Regular columnist John Cassar White concluded his excellent article ‘Whatever happened to inflation?’ with a very important position, viz that “it is high time that governments start to shift the burden of taxation from work to wealth”.

During the course of his concluding speech at the very successful conference held last week on ‘Sustainability of the Financial Sector in Malta’, Finance Minister Edward Scicluna also made a very short passing reference to the fact that the number of important international economists who are now squarely behind the concept of wealth taxation is indeed large.

But it is governments and politicians everywhere who keep speaking of the problems in making the change (rather than getting down to doing it!) that are delaying the change.

Under a wealth taxation based system, where workers see themselves taking home more of lesser taxed incomes, there exists the now undoubted potential of increasing productivity. Workers work harder because they keep ever more of what they earn.

Simultaneously, one sees reducing consumption inequalities. Compare this to much-talked about increases in minimum wages: these have proved to have little effect on the number of low wage jobs.   

Academia’s delving into and concern with wealth taxation has a long up-and-down historical record. There was an initial period when much faith was put into mere shifting of the tax burden (impact and incidence) from direct (e.g. income tax) to indirect taxation forms (VAT, sales, or purchases, etc).  Even when VAT was first introduced in Malta its then proponent, former minister John Dalli, often made the claim that with an annual ‘x’ rate of increase in VAT collection he would be in ever better shape to reduce income tax by ‘y’.  But those plans went up the chimney in the sense that today one of our major fiscal problems is the rampant evasion of VAT which takes place daily in these islands, with Gozo being especially notorious.

This reality, not restricted only to Malta, has inevitably spurred research into other alternatives. Internationally we today are at the stage where there no longer exist doubts about the efficiency gains to be made from wealth taxation. Certainly these are gains which can only be made if certain hard work is unashamedly undertaken before their introduction (e.g. detailed cadastes, or capital assets held data collection), but the alternative is only a situation of “use it or lose it”.

Inter alia, Guvenen et al (2019) from the US National Bureau of Economic Research, make this case for the taxation of wealth as opposed to income: “Under capital income taxation [the bulk of capital income is generally built over time through work] entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, on the other hand, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base and shifts the tax burden toward unproductuive entrepreneurs.

Clinging on to structures that simply refuse to move on from the past will not help the have-nots in the economy

“Furthermore wealth taxes reduce the after-tax returns of high-productivity entrepreneurs less than low-productivity ones, which creates a behaviourial savings response, which further shifts the wealth distribution toward the productive ones. Finally, the general equilibrium response of prices to wealth taxes can dampen the aggregate savings incentives, but its effect on reallocation is still in the same direction as the first two effects. The resulting reallocation increases aggregate productivity and output.”

Very wisely, Cassar White gets to the necessity of taxing wealth, as opposed to income, through a process of observation of how wage increases have remained low, and nowhere near the inflation of asset prices. With every day that passes central banks everywhere seem to be self-inducing their irrelevance, powerlessness, and inability to improve things through the exercise of monetary policy.

This today has become a function practically totally circumscribed to the areas of interest rates and, where applicable, exchange rates.

But everyone knows that those are not the only two realities of economies’ functioning. And if central banks cannot get their monetary policy imposing teeth into other economic disciplining actions, then actions like Draghi’s “anything to protect the euro”, et similia, will only amount to firefighting on home fronts and never on real nitty-gritty policies.

There was a time when the annual reports of all local banks would include in their copious notes details (both total amounts and percentages) of to what economic sectors the banks would be making their lendings. Users of such accounts would be able to know whether, and where, their bank is exposed in its lending practices. For example: do we have too much or too little of our local banks’ lendings going to the building and construction sector?

Such vital data now no longer appears, and one is led towards deducing that central banks no longer see themselves as able to impose (often used to be on a ‘nod and wink’ basis!) action that is closer to the ground than to the board rooms!

A general position that can be deduced is that overall economic policy cannot be profitably conducted if institutions operate in some sorts of separate silos structures. Whether it is inflation, whether it is the best fiscal methodology bias, or whether it is central banking that is also present where basic daily economic realities are concerned, clinging on to structures that simply refuse to move on from the past will not help the have-nots in the economy.

Dr John Consiglio teaches in the Dept of Banking and Finance of the University of Malta.

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