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As the Covid-19 pandemic rages, governments have spent heavily to support their economies. The world economy’s fiscal position is projected to deteriorate to -7.9% in 2021. The collective fiscal position of advanced economies is expected to be -8.8% and emerging economies’ position is expected to reach -6.6%. Australia’s fiscal balance is expected to reach -8.5% this year, from -4.4% in 2019 and to be -2.0% in 2026.

Debt-to-GDP ratios are rising and is projected to reach 97.8% worldwide in 2021. For advanced economies it is expected to approach 121.6%, and for emerging economies to approach 64.3%. Australia’s debt-to-GDP ratio is expected to be 62.1% in 2021, up from 46.6% in 2019, and projected to increase to 64.3% in 2026.

There are several ways to address these imbalances. This blog revisits the possibility of a wealth tax.

Why is a wealth tax warranted?

Wealth inequality has been increasing for some time. The pandemic has made it worse. According to Oxfam, the combined wealth of the world’s top ten richest men increased by US$540 billion between March 2020 and December 2020; for the top 1,000 billionaires, it increased by US$3.9 trillion.

When examining the effects of Covid-19 on households, the Bank for International Settlements discovered the degree of inequality through its resiliency measure. This measures the number of periods during which households can cover subsistence consumption and their debt service burdens with liquid assets, in case of income loss. For instance, the bottom 20% of net wealth holders in the United States can survive 3 months without income; the middle 20% can survive about 1 ¼ years; and the top 20% can survive for approximately 120 years.

The bottom and middle 20% of Australian households are very similar to their American counterparts: about 3 months for the bottom 20% and 1 ¼ years for the middle 20%. The top 20% would need 25 years to deplete their liquid assets, without income, before dipping into their illiquid assets. While not as bad as the US, the wealth at the top end is growing faster than other deciles even before the pandemic.

The OECD’s Wealth Distribution Database indicates the top 1% of wealth holders increased their share of wealth from 13.3% in 2012 to 16.1% in 2018; the top 5% increased their share from 32.2% to 35.1% (2012 and 2018, respectively); and, the top 10% controlled 48.5% in 2018 (up from 44.9% in 2012). The share of the bottom 40% declined from 5.1% in 2012 to 3.8% in 2018.

Could a wealth tax render debt sustainable and provide support for the social safety net?

Historically, wealth taxes have not been very effective. One reason for this is that they are defined on net wealth (assets minus liabilities). The definition permits the use of debt to reduce net worth to avoid the tax. A gross tax would ensure a consistent source of revenue to honour debt service commitments. It would also enable a government to spend more freely in other areas such as aged care, indigenous communities, education, domestic violence, and initiatives to support a green transition.

The forms and ownership of private, gross assets should be cast widely so that the tax base would include bonds, stocks, machinery equipment, structures and real estate, savings accounts, and so forth.

The late post-Keynesian economist Michal Kalecki (1899 – 1970) argued that the financing of public expenditure needs to be made equitable in this manner so as to avoid distorting consumption and investment decisions. He argued that applying a tax rate to private, gross assets (‘wealth’) had the potential to generate enough revenue to cover the interest cost of the national debt, where the interest cost is the national debt times the interest rate.

National debt × interest rate = Gross assets × tax rate.

Therefore, the tax rate would be: (national debt x interest)/Gross assets.

The approach is equitable in the sense that everyone’s assets are subject to the tax. However, there could be exemptions for the poor, for owner-occupied dwellings (under a threshold) and for small businesses. It does not matter how individuals and firms acquired their assets. What matters is that they own assets.

What revenue would a gross wealth tax raise?

We can estimate the revenue by considering asset data. The United States has complete data on private gross assets for households, non-financial corporate and non-corporate firms and the domestic financial sectors. Household assets include non-financial assets (real estate, consumer durables) and financial assets (deposits, money market funds shares, debt securities, corporate equities, mutual fund shares, pension entitlements, equity in non-corporate business and so forth). Similarly, the assets of non-financial, non-corporate and corporate businesses and the domestic financial sectors can be decomposed into various non-financial assets and financial assets.

