Herve 2015). Notably, taxation is a wide and diverse

 

 

 

 

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Income and Wealth Tax

Throughout history, taxation
systems have been a crucial element used to promote economic growth and
development as well as ensure sustainability of the commercial sector.
Furthermore, failed taxation systems have led to major economic setbacks, such
as inflation, low industrial growth rates, and economic stagnation. In this
regard, taxation systems are sensitive tools in an economy which can either lead
to its prosperity or collapse (Piketty, 2015). Notably, taxation is a wide and
diverse system, which addresses all economic sectors in a country, monarchy,
kingdom, or a trade union. One of the main influential sections of a taxation
system is the income and wealth tax because it addresses matters concerning
social welfare and personal development. From an economic perspective, wealth tax
commonly referred to as capital or equity tax can be described as the total
levy on the value of personal assets. Some of the commonly levied personal
assets include real estate, bank deposits, and assets in insurance, ownership
of unincorporated businesses, personal trusts, pension plans, and financial
securities. On the contrary, income tax is defined as the total levy on the
financial income generated by all entities within their jurisdiction. The law
requires every enterprise as well as individuals to file their tax returns
every financial year to determine whether they owe any taxes to the state or
they are eligible for a tax refund.

Given that taxation is the main
revenue collection approach that is used by governments to fund different
projects, such as public service and enhance regional development, governments
should develop realistic and tractable tax bills, which will lead to
socially-optimal capital taxation. However, in the last two decades, the
tractability of the taxation systems, especially in European Countries and the
United States, taxation of wealth and income has been undermined by various
objectives. Through literature review, this paper analyzes the constraints faced
by current taxation systems as well as their implications for the society and
the economy. From this analysis, conclusions and recommendations to improve and
stabilize taxation systems will be offered (Chakrabarti, Chakraborti,
Chakravarty, & Chatterjee, 2013). Notably, the objective of this paper is
to evaluate and analyze the policy uncertainties involved in wealth and income
tax bills and use economics principles to develop lasting solutions by
developing a tractable and realistic taxation model.

 

Characteristics of Income and Wealth Tax

 

Income tax is mostly preferred by
many individuals and business because it offers a series of deductions
including the mortgage interest, healthcare bills, education expenses, as well
as other welfare deductions such as insurance cover. There are several
categories of income taxes including the business, state and local, and
property and sales income tax. The business income tax is levied on the
enterprises’ economic earnings and is deducted from the firm’s calculated
profits. The state and local income tax are levied on the individual income
statement or in other words the monthly salary. On the other hand, the property
and sales tax is levied on assets and properties based on the auditor’s reports
or the assessed values.

Wealth tax is the money levied on
the wealth possessed on individuals in a given country. According to the wealth
taxation model, the tax is imposed on the person’s net worth, which is
accumulated on the net values of assets after deducting the liabilities owed
(Stiglitz, 2015). However, in the recent years, most countries, especially in
Europe and North America, have abolished the wealth tax and turned their
interest on the income tax. For instance, the United States does not charge
wealth tax but requires its citizens as well as local enterprises to file
income and property taxes. Although the wealth income is seen as unjust means
of taxation, it is the best model of enhancing equitable redistribution of
resources in an economy. 

 

Reasons for Supplementing Wealth Tax with Income Tax

 

One of the main reasons behind
abolishment of wealth tax by countries such as the US, UK, Germany, Finland,
Iceland, Sweden, Spain, and Luxemburg is the assumption of double counting in
the calculations. Some scholars argue that charging the income tax alongside
the wealth tax is double taxation because these assets are the contributors to
the final income statements. Notably, this statement is true to a lesser extent
because the wealth tax is only charged on the appreciation value or the
attributed economic activities. In this regard, the wealth tax does not apply
to unproductive or depreciating assets in the country (Piketty, 2015). On the
other hand, abolishing the wealth tax gives the wealthy a chance to accumulate
more un-taxable wealth through the appreciating value of the assets in the
country. Moreover, the wealthy are motivated to own more assets, which are not
turned into economically productive activities. As a result, the economic
productivity in the country declines as well as the industrialization factor.
Furthermore, the social welfare deteriorates due to inequitable redistribution
of resources.

