How to Tax Wealth

IMF How To Notes, March 8, 2024

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Tackling income and wealth inequality is at the top of the policy agenda in many countries.
The note discusses three approaches to wealth taxation:
- (1) taxing returns with a capital income tax,
- (2) taxing stocks with a wealth tax,
- (3) taxing transfers of wealth through an inheritance (or estate) tax.
The note concludes that taxing actual returns is generally less distortive and more equitable than a wealth tax.
Reform priorities should focus on strengthening the design of capital income taxes (notably capital gains) and closing existing loopholes.
Technological advances in tax administration—including cross-border information sharing—should be harnessed to foster tax compliance.
The inheritance tax is important to address the buildup of dynastic wealth.

Three distinct approaches to taxing wealth are evaluated: capital income taxes (returns), wealth taxes (stocks), and inheritance/estate taxes (transfers).
Taxing actual returns (capital income tax) tends to be:
- Less distortive than a wealth tax.
- More equitable than a wealth tax.
Wealth taxes (on stocks) are relatively more distortive and less equitable compared with taxes on returns.
Inheritance taxes play a specific role in addressing dynastic accumulation of wealth.
Closing existing loopholes in capital income taxation (notably capital gains) is a high-priority reform area.
Improvements in tax administration and cross-border information sharing can materially improve compliance.

Prioritize strengthening the design of capital income taxes, with particular attention to capital gains taxation.
Close existing loopholes that undermine capital income tax bases.
Leverage technological advances in tax administration to improve compliance, including cross-border information sharing.
Consider inheritance (estate) taxes as a targeted tool to address dynastic wealth buildup rather than introducing new wealth taxes that tax stocks directly.

Subject: Capital income, Capital income tax, Economic sectors, Financial crises, Income, Income and capital gains taxes, Income tax systems, National accounts, Tax policy, Taxes, Wealth tax
Keywords: capital gains, Capital income, capital income tax, estate tax, estate tax tax rate, Global, Income, Income and capital gains taxes, income inequality, Income tax systems, income taxation, one-off wealth taxes, tax administration, tax loopholes, tax planning, tax sensitivity, wealth inequality, wealth tax

How to Tax Wealth — Shafik Hebous, Alexander D Klemm, Geerten Michielse; IMF How To Notes; March 8, 2024.

How to Tax Wealth
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