The current size of the national debt for the United States is US$28.7 trillion. Private assets are estimated at US$322.2 trillion (data obtained from the Fred Database at the St Louis Federal Reserve). The Congressional Budget Office forecasts the highest interest rate over the next 10 years for US government debt to be 3.15% (and net interest outlay projected to be US$345 billion). We use these figures for estimation.

With this information, the wealth tax rate is 0.28%. When applied to gross private assets, it yields revenue of US$904.0 billion. After funding the interest liability, this leaves US$559.0 billion for other outlays. With the stronger than anticipated recovery from COVID-19, the Congressional Budget Office has now projected the 2021 Federal tax revenue is likely to be closer to its 2022 forecast of $3,995 billion. The excess revenue from the wealth tax adds approximately 14% to forecasted revenue, which helps to keep austerity at bay. The revenue generated over a 10-year period not only reduces reliance on new borrowing but also reinforces the social safety net and funds green initiatives( see Schroeder (2021) for more detail.)

Data on private gross assets for Australia are incomplete. However, there is enough to make an initial estimate. Private gross assets for Australia for households is $14,691.8 billion (non-financial and financial), non-financial corporations’ assets (financial) are $1,707.8 billion and financial corporations’ assets are $10,402.4 billion. These assets sum to $26,802 billion. The national debt for 2020-21 is estimated at $963 billion. Let’s assume the interest rate is 3%.

With this information, the estimated tax rate is just 0.108% (($963 billion x 3%)/$26,802 billion). What is the impact for individual taxpayers? An owner of a 1-bedroom flat with a value of $2 million would incur a tax of $2,016. The estimated total revenue generated is $28.9 billion ($26,802 billion × 0.108%). Complete data on private assets would lower the wealth tax rate as the pool of assets will be larger. Assuming that the federal tax take is about $470 billion, the revenue from the wealth tax amounts to an additional 6.1%. Part is dedicated to servicing the national debt. After funding net interest outlay estimated at $14.1 billion, excess revenue is $14.8 billion.

The gross wealth tax establishes a mechanism for quickly raising funds for government in the event of an adverse shock to the economy. Additional funds can be obtained by raising the tax rate from 0.1% to 0.2%, say, or whatever is needed. The mechanism protects the social safety net from potential austerity measures in the wake of deficit spending. It also entails the added benefits of protecting the sovereign credit rating from downgrades and bolstering investor confidence.


A gross wealth tax can incorporate thresholds and exemptions. For instance, owner-occupied dwellings valued at $1.5 million or less could be exempted from the tax. All investment property would be subject to the wealth tax.

The ABS’s Housing Occupancy and Costs suggests that a conservative estimate of the value of investment property was approximately $1,000 billion in 2017-2018. Growth in the housing market since then suggests a current value of approximately $1,500 billion. As the value of residential property is approaching $10 trillion, then $8,500 billion pertains to owner-occupied dwellings. If half of this amount represents dwellings with a value less than $1.5 million each, we would reduce household assets by $4,250 billion, to $10,441.8 billion; private, gross assets decline to $22,552 billion. To raise the same revenue, the wealth tax rate on remaining gross assets rises to 0.128%.

Implementation of the tax could take place gradually, starting with high wealth holders. Payment plans could also be implemented for taxpayers who initially struggle with liquidity. The suggestion here is to set the tax at an initial rate 0.25% and adjust it every 3-5 years in light of changing economic conditions and better information on the size and distribution of gross, private assets.

What could the Australian government do with an extra $14.8 billion in a year?

The wealth tax would enable a national government to spend more confidently and without fear of austerity. It could add to existing expenditures on federal services, or be provided to states or municipalities to ensure they have the liquidity they need to service their debt burdens.

With a broader perspective on inequality, another possibility is to use a gross wealth tax to support a Universal Basic Income scheme. Initial estimates for such a scheme range between $103 billion to $126 billion per year. The wealth tax rate could be increased to about 0.5 to 0.7% to generate the funds to support this without threatening the viability of services already in place. The scheme would not only appeal to those already in poverty but to Australian youth who fear income insecurity and changing labor market conditions as artificial intelligence begins to roll through the economy.

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