 

Literature Review

 

According to Kayrouz, and Atala (2015),
the main objective of wealth and income tax bills is to promote equity, and
equality in the society. As such, the tax bills are supposed to be forms of
redistribution of wealth in the economy, where every region receives equitable
development. However, recent development such as replacement of gift, income,
and estate taxes with the progressive wealth tax does not promote equitable
wealth distribution. In most cases, economists measure economic inequality by
mainly focusing on the income statistics (Scarnicci, 2013). Through such
understanding, the progressive wealth tax bill becomes the best metric for
enhancing equitable development. However, charging the wealth tax on income is
a shallow approach because not all wealth will be harbored in an income
statement. In this regard, the progressive tax bill does not comprehensively
enhance equitable distribution of resources because the income statement is not
an efficient mode of measuring the equality in an economic region. In economics
perspective, wealth is a measure of accumulated assets; hence, the tax bill
should focus mainly on the overall assets accumulation but not the returns
inspired by the asset accumulation. According to (), a person may have a
high-income statement but a low accumulation of assets while another individual
might have a high accumulation of assets but a lower income statement. In this
regard, using the progressive tax bill to tax the two individuals will result
in inequitable wealth distribution because the wealthy will be favored.
Therefore, eliminating estate and gift taxes will widen the gap between the
poor and the rich in the economy, which will result in low living standards and
deteriorating social welfare. Markedly, Trump administration’s tax bill
abolished the gift and estate taxes by placing them under the income tax. In
the short run, there will be a short deviation on economic progress but in the
long run, the economy will suffer from inequitable distribution of resources
due to the progressively increasing gap between the wealthy and the poor.

A research conducted by Vermeulen, (2017)
shows that some of the tax systems are greatly influenced by the national
public debt. For instance, in 2013, the IMF introduced a 10% tax levy in the
European countries in the attempt of reducing their public debt. Notably,
increasing the tax levy on enterprises and individuals to repay the national
debt makes the country to lag behind in terms of development. According to
Marxist theory, the revenue collected from taxation should be used mainly for
development and promotion of social welfare. Therefore, the funds should to
support systems such as education and healthcare. Evidently, stabilizing the
health sector increases the economic productivity of a country due to the
resulting sustainable labor force. The increased productivity enables the
country to experience a favorable balance of trade; hence, the total revenue
collected by the federal government increases. On the other hand, investing on
education enables the country to become innovative and creative, especially in
the industrial sector. As a result, the country experiences high
industrialization rate, which raises the number of exports in the country. Karl
Marx argued that the revenue collected on increase in productivity, especially
the custom duty charged on the export and imports should be used partially to
supplement the budget deficit while the rest should repay the national debt. In
this regard, the country will experience a sustainable growth rate. However,
using the wealth and income tax to repay the national debt directly will
destabilize the economy by reducing the economic productivity and growth rate
in the short-run. In the long-term, the economy will be rendered stagnant or
contract a depression due to low production rate and high government
expenditure.

 Roxana-Manuela, and Daniela-Neonila (2014),
argues that optimal tax on capital income can be improved and perfected by
introduction of capital market imperfection in models with or without relative
economic inheritance. One of the main factors that make the optimal capital
income positive is its efficient mode of redistribution of wealth from the
owners of capital to non-owners of capital. The optimal capital model shows
that income taxation is only positive when the consumption is positively
correlated with savings. However, computing the numerical values for optimal
capital tax rates leads to imbalance wealth distribution in the society. With
regard to these metrics, the optimal capital model taxes the old highly, while
the young are taxed at a considerably lower rate. Thus, the model cannot be
used as reliable and responsive metric towards wealth distribution because it
bases its focus not on the economic activities but on the age group. Notably,
old age does not necessarily translate to wealth or young to poverty; hence,
basing the model’s argument on age brackets does not solve the equality and
equity problems.

