In two studies looking at taxes on net wealth and savings, the OECD has identified ‘significant scope’ for reform.
The reports – Taxation of Household Savings and The Role and Design of Net Wealth Taxes – argue that taxes are among the most effective tools governments have for reducing inequalities and promoting inclusive growth.
“While countries do not necessarily need to tax savings more, there is a lot of room to improve the way countries tax savings,” said Pascal Saint-Amans, director of the OECD’s centre for tax policy and administration.
“There is also a very strong case to be made for addressing income and wealth inequality through the tax system, notably by ensuring effective taxation of capital.
“Governments have an opportunity to increase both the efficiency and fairness of their tax systems.”
Taxing net wealth
The Role and Design of Net Wealth Taxes assesses the case for and against the use of net wealth taxes to raise revenue and reduce inequality.
Stopping short of calling for its introduction, the report found there may be scope for wealth taxes in countries where the taxation of capital income is low or where inheritance taxes are not levied.
The report argues that to understand the efficiency of net wealth taxes requires taking the rest of the tax system into account.
There is a stronger justification for levying a net wealth tax in countries with dual income tax systems that tax capital income at low and flat rates or in countries where capital gains are not taxed, eg Switzerland.
In those countries, the double taxation effect and the cumulative distortion imposed by a net wealth tax are less evident.
A similar argument can be made for countries that do not levy taxes on inheritances, like Norway and New Zealand, although the effects of a low net wealth tax are likely to be much stronger than those of an inheritance tax, the report notes.
It suggests a wealth tax should have a high threshold, although a lower threshold could be justified in otherwise low tax jurisdictions without broad-based personal capital income taxes, including capital gains taxes, and well-designed inheritance and gift taxes.
Taxation of Household Savings provides a detailed review of the way savings are taxed in the 35 OECD countries and five key partner countries; Argentina, Bulgaria, Colombia, Lithuania and South Africa.
It found large differences within countries in the tax treatment of a range of assets, such as bank accounts, bonds, shares, private pensions and housing, and points out that tax rules – rather than pre-tax rates of return – are likely driving some savings decisions.
Analysis of asset-holding patterns across income and wealth levels shows that differences in tax treatment of certain types of savings often favour wealthier taxpayers over poorer taxpayers.
For example, poorer taxpayers tend to hold a larger share of their wealth in relatively high-taxed bank accounts than wealthier taxpayers, who tend to hold a greater share of their wealth in investment funds, pension funds and shares, which are often taxed at lower rates.
Faced with these outcomes, the report outlines a range of opportunities for greater tax neutrality across different types of savings to foster more inclusive growth. At the same time, it recognises the case for preferential tax treatment to encourage retirement savings.
The report also finds that opportunities may exist for some countries to increase or reintroduce ‘progressivity’ in their taxation of savings as a result of the recent move towards the automatic exchange of information between tax administrations.