefit from current tax saving.
  - Wealthy investors often borrow to finance consumption to avoid triggering tax liability and could borrow to pay accrual taxes (example: Elon Musk pledged $58 billion of shares as collateral for personal loans).
- Treatment of losses:
  - Widespread capital losses in declining markets could threaten tax revenues if losses are offset against other income.
  - Mitigation: allow capital losses to be offset only against capital gains rather than all income (typical under current realization-based systems).
  - Example relevance: crypto assets—massive gains alongside massive losses—justify allowing loss offsets only against other crypto gains (Baer and others 2023).

### Owner-occupied housing
- Conceptual taxation for investment property:
  - Income includes rents and capital gains; costs include maintenance, depreciation, and cost of finance.
- Owner-occupied housing challenge:
  - No rent is paid, but the owner enjoys housing services equivalent to income.
  - Theoretically coherent approach: calculate taxable imputed rent and allow same deductions as for investment property to avoid preference for owner-occupation.
  - In practice, imputed rents are rarely taxable (exceptions: Switzerland and the Netherlands).
  - If imputed rents are disregarded but some costs (notably mortgage interest) remain deductible, this creates incentive to overconsume housing and excessive leverage.
  - Housing is also subject to taxes other than on income (see Box 2 in source).

### Capital income taxes in practice
- Trend: Tax rates on capital income, at both corporate and personal levels, have generally declined over the decades (Figures 1 and 2 noted in source).
- No pure systems:
  - No country employs a pure version of any possible capital income tax system; special treatments persist (capital gains taxed on realization or exempt; owner-occupied housing generally exempt).
  - No pure dual systems— not all capital income is subject to the same low rate.
- Debt bias:
  - Debt bias is common; allowance for corporate equity (ACE) can mitigate by allowing deduction of notional interest on equity.
  - Very few countries currently use ACE (examples: Malta; partially Italy and Türkiye).
- Dividend taxation relative to labor income (OECD, 2022):
  - Just over half of OECD members tax dividends (taking into account both corporate- and personal-level taxes) at a lower rate than labor income, three tax both at the same rate, and the remainder at a greater rate.
  - Cross-country differences can be sizeable: Greece offers an 18-percentage-point advantage for dividends, while Costa Rica has 15-percentage-point preference for labor income.

### Wealth taxes — income versus wealth, efficiency, and equity
- Fundamental distinction:
  - Capital income taxes apply to flows; wealth taxes apply to stocks (net wealth = assets minus liabilities), irrespective of return.
  - One-off wealth taxes or capital levies are a special case.
- Equivalence and implications:
  - Wealth taxes are equivalent to taxing an assumed fixed rate of return rather than the actual return.
  - Example numerical illustration (Figure 7 scenario):
    - Assumes a capital income tax rate of 25 percent and a wealth tax rate of 1.25 percent.
    - With these rates, they are equivalent for assets yielding a return of 5 percent.
    - Effective tax rates on returns decline as the return rises; they rise for very low returns, tending to infinity as returns approach zero, and would still be collected on loss-making assets.
- Scope and double taxation concern:
  - Some countries tax corporate assets (example: Luxembourg and Switzerland), but such taxes are not individual wealth taxes and can create double taxation if individual wealth taxes also cover business wealth.
- Efficiency considerations:
  - Capital income taxes are generally more efficient than wealth taxes because wealth taxes cover only a fixed return and leave rents (economic rents) untaxed, whereas efficient taxation targets rents and leaves normal returns lightly taxed.
  - Risk and investment incentives:
    - Wealth taxes generally lead to higher after-tax risk; successful risky investments have returns reduced less by wealth taxes than by capital income taxes, but unsuccessful investments are reduced more by wealth taxes.
    - Capital income taxes smooth outcomes, making risky investments more attractive to risk-averse investors (Domar and Musgrave 1944).
    - Progressive capital income taxes can reduce attractiveness of risky investments by disproportionately reducing high returns.
  - Theoretical arguments for wealth taxation:
    - Guvenen and others (2023): if entrepreneurs differ in ability and more productive ones earn higher average returns, wealth taxation can encourage savings among productive entrepreneurs, shifting capital to them and boosting productivity and growth. This hinges on returns being a function of entrepreneurial skills.
    - Empirical evidence (Fagereng and others 2020) suggests returns differ across investors with persistence over time and rise with wealth.
    - Counterpoints: higher returns may reflect financial sophistication, access to information, monopoly rents, rent-seeking, or luck.
    - Other models find small efficiency gains dominated by redistributional benefits of taxing high incomes (Boar and Midrigan 2023).
- Macroeconomic management:
  - Wealth taxes provide more stable revenues over the cycle and weaker automatic stabilizers than capital income taxes.
  - In recessions, when capital rates of return plummet or turn negative, capital income tax liabilities fall or vanish, while wealth taxes continue to apply with only slight reductions from a smaller tax base.
  - Therefore, unless steady revenue is prioritized, capital income taxes better strengthen automatic stabilizers.
- Equity implications:
  - Capital income taxes are more equitable than wealth taxes when measured in percent of income.
  - Horizontal equity: among two individuals with the same wealth, capital income taxes are higher for the one earning higher returns; wealth taxes are identical.
  - Vertical equity: wealthier individuals likely have better access to financial advice and greater capacity to accept risk, implying higher average returns; capital income taxes automatically cover these returns, while wealth taxes would require additional progressivity in rates to capture rising shares of rents and only get it right ex ante, not ex post.
  - General equilibrium effects: if wealth taxes reduce aggregate capital formation more than capital income taxes, wage rates could fall as capital becomes scarcer and marginal product of labor declines (Stiglitz 1978).

