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Compare and contrast a wealth tax and an income tax. Evaluate how the differences between these two taxes might impact individual behavior Answer

Wealth and Taxation Please respond to the following:

  • Compare and contrast a wealth tax and an income tax. Evaluate how the differences between these two taxes might impact individual behavior.
  • Compare and contrast the following: property taxes, land taxes, and property transfer taxes. Choose the one type that impacts individual life the most. Provide an example to support your choice.
  • Compare and contrast a wealth tax and an income tax. Evaluate how the differences between these two taxes might impact individual behavior.

 

Ans: The income tax is based on current earnings in a year, while a wealth tax is based on the accumulated value of income that is saved and invested in real property and other taxable assets. The wealth tax has a lower and less direct impact on labor choices than the income tax because the tax can be avoided by shifting consumption patterns. The wealth tax is less comprehensive than the income tax because wealth is harder to assess and is generally focused on a few specific areas, such as property. This creates shifts away from these types of investment.

Property taxes are levied on the value of property, which generally increases as it is developed, where as land taxes are based on the land regardless of how it is developed. Property taxes can discourage development of land and shift the distribution of what land is developed. Transfer taxes tax more things than either land or property (they include transfers of land and property as well as other forms of wealth), but are only placed on those inheriting the wealth and are collected once.

Wealth is a stock, because it refers to the value of the assets an individual has accumulated as of a given time. Wealth taxes help to correct certain inevitable problems that arise in the administration of an income tax. All capital gains, realized or not, belong in the tax base of a comprehensive income tax. In practice, it is often impossible to tax unrealized capital gains. By taxing the wealth of which these gains become a part, perhaps this situation can be remedied. Now, it is true that wealth at a given point in time includes the sum of capital gains and losses from all earlier years. However, there is no reason to believe that the yield from an annual wealth tax approximates the revenues that would have been generated by full annual taxation of unrealized capital gains. The higher an individual’s wealth, the greater his or her ability to pay, other things including income being the same. Therefore, wealthy individuals should pay higher taxes. Wealth taxation reduces the concentration of wealth, which is desirable socially and politically. Most important wealth tax in the United States is the property tax. A wealth tax is based on the total value of all assets, including home ownership; cash, bank deposits, money funds, and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts. A wealth tax is a tax on capital and land at a flat rate. The difference with income tax is that it is a tax on the flow of assets (a change in stock) and a wealth tax is imposed on the accrued purchasing power of stock. People who are wealthy have an ability to invest which increases their future purchasing power and can offset some of the taxes. People who are taxed based on income have fewer saving and cannot invest as much as a wealthier person can.

References:

Harvey S. Rosen. (2004). Public Finance, 7th Edition. The McGraw-Hill Companies.

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