FULL IMF PAPEPER: Taxing Our Way out of—or into?— Trouble  pdf

Box 6. a One-Off Capital Levy?

The sharp deterioration of the public finances inmany countries has revived interest in a “capital levy”—a one-off tax on private wealth—as an exceptionalmeasure to restore debt sustainability.1) The appeal isthat such a tax, if it is implemented before avoidance
is possible and there is a belief that it will never berepeated, does not distort behavior (and may be seenby some as fair). There have been illustrious supporters,including Pigou, Ricardo, Schumpeter, and—until hechanged his mind—Keynes. The conditions for successare strong, but also need to be weighed against the risksof the alternatives, which include repudiating publicdebt or inflating it away (these, in turn, are a particularform of wealth tax—on bondholders—that also falls onnonresidents).

There is a surprisingly large amount of experience todraw on, as such levies were widely adopted in Europeafter World War I and in Germany and Japan afterWorld War II. Reviewed in Eichengreen (1990), thisexperience suggests that more notable than any loss ofcredibility was a simple failure to achieve debt reduc-tion, largely because the delay in introduction gavespace for extensive avoidance and capital flight—in turnspurring inflation.

The tax rates needed to bring down public debt toprecrisis levels, moreover, are sizable: reducing debtratios to end-2007 levels would require (for a sample of15 euro area countries) a tax rate of about 10 percenton households with positive net wealth.2)

1 As for instance in Bach (2012).

2 IMF staff calculation using the Eurosystem’s HouseholdFinance and Consumption Survey (Household Finance andConsumption Network, 2013); unweighted average.