*Source: htnea2024001 — IMF | How to Note.*

### 59.      Apart from the theoretical difference of comprehensive capital income or wealth taxes, in

### htnea2024001 - 59.      Apart from the theoretical difference of comprehensive capital income or wealth taxes, in

### Administrative and Legal Issues
- Wealth taxes can appear easier to enforce in some cases because certain capital income (such as unrealized capital gains on hard-to-value or illiquid assets) can be difficult to determine and tax.
- Valuation difficulties affect both wealth taxes and capital income taxes; advantage of a wealth tax: volatility of the value of the wealth stock is smaller than that of the capital gain (change in stock), so measurement issues have a slightly smaller revenue effect in any given year.
- Liquidity constraints:
  - Some taxpayers may lack liquidity for remitting a wealth tax when wealth produces no positive financial return.
  - When assets are divisible, partial liquidation is a minor inconvenience; indivisible or highly illiquid assets (for example, a pension entitlement) can make sale infeasible.
  - Potential solutions:
    - Setting a high threshold (the very wealthy should have ways to obtain liquidity).
    - Allowing special treatment for certain assets, such as primary residences and pension wealth.
- Empirical finding: Loutzenhiser and Mann (2021) using UK data found that under a wealth tax with a 1 percent rate and a £500,000 threshold, about 18 percent of wealth taxpayers would face a tax bill exceeding 10 percent of their income and liquid assets; if pension wealth is excluded, this drops to 3 percent. They do not assess asset divisibility; share needing to liquidate a sole/main asset would be smaller.
- Wealth taxes can produce a total tax bill that exceeds all income and can be collected even if income is negative (e.g., a year of capital losses).
  - Some countries impose upper caps on total income and wealth taxes as a percent of income: France limited total taxes to 75 percent of income; Spain limit was 60 percent (interacted with lower limit of at least 20 percent of the wealth tax being payable).
  - No country appears to carry forward wealth tax forgone due to a cap.

### A Wealth Tax on the “Superrich”
- Practical differences when applied only to a small number of superrich:
  - Smaller taxpayer pool reduces administrative costs.
  - Compliance costs and liquidity concerns are less relevant for exceedingly high wealth.
- Potential effects on entrepreneurship and innovation:
  - A wealth tax restricted to the very top would not affect most entrepreneurs or inventors given high thresholds.
  - Conjecture: non-linear tax elasticity of entrepreneurial decisions, decreasing at the very top due to high consumption and security levels—no empirical evidence given paucity of such taxes and sample size.
  - Counterargument: entrepreneurial risk is highly concentrated at the top (Hall and Woodward 2010); measures affecting risk-adjusted payoffs could discourage investment.
- Rationale for reducing extreme wealth:
  - To address extreme inequality, some argue reducing wealth toward an upper limit over time (concerns about rent-seeking and influence on rule making; Stiglitz 2012).
  - Wealth-reducing outcomes can be achieved more easily through a wealth tax than through income tax, which would require tax rates exceeding 100 percent of capital income.
  - Political economy constraint: evidence that the superrich influence political processes, potentially hindering progressive tax reforms (Page and Seawright 2023).
- Definition issues:
  - No common definition of “superrich”; often refers to top 0.01 percent of income or wealth distribution, or other top fractions; sometimes billionaires or top few hundreds (Scheuer and Slemrod 2020).
  - Related concept: “superstars” highlighting ability differences within groups (e.g., sport stars, actors, inventors, scientists).

