CAMBRIDGE – Should advanced countries implement wealth taxes as a means of stabilizing and reducing public debt over the medium term? The normally conservative International Monetary Fund has given the idea surprisingly emphatic support. The IMF calculates that a one-time 10% wealth levy, if introduced quickly and unexpectedly, could return many European countries to pre-crisis public debt/GDP ratios. It is an intriguing idea.
The moral case for a wealth tax is more compelling than usual today, with unemployment still at recession levels, and with deep economic inequality straining social norms. And, if it were really possible to ensure that the wealth levy would be temporary, such a tax would, in principle, be much less distortionary than imposing higher marginal tax rates on income. Unfortunately, while a wealth tax may be a sound way to help a country dig out of a deep fiscal pit, it is hardly a panacea.
For starters, the revenue gains from temporary wealth taxes can be very elusive. The economist Barry Eichengreen once explored the imposition of capital levies in the aftermath of World Wars I and II. He found that, owing to capital flight and political pressure for delay, the results were often disappointing.
Click here to read more.
© Project Syndicate
