Capital Levy
April 8, 2009
Overview Description
A capital levy is a form of taxation applied by the government wherein it takes part of the capital of any business or person, as distinguished from a business or personal income. In other words, it is a direct tax, charged concurrently on the capital resources of all persons who possess taxable capital in excess of a minimum set value, and paid in part out of capital resources. Note that it is a one-time payment accumulated once rather than annually as in most cases with other common tax.
The aim of capital levy is to capture a tangible portion of taxpayer’s wealth, to be able to facilitate the government cope with major unforeseen emergencies, to reduce public debt or to redistribute wealth for the overall economic growth and development. For instance, a capital levy of 60% on an individual or business with $200,000 net worth will pay $60,000 in tax, regardless of their amount of income.
Implementing Capital Levy
The confiscatory nature of taxing capital levy is more obvious than with income tax, hence making it difficult for the government to execute to its full effectiveness. Practically, there are serious troubles that get in the way of implementing capital levy, thanks to its unfathomable distribution results. In any democratic society, it is obvious that property owners who are subject to capital levy would resist adopting it and it goes without saying their resistance is sure to cause a delay.
As a result, it will discourage saving and offer a good incentive for capital flight. This will wear away domestic tax base and destabilize government finance, ultimately reducing the potential yield and allowing all special circumstances that provided for the justification for capital levy go back in the past. Thus, capital levy can only be successfully implemented in cases where urgent and important basics of a democratic process are concealed. It can also be effectively implemented when the capital levy is imposed by an outside power, which will minimize any negative impact on the reputation of subsequent governments.
It is believed that capital levies will be easier to implement in an economy where monitoring is easy and one whose government is transparent enough, to allay all fear of a moral hazard problem. A government can allay fears by committing to use proceeds from capital levies for example say to fund direct retirement, instead of increasing the overall government expenditure.
Opponents of capital levy argue that it is a deterrent to investment and savings but others argue that it only happens practically due to policy issues and the governance of a specific economy, but that it shouldn’t be the case theoretically.
Conclusion
Note that capital levy can actually raise the cost of debt service instead of reducing it. This is through increasing the ex ante interest rate which is normally demanded by lenders. In a typical economy, the private sector may punish the government for its non-payment on preceding implicit obligations, where punishment takes the form of penalty interest rates as a result of a default or unexpected capital levy.
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