An assessment of wealth taxes in a joint income-wealth perspective

Over the last decades many researchers and policymakers have made strong arguments for broadening the taxes on wealth and its returns. Although the theoretical literature on (optimal) wealth taxation is growing, there exists a large void in empirical research. In this paper we address this void by analysing the redistributive and budgetary impact of wealth taxes in six European countries. We use data from the Eurosystem Household Finance and Consumption Survey (HFCS) which have been included in the tax-benefit model EUROMOD. In a first step we analyse wealth taxes against their main tax base, i.e. net wealth. In a second step we adopt a more integrated perspective by studying taxes on income and wealth jointly and assessing their redistributive effects against a broader measure of ability to pay, i.e. the joint distribution of income and wealth. We show that existing wealth taxes do not achieve any significant redistribution. Although they are in most cases strongly progressive, the low redistributive effect is mainly due to their small size. Moreover, there is a lack of neutrality in the tax system with regard to the source from which households draw their financial living standard, income or wealth. Hence, existing wealth taxes score badly on both vertical and horizontal equity grounds.