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Thomas Piketty recently proposed a 2% wealth tax on net assets exceeding Rs 10 crore to reduce inequality in India. Given that several countries have implemented wealth taxes, it is crucial to examine their experiences and outcomes to draw lessons for India.
Great Success: Norway’s Wealth Tax Model
Norway’s wealth tax is widely regarded as successful. It applies a 0.85% tax on net wealth above NOK 1.7 million (~$200,000) and increases to 1.1% for wealth exceeding NOK 20 million due to an additional 0.4% state tax. The public supported this tax due to the country’s egalitarian ethos. The general populace perceives these taxes as a means to promote social equity and fund extensive public services, which are highly valued in Norwegian society. It further signifies the importance of ethics in economics as stated by Amartya Sen.
Norway’s wealth tax, contributing ~1% to GDP, sees low emigration due to strong public services and societal trust. A study found reducing the municipal rate from 0.85% to 0.35% increased average taxable wealth by 60%, showcasing wealthy individuals’ sensitivity to tax rates and financial behaviour adjustments.
Evidence suggests wealth taxes encourage savings, with studies showing each additional NOK in wealth tax raises annual net financial savings by 3.76 NOK, highlighting positive effects on saving behaviour.
Switzerland’s Wealth Tax: A Decentralized System Driving Wealth Dynamics
Switzerland’s wealth tax system is unique, with each of its 26 cantons setting its own rates, leading to significant variation across the country. There is no federal wealth tax, but wealth taxes account for 3.6% to 3.8% of total state income, making Switzerland one of the highest users of wealth taxes in the OECD.
The relatively low exemption thresholds mean a larger portion of the population is taxed, impacting reported wealth levels significantly.
Switzerland’s decentralized tax system encourages competition among cantons, with lower tax rates favouring wealth accumulation. A study found that a 1% reduction in wealth tax can increase reported wealth by 43% in six years, driven by factors like taxpayer mobility and housing market dynamics.
ISF Fallout: Lessons from France’s Wealth Tax Experiment
France’s wealth taxation history includes the Impôt de Solidarité sur la Fortune (ISF), a progressive tax introduced in 1989 and abolished in 2017. It targeted individuals with assets over €1.3 million, aiming to reduce inequality and fund social programs. Tax rates ranged from 0% for assets under €800,000 to 1.8% for wealth exceeding €16.79 million.
The ISF faced criticism for contributing to capital flight, with wealthy individuals leaving France in response to the tax. In 2006, around 843 individuals, primarily relocating to Belgium and Switzerland, emigrated, leading to an estimated €2.8 billion loss in potential tax revenue.
Despite its controversial nature, the ISF generated significant revenue, contributing €4.42 billion in 2007, or about 1.5% of France’s total tax receipts. However, the tax’s revenue was relatively low compared to its administrative costs, which were around €5 billion annually.
Spain’s wealth tax allows autonomous regions to adjust rates and exemptions. For example, the Madrid region has historically granted a 100% tax relief, effectively eliminating the wealth tax for its residents.
Argentina and Bolivia: Wealth Taxes as Economic Cushions
In 2020, Argentina introduced a one-time solidarity wealth tax during the COVID-19 pandemic, with progressive rates ranging from 1% to 3.5% on domestic assets and up to 5.25% on foreign assets. This tax raised $2.4 billion for pandemic relief and was initially seen as temporary, though it has since evolved. The wealth tax highlighted its role in providing financial support during crises. Similarly, Bolivia introduced the “Impuesto a las Grandes Fortunas” (Tax on Large Fortunes) in December 2020, targeting the economic impact of the pandemic, showcasing how wealth taxes can help address economic challenges during crises.
Way Forward for India
India’s previous experience with the wealth tax (1957–2015) was marked by inefficiencies, including numerous exemptions and loopholes, leading to low revenue collection despite high administrative costs. Finance Minister Arun Jaitley justified its abolition by emphasizing these challenges.
However, with advancements in technology, reintroducing a wealth tax targeted at ultra-high-net-worth individuals could be a viable option, ensuring the middle class remains unaffected.
Drawing lessons from Norway, the government should invest wealth tax revenues in qualitative improvements in health, education, and social capital to build trust and minimize tax migration. Promoting egalitarian ideals requires revisiting India’s spiritual and philosophical foundations alongside its constitutional values.
Insights from Switzerland highlight the need to account for wealth volatility and its ripple effects on asset portfolios when designing wealth tax policies. Meanwhile, Spain’s approach of offering exemptions in autonomous regions demonstrates how reasonable thresholds and targeted relief can mitigate risks of capital flight.
By balancing efficiency, equity, and innovation, India can create a wealth tax system that fosters redistribution while safeguarding economic stability.
These pieces are being published as they have been received – they have not been edited/fact-checked by ThePrint.