New Developments in the Taxation of Financial Income and Wealthy Individuals

In May 2021, the Select Revenue Measures Subcommittee of the United States House Committee on Ways & Means held a hearing titled “Funding Our Nation’s Priorities: Reforming the Tax Code’s Advantageous Treatment of the Wealthy.” In November 2023, the Senate Committee on the Budget held a hearing titled “Fairness and Fiscal Responsibility: Cracking Down on Wealthy Tax Cheats,” which addressed issues including tax enforcement. Drawing on the analysis and discussions in the U.S. congressional hearings in which financial resources and fairness of taxation are keywords, as well as the experiences of Japan and other countries in this area in recent years, this study explores the prospects for post-COVID-19 taxation of financial income and wealthy individuals. The reason for focusing on the U.S. experience and findings is that the U.S. (federal) tax system derives a substantial portion of its tax revenues from income taxes. In addition, timely discussions are carried out on the issue of how to restore the progressivity of the tax system in order to finance the bigger government in the post-COVID-19 era. This paper (1) analyzes the concentration of financial assets and income among the wealthy in Japan and the United States and the current state of distribution. (2) Then, it discusses institutional options to secure revenue and adjust distortion in the distribution of tax burdens. Options include the top-up minimum tax for the super-wealthy that Japan introduced in the FY2023 tax reform (applicable from CY2025), the additional tax (surcharge) for the super-wealthy, and a more ambitious proposal for mark-to-market taxation of unrealized gains being proposed by the Biden administration in the United States. Since financial income, which is statutory taxed more favorably than labor income, is heavily concentrated among wealthy individuals, this paper argues that changes in the way the wealthy are taxed can effectively address the problem of distortion in the distribution of tax burden without any changing taxation of financial income itself. In a post-COVID-19 economy, envisioning a tax system that efficiently and equitably raises funds to address priority issues and promotes inclusive economic growth became a common challenge for all countries. Focusing on wealthy individuals, what is the tax system based on ability-to-pay, how much progressivity should be restored in the tax system as a whole, and what are the institutional options for this? To what extent do these options contribute to the optimization of the burden? Also, what is the contribution to financial resources? These are the themes explored in this paper. Note on Recent Important Development: G20 Ministerial Declaration on Tax Cooperation at the G20 meeting in Brazil in July 2024, finance ministers adopted the G20 Ministerial Declaration on Tax Cooperation. This historic declaration reflects a unified commitment among G20 countries to enhance international cooperation on the taxation of the ultra-wealthy. In the years ahead, the growing international momentum for taxing the wealthy should be leveraged as a catalyst for stimulating domestic discussions on this critical issue.