Thursday, April 2, 2020
John D. Stowe (Ohio University), Wealth Taxes and Capital Markets:
Wealth taxes have been adopted or considered as an adjunct to existing tax systems such as income taxes, property taxes, and consumption taxes. Discussions about a wealth tax are usually a mixture of political, social, and economic issues, with many of the published papers designed to serve an author’s agenda. The purpose of this note is to leave many of these issues behind and to focus on the effects of a wealth tax on capital markets.
- Wealth taxes, like any cash flow, are capitalized and incorporated into the valuation of taxed assets. Wealth taxes may apply to many asset classes, and we will focus on wealth tax effects on stock and bond valuation.
- Because the tax is imposed annually, the valuation impact can be a large multiple of the nominal size of the annual wealth tax rate.
- Taxed assets will have lower valuations and higher required rates of return. Because of this, in a market economy the impacts of the tax will not be limited to the persons paying the wealth tax but are shared across all capital market participants. Individuals will experience reductions in the values of their taxable accounts, their RAs and 401(k)s, and the funding of their pension plans. Corporations will have lower valuations and higher costs of capital. The government sector will realize lower property tax and capital gains tax revenues and increased interest costs on their outstanding debt obligations. Assets owned by domestic investors will have lower valuations than untaxed international investors, causing a shift away from domestic ownership of taxed asset classes.