In his research Gatt (2014), found
that wealth tax is the best means of promoting equity in regional development
because it is the most efficient way of reducing the gap between the wealthy
and the poor. By charging taxes on the assets held, will enable the government
to turn most of the unutilized resources in the country into productive
economic factors. For instance, charging tax on the huge amount of land owned
by the wealthy people in a country will inspire them to start economic
activities on these assets rather than leaving them idle. According to Milton
Freidman, a United States economist, abolishing the wealth tax in the country
has motivated the rich people to transform their cash into long-term assets
such as land and other real estate assets (Venkataraman, 2014). However, this
transformation of current assets into long-term assets reduces the country’s
economic power since these resources are not engaged in economic production.
However, the owners benefit from the consistent appreciating value of the
assets. Therefore, the state is left to suffer as the wealthy continues to
accumulate wealth in a more consistent manner. The poor on the other hand, do
not have many assets and most of their income is derives from the salaries,
wages, rents, and commissions, which are all liable to income tax deductions.
In this regard, abolishing the wealth tax gives the wealthy a chance to evade
taxes while the poor continue to suffer the wrath of high taxation bills.

 

Evaluation and Economic Analysis

 

Admittedly, imposing wealth tax is
one of the most influential means of promoting the efficient allocation of
resources in the country. One of the main factors that enhance the efficient
allocation and redistribution of wealth is contributed by the increased revenue
collected. By levying a tax on the property, assets, and gifts, the government
will acquire more revenue, which will be used to supplement budget deficit and
promote economic growth rate (Saez, & Zucman, 2016). Moreover, the
government will have more resources at its disposal, which will lower its
public borrowing rates. In this regard, the economy will be sustainable because
most of its revenue will be invested in long-term projects such as education
and healthcare. Therefore, the wealth tax will not only solve the economic
constraints in the short run but also enhance economic sustainability in the
long run.

Apart from enhancing efficient
allocation of resources, the wealth tax will also enable the country to
increase its productivity because taxing property owned such as on the real estate
will motivate the wealthy to turn their assets into productive activities such
as building rental houses or starting ranches or firms (Roine, &
Waldenström, 2015). In this regard, the country will experience an upsurge in
economic activities, which enhance high growth rate in the industrial sector.
Moreover, more job opportunities will be created due to the rising demand for
labor in the real estate assets. In general, turning the idle assets into
productive activities will enable the economy to grow and acquire
sustainability in the both short- and long-term basis.

On the topic of redistribution of
wealth and reduction of the wealthy and poor gap, the wealth tax will serve as
an efficient and responsive platform. Markedly, the revenue collected from the
wealth tax will reduce the budget deficit, which will relieve the pressure
mounted on the income tax (Jones, 2015). Therefore, by charging the wealth tax,
the economy will realize friendly and manageable income taxes, which will
enable the poor to start saving for investments. On the other hand, the wealthy
will not have an easy way out of conserving their wealth and will be pushed
towards generating more wealth through avenues such as industrialization.
Therefore, the economic activities in the country will increase at a high rate,
which will lead to more revenue collection. Furthermore, the increased amount
of savings will enable the citizens to engage in investment activities such as
entrepreneurship and stock exchange markets. In this regard, the social welfare
will be promoted as the standard of living in the country raises. In the long
run, the country will experience economic prosperity and high bargaining power
in the international markets. 

 

Recommendations

 

Although wealth tax suffers some
limitations, abolishing it does not lead to economic stability in a nation but
inspires more development constraints and inequitable distribution of
resources. In this regard, economists should devise a more inclusive model that
will harbor both income and wealth tax concurrently to not only enhance
efficient allocation of resources but also reduce the poverty rates in the
world. Notably, endorsing the income tax alone as the main form of wealth
distribution does not benefit the poor because they are mainly dependent on the
salaries and wages. On the other hand, the wealthy can evade taxes by investing
in the real estate businesses, where they buy a huge chunk of land, and leave
them unattended. Given that the land will appreciate in value, the wealthy are
assured of a consistent form of untaxable income while the poor are left to
suffer the wrath of the income tax.