- Key statistics and illustrative estimates:
  - The global top 500 wealthy individuals had an estimated combined wealth of $7.7 trillion in 2023.
  - At an assumed average return of 5–10 percent, this wealth generates annual income of $385–$770 billion.
  - EU Tax Observatory (2023) estimate: a wealth tax of 2 percent on the world’s top billionaires in 2023 (about 2,800 billionaires, 30 percent of whom are in the United States according to the report) can raise about $250 billion (or 0.2 percent of world GDP).
  - Saez and Zucman (2019) analysis of a Senator Warren proposal: revenue estimate of $49 billion from the top 400 families; large effect on progressivity within the top 0.1 percent.

### Box 1. Capital Levies (One-Off Wealth Taxes) — Findings and Practical Considerations
- Capital levies (ad hoc temporary wealth taxes) are sometimes used after major shocks (wars, natural disasters).
- Theoretical property: nondistortionary if unanticipated and not expected to be levied again.
- Practical difficulties:
  - Unanticipated and one-off conditions are virtually impossible to meet; debates and leaks make them predictable, triggering avoidance and evasion before imposition.
  - Once used, levies tend to be expected again, making behavior distortions likely.
- Historical experience:
  - Many historical capital levies failed due to slow introduction allowing avoidance and evasion.
  - Exception: Japan after the Second World War—international links severed and exceptional circumstances supported credibility of a one-off levy.
- Recent examples:
  - Ecuador introduced a temporary wealth tax after COVID-19.
  - Iceland (wealth) and Ireland (pension assets) levies following the global financial crisis had features of capital levies but were assessed over a few years on updated values; both were extended beyond initial horizon and ultimately expired.
  - Spain: wealth tax extended annually and became permanent in 2021.
  - Colombia: wealth taxed 1935–1992; reestablished in 2002 as “temporary” to finance war against illegal armed groups; became permanent thereafter with reformed rate structure and base.

### Wealth Taxes in Practice
- Decline among advanced economies:
  - Among OECD members, explicit wealth tax leviers declined from 12 in 1990 to only 3 (the Netherlands de facto levies a wealth tax via personal income tax; Liechtenstein outside OECD does as well).
  - Where employed, wealth tax revenue is not significant due to high exemption thresholds and widespread evasion and enforcement challenges (Kopczuk 2019; Advani and Tarrant 2021).
  - Switzerland: highest revenue yield globally at 1.4 percent of GDP over the 2018–20 period; Switzerland does not levy a capital gains tax and has high wealth concentration (Föllmi and Martínez 2017).
  - Existing modest and limited wealth taxes may not indicate effects of more comprehensive or higher wealth taxes.
- Emerging and developing economies:
  - Wealth taxes most common in Latin America; some introduced after COVID-19.
  - Wealth tax generates 0.35 percent of GDP on average in developing countries; historically it has rarely exceeded 0.1 percent of GDP.
  - Use of wealth taxes to foster tax enforcement: revenue administrations can observe assets (notably immovable property) more easily than income.
  - Several enforcement/monitoring practices:
    - Brazil and Indonesia: mandatory reporting of assets and liabilities on tax returns to check compatibility with reported income.
    - Thailand: tax authority can reassess individual income tax liability based on net worth.
    - Bangladesh: reported net worth triggers either income tax surcharge or wealth tax, whichever is higher.
- Al-Zakat:
  - A form of wealth tax paid by Muslims in some countries—generally 2.5 percent of net wealth above a threshold.
  - In Saudi Arabia (no individual income taxation) it is mandatory for individuals doing business and revenue enters a general “social budget”; in some countries voluntary and revenue tends to be earmarked.
  - Often voluntary or population-limited; not included in Table 1.
  - Note on base variation: While there is consensus on rate of 2.5 percent, the base definition varies (e.g., Malaysia’s ‘Zakat Harta’ base is mainly ‘earnings’ rather than stock of wealth).

### Box 2. Taxes on Specific Types of Wealth — Key points
- Real property taxes differ fundamentally from comprehensive wealth taxes:
  - Cover only one type of asset.
  - Do not allow deduction of debts (including mortgages), so they can apply even when net wealth is minimal.
  - Serve other purposes (local government finance) and are efficient and growth-friendly (Johansson and others 2008).
  - Can be designed progressively with exemptions for modest homes.
  - Merits: immobile, visible, easier to enforce; luxury properties unlikely to go undetected; repossession possible in case of non-payment.
- Limitations of partial wealth taxes:
  - Many wealth taxes exclude nonfinancial assets (household items, infrequently-traded art), contributing to low revenues and declining use (Perret 2021).
  - Narrow taxes covering conspicuous consumption (luxury vehicles, vessels) or certain financial assets have low revenue yield and invite avoidance by holding wealth in untaxed forms or indirectly.

