A tax on wealth does not mean growth

There is a recurrent idea in the debate on how to help Italy come out of the financial crisis: the tax on wealth, or equivalent measures. Especially bankers like the idea. That is not surprising because banks and insurances have their portfolio full of public securities.

A withdrawal on the wealth of families to help the State face its debts, if it were successful, would first of all benefit the financial intermediaries that today are sinking fast.
But one judges ideas by examining their merits and not based on the interests of who proposes them. Is it really a good idea to tax the wealth of families? There are two ways of conceiving it. The more suggestive and popular is a one-off withdrawal on wealth, which allows to rapidly and significantly knocking down public debt. The net wealth of Italian families is some five times higher than national income, against a public debt that is 120% of GDP.

Why not solve the problem once and for all, and reduce the debt with a tax on wealth? Thanks to the just-approved budget law, in a few years we will be close to break-even. Also if the public debt had been much lower, we would have finally reached sustainability levels.
The reasoning is suggestive, but superficial. The wealth of families is made up of many items, some of which are completely not liquid like land, inventories, provisions by companies and insurances to face commitments towards families, trade receivables. Other items, even if liquid, like postal