null The redistributive effects of wealth tax

The redistributive effects of wealth tax

José María Durán Cabré and Alejandro Esteller Moré, Universitat de Barcelona & Institut d’Economia de Barcelona

A wealth tax can help to reduce the high degree of inequality in wealth distribution. But Spain’s wealth tax has several major shortcomings that significantly reduce its capacity for collection and redistribution and even question the very existence of the tax. We have specifically calculated the effects of the residence and family business exemptions and joint income and wealth limit. The short-term redistributive effect is minor, but it has a much greater impact if analysed in the long term, which is more in line with taking into account the process of wealth accumulation. The tax can be reformed and structured in a simpler, more neutral manner without losing its capacity for collection, but this requires the elimination of special treatments that are a major source of tax avoidance.
Key points
  • 1
       Wealth is very unevenly distributed and tends to be concentrated in the hands of a few. Although Spain is not one of the countries with the highest degree of wealth inequality, the economic crisis has led to a considerable increase. The accumulated wealth of the richest 1% of households increased by almost 7 percentage points between 2005 and 2014.
  • 2
       Wealth provides an additional payment ability to that of income, so a wealth tax that also helps to reduce inequality can be justified. But its correct legal structure is essential.
  • 3
       The current revenue from this tax is only 44.60% of what could be obtained if all assets were to be valued at market prices and non-compliance was avoided. This major difference undoubtedly weakens the effective redistributive capacity of the tax.
  • 4
       The family business exemption and joint income and wealth limit provided for in Spanish wealth tax greatly reduce its redistributive capacity. The richest households obtain average savings of slightly more than 3.8 million euros and the revenue that is not obtained represents almost 73% of potential revenue. But this limit arises from a constitutional requirement to avoid the confiscatory nature of taxes.
  • 5
       The redistributive effect of the tax is weakened in the short term, but it has a much greater impact in the long term, a view that is in line with the process of wealth accumulation. If the current tax were to be applied at its full potential, the wealth of the richest 10% would only be reduced by 3.12% over 85 years.
  • 6
       The tax can be reformed and structured in a simpler, more neutral manner while maintaining the same level of collection if special treatments are eliminated, thereby helping to stop a major source of tax avoidance.

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José María Durán Cabré and Alejandro Esteller Moré , Universitat de Barcelona & Institut d’Economia de Barcelona

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