Once And For All—Why Capital Levies Are Not The Answer
IMF Blog, November 6, 2013
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- Authors: Michael Keen
- Published: November 6, 2013
Overview and central analogy
- Author: Michael Keen
- Date: November 6, 2013
- Core analogy: Leaving $40 on the kitchen table, waking to find $30 and a government note saying, “Thank you very much, we took $10 as a tax payment.” This illustrates the idea of a one-off capital levy and its appeal as a “non-distorting” tax.
The theoretical appeal of a capital levy
- A capital levy, as described, is a one-off charge on capital assets; the precise base is a matter for choice.
- The idealized appeal rests on two properties:
- It is difficult for taxpayers to reduce, avoid, or evade after it is imposed.
- It does not change relative prices if truly unanticipated and not repeated, so it is close to an “ideal” non-distorting tax.
- Equity appeal: Such a charge would naturally fall most heavily on those with the most assets.
Practical and credibility problems
- Two conditions required for a capital levy to be non-distorting:
- It must be unanticipated.
- It must be believed certain not to be repeated.
- Real-world impediments:
- Introducing and implementing any new tax takes time, making secrecy difficult.
- Advance debate and announcement give time for assets to be moved abroad, run down, or concealed.
- The risk of future levies discourages saving and investment that generate future capital assets.
- Credibility costs: unanticipated levies can jeopardize confidence in future tax policy and lead to distortions beyond the immediate levy (for example, undermining expectations about deductions for depreciation or interest).
- Resulting effect: Rather than being non-distorting, capital levies are likely to be “very distorting.”
Historical experience and empirical findings
- Box 6 of the recent Fiscal Monitor contains an analytical description of capital levies and experiences (the IMF did not propose such a levy; the box reviewed the issue).
- Historical record summarized:
- Governments have rarely implemented capital levies.
- They have almost never succeeded in raising much revenue.
- Attempts have often been preceded by lengthy public debate and capital flight, sometimes associated with an inflation that eroded the underlying debt problem.
- Eichengreen finds only one successful example: Japan after the Second World War, where the tax was imposed by an occupying power and so was largely unconstrained by democratic norms and did not taint for future governments. This was the exception—emphatically not the rule.
Distinction from other wealth-related taxes
- A capital levy is one form of wealth tax but should not be confused with other taxes on wealth and transfers, including:
- Taxes on estates left at death.
- Taxes on inheritance and gifts.
- Taxes on real estate.
- Taxes on transactions in capital assets.
- The economics of these other taxes are quite different and, in some cases, much more attractive.
- The Fiscal Monitor discussed these alternatives and their economics, warranting separate consideration.
Source: IMF blog post “Once And For All—Why Capital Levies Are Not The Answer,” Michael Keen, November 6, 2013.
Content in this bundle
- iMFdirect博客: 一了百了——为什么资本税不是解决办法, 2013年 11月6日
- Fiscal Monitor: Taxing Times; October 2013