### Key Statistics and Table Highlights (selected)
- Wealth tax empirical example: 1 percent rate with £500,000 threshold → about 18 percent of wealth taxpayers face tax bill > 10 percent of income and liquid assets; excluding pension wealth → 3 percent.
- Global top 500 combined wealth in 2023: $7.7 trillion.
- Implied annual income at 5–10 percent returns: $385–$770 billion.
- EU Tax Observatory estimate: 2 percent wealth tax on ~2,800 billionaires → about $250 billion (0.2 percent of world GDP); 30 percent of those billionaires in the United States.
- Saez and Zucman revenue estimate for Senator Warren proposal (top 400 families): $49 billion.
- Switzerland wealth tax revenue: 1.4 percent of GDP (2018–20 average).
- Average wealth tax revenue in developing countries: 0.35 percent of GDP; historically rarely exceeded 0.1 percent of GDP.
- Al-Zakat typical rate: 2.5 percent.

*Source: IMF staff compilation using PwC, IBFD, and EY tax guides.*

### 69.      This section considers wealth transfers through inheritance or gifts. Some assets are also subject

### Estate, Inheritance, and Gift Taxes

### Overview
- Transfer taxes on wealth can be levied on inter vivos transfers (gift tax) or on transfers at death (inheritance tax or estate tax).
- Two basic forms at death:
  - Inheritance tax: levied on the recipient (recipient based).
  - Estate tax: levied on the transferor or their estate (transferor based).
- Tax bases typically include either worldwide net assets of a taxpayer with sufficient nexus or assets situated in the jurisdiction regardless of nexus.
- Rates are typically applied on graduated rates; inheritance rates may also depend on degree of relationship to the transferor.

### Efficiency considerations
- Recipients: gifts and inheritances are akin to lump sums and mainly have an income effect that is likely to reduce labor supply.
- In dual income tax systems, there is no further effect; in comprehensive income tax systems, new capital income from inherited wealth can push taxpayers into higher tax brackets and generate a substitution effect that reduces labor supply. Taxing wealth transfers can mitigate these effects and strengthen labor supply.
- Transferors: behavioral responses matter because transferors control saving and bequest decisions.
  - Purely accidental bequests (e.g., dying earlier than planned) imply no effect on transferors’ working and saving decisions and could be taxed at high rates with no efficiency cost.
  - Purposeful bequests (strategic or altruistic motives) generate two opposing effects:
    - Substitution effect: transferors may work and save less because part will be taxed before passing on to heirs.
    - Income effect: transferors may work and save more to pass on a given amount after tax.
- Empirical evidence: no consensus on magnitude of behavioral effects over long horizons; accumulation of wealth even by people without children suggests that negative effects on working and saving may not be large for many individuals.
- Tax planning effects are likely stronger because taxpayers have time to plan.

### Equity considerations
- Empirical estimates of inherited wealth share vary:
  - Davies and Shorrocks (2000) suggest a reasonable estimate of 35–45 percent.
  - Piketty and Zucman (2015): in 2010, inherited wealth shares ranged from just over 50 percent in Germany to close to 60 percent in the United Kingdom.
  - Acciari and Morelli (2020) (Italian data): inheritances increased from 8.4 to 15.1 percent of GDP between 1995 and 2016.
  - UBS (2023) report: new billionaires acquired greater wealth through inheritance than entrepreneurship.
- Taxing inheritances can affect wealth inequality and dynastic wealth buildup, but theoretical effects are ambiguous:
  - If inheritances are less unequal than existing wealth or split among many heirs, inheritances can reduce wealth inequality; a flat inheritance tax could counterintuitively worsen distribution in some cases.
  - Design responses: use sufficiently large personal exemptions and progressive rate structures; use tax revenues for redistribution, poverty-reducing spending, or growth-enhancing tax cuts to improve income distribution.
- Inheritance tax vs estate tax:
  - Inheritance tax is preferable for equity because it is linked to post-transfer wealth distribution; estates split across many heirs are taxed less under inheritance taxes.
- In consumption tax systems, taxing bequests treats them as consumption and restores equivalence between consumption and lifetime income.
- Optimal inheritance tax (Piketty and Saez 2013):
  - Optimal tax rates are higher when bequests are relatively inelastic, bequest concentration is high, and preferences for redistribution are strong.
  - Calibrations for the United States and France indicate optimal tax rates could be 50–60 percent, and even higher for top bequests.