It is the mandate of the federal
government to raise revenue through taxation systems, which will be used to
supplement budget deficits and finance projects such as healthcare,
infrastructure building, and education. Therefore, the government should use a
comprehensive and inclusive means of raising the taxes without favoring any
group in the economy. In this regard, the wealth tax should be imposed on all
the assets owned in the state regardless of whether there are economic
activities going on or not. This will motivate the asset holders to transform
them into productive entities. However, the taxation policies should avoid the
problem of double counting when charging both the income and wealth tax on
individuals and enterprises. In this regard, the country will experience a
swift and sustainable economic growth in both short and long run.

 

Conclusion

 

For any economy to function
sustainably, an efficient, responsive, and equitable taxation system must be
developed and implemented effectively. The main characteristics of an efficient
and responsive taxation system include equitable distribution of resources,
inclusivism, equality in levying mechanism, and sustainable on the cost.
Moreover, the metrics used to charge the taxes must be comprehensible and easy
to understand. In this regard, the government should charge affordable income
taxes to all the employed citizens to enable the state to raise enough revenue.
On the other hand, the assets, gifts, and property owner should also be liable
to taxation. For instance, charging the tax real estate appreciation value will
enable the government to accumulate more revenue. Moreover, appreciation levy
will encourage the asset owners to convert their assets into economic
production forms such as building rentals. Incorporating the wealth and income
tax in the national taxation system will reduce the pressure mounted on the
income tax, which will enable the poor to save due to the low rates of
taxation. As a result, the poor will start investing in entrepreneurship or
stock market avenues, which will reduce the gap between them and the rich in
the long run.

 

 

 

 

 

 

 

 

 

 

 

 

References

Piketty, T. (2015). About capital in the twenty-first century.
American Economic Review, 105(5), 48-53.

Roine, J., & Waldenström, D. (2015). Long-run trends in the
distribution of income and wealth. In Handbook of income distribution (Vol. 2,
pp. 469-592). Elsevier.

Jones, C. I. (2015). Pareto and Piketty: The macroeconomics of top
income and wealth inequality. Journal of Economic Perspectives, 29(1), 29-46.

Vermeulen, P. (2017). How fat is the top tail of the wealth
distribution?. Review of Income and Wealth.

Saez, E., & Zucman, G. (2016). Wealth inequality in the United
States since 1913: Evidence from capitalized income tax data. The Quarterly
Journal of Economics, 131(2), 519-578.

Stiglitz, J. E. (2015). New theoretical perspectives on the
distribution of income and wealth among individuals: Part IV: Land and Credit
(No. w21192). National Bureau of Economic Research.

Chakrabarti, B. K., Chakraborti, A., Chakravarty, S. R., &
Chatterjee, A. (2013). Econophysics of income and wealth distributions.
Cambridge University Press.

Gatt, L. (2014). Promoting positive state-society relations through
equitable taxation: Africa-wide-featured analysis. Africa Conflict Monthly
Monitor, 2014(Jan 2014), 10-15.

Venkataraman, M. (2014). Setting Circle Rates for Urban Property
Transactions. Browser Download This Paper.

Roxana-Manuela, D., & Daniela-Neonila, M. (2014). The Need For
Srategy In The Training Of Employees: A Condition For Improving The Human
Capital In Romania, As Eu Member. Management Strategies Journal, 26(4), 77-83.

Kayrouz, A., & Atala, I. (2015). The Economic Chaos In
Developing Countries: The Case Of Lebanon. European Scientific Journal, ESJ,
11(22).

Scarnicci, M. C. (2013). Determining National Income, an Endless
Journey Started 400 Years Ago. International Journal of Business and Social
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