The ongoing debate around wealth tax, a concept often heralded by progressive thinkers, warrants a closer examination through the foundational principles of taxation. These guiding tenets, first articulated by economist Adam Smith in The Wealth of Nations (1776), remain as relevant today as they were nearly 250 years ago. Known as the “canons of taxation,” they provide a robust framework to evaluate the practicality and fairness of tax policies, including the contentious wealth tax.
Smith’s principles begin with the canon of equity, which asserts that taxes must be proportional to an individual’s ability to pay. As Smith famously stated: “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.” Wealth tax proponents argue it aligns with this principle by targeting those with significant financial resources. However, its opponents point to the challenges in assessing wealth equitably, given the opaque nature of certain asset classes.
The second principle, certainty, emphasizes that tax liability should not be arbitrary. “The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person,” Smith noted. This is where a wealth tax begins to falter. Calculating wealth, particularly for non-liquid assets like unlisted shares, gold, land, or cryptocurrency, presents significant challenges in transparency and accuracy.
Next is the canon of convenience, which calls for taxes to be easy to pay. Smith explained: “Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.” Wealth taxes, due to their complexity, often impose administrative burdens on taxpayers and authorities alike, violating this principle.
The fourth canon, economy, focuses on efficiency, advocating for tax collection methods that minimize costs to both taxpayers and the government. A wealth tax, however, is notorious for its high administrative expenses, from asset valuation to enforcement, which can outweigh its revenue benefits.
Subsequent economists expanded Smith’s list. Alfred Marshall introduced elasticity, highlighting the need for taxes to adapt to economic fluctuations, while Arthur Pigou emphasized neutrality, cautioning against taxes that distort economic incentives. Taxes must also adhere to simplicity, ensuring they are straightforward to understand and comply with, a criterion that wealth taxes often fail to meet.
Lastly, there is the emerging canon of feasibility, which underscores the importance of practicality. This is perhaps the greatest hurdle for a wealth tax. As wealth represents a stock rather than a flow, reliable and comprehensive data on asset valuations is scarce. Visible wealth, such as listed shares, is easier to tax, but excluding other forms of wealth risks inequity and economic distortions. For instance, a wealth tax disproportionately targeting stock market holdings could deter investment in an essential driver of capital allocation in India. Moreover, the specter of capital flight looms large, as individuals and corporations may relocate assets to jurisdictions with friendlier tax regimes.
While a wealth tax embodies the spirit of progressive taxation, it faces significant challenges in practice. As critics have observed, it remains high on idealism but low on pragmatism. For a sustainable and equitable tax system, adherence to foundational principles is essential, ensuring policies are fair, efficient, and economically sound.