### Tax planning and anti-avoidance measures
- Common avoidance routes:
  - Inter vivos gifts: giving assets before death; well-integrated gift taxes are crucial backstops.
  - Separation of ownership and returns:
    - Trusts (common law): assets transferred to a trust, grantor may retain benefit flows; policy responses include treating transfers to a trust as a bequest, taxing transfers to a trust, or subjecting trusts to a one-off tax every 30 years or an equivalent annual tax.
    - Usufruct constructions (civil law): transfer asset ownership while retaining right of use or income; taxing accrual toward full ownership value would close this loophole.
  - Preferential treatment for certain assets (e.g., business assets) can create avoidance by holding private assets in corporate shells; options include abolishing preferences or applying anti-avoidance rules limiting preferential rates to assets more than 90 percent used for business purposes.
  - Minor avoidance: investing in children’s earning capacity (education) rather than wealth transfers—limited by maximum education costs and possible positive externalities.

### Inheritance and estate taxes in practice
- Prevalence and revenue:
  - In the OECD, about two-thirds of its member states have a tax on wealth transfers, yielding on average about 0.2 percent of GDP (0.5 percent of total tax revenue) in 2020.
  - The use of wealth transfer taxes has been declining, with nine OECD members having abolished such taxes since the 1970s.
- Cross-country variation:
  - Inheritance taxes are far more common than estate taxes and are almost always accompanied by gift taxes.
  - Rate and base complexity: exemptions, preferential treatments, and rate schedules vary widely.
  - Summary statistics:
    - Top rates are at or below 10 percent in more than half of countries, but much higher in the upper third of the distribution, reaching a maximum of 55 percent in Japan.
    - Exemptions are generally not very high (median of around $20,000), but can exceed millions of dollars in some countries; the US exemption is $12.9 million (noted as truncated in the figure).

### Key policy recommendations and implications
- Distinguish “how much” to tax from “how” to tax:
  - The note argues that returns to capital generally should be taxed for equity and possibly efficiency reasons; country-specific choices determine tax levels.
- Prioritization:
  - Improve capital income taxation before considering net wealth taxes; improving capital income taxes tends to be both more equitable and more efficient.
- Strengthening capital income taxes involves more than rate increases:
  - Consider higher tax rates where capital income tax rates are relatively low.
  - Where administrative capacity permits, adopt a comprehensive approach to taxing labor and capital income.
  - Address loopholes, notably the undertaxation of capital gains:
    - Remove reduced tax rates, exemptions, or downward adjustments for capital gains.
    - Ensure wealth transfers are treated as capital gain realizations.
    - Consider moving toward taxation on accrual, with safeguards for liquidity constraints and valuation difficulties.

*Source: IMF | How to Note.*

### 94.      There can still be a case for using a net wealth tax to complement capital income taxes,

### There can still be a case for using a net wealth tax to complement capital income taxes,

### Rationale for a targeted net wealth tax
- Such additional net wealth tax can address limitations of existing capital gains taxes (such as deferral of realizations).
- It can provide an additional tax to discourage accumulation of capital beyond some level.
- Feasibility depends on each country’s constitution.
- Application concentrated only on very high wealth levels is highlighted as particularly relevant.

### Taxing capital transfers (gifts and inheritance)
- Taxing capital transfers through gifts or inheritance provides another opportunity to address wealth inequality.
- The efficiency costs of such taxes are modest.
- The key challenge is tax avoidance facilitated by loopholes, the most obvious being gifts inter vivos, which in many countries are taxed more lightly.
- Inheritance taxes are better aligned with redistribution than estate taxes since exemptions and rate structures can account for the circumstances of the heirs.

### Enforcement, information sharing, and technological challenges
- Progress in information sharing during the last decade has enabled better enforcement of capital taxes at the top of the income distribution.
- Countries should continue tackling international tax avoidance and the remaining loopholes irrespective of the chosen tool to better tax the affluent (and even without new or higher taxes).
- Authorities need to keep up with technological advances, such as crypto assets and artificial intelligence, which could introduce new avoidance and evasion opportunities.

*Source: IMF | How to Note, paragraphs 94–96.*

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_Source: https://www.imf.org/-/media/files/publications/howtonotes/2024/english/htnea2024001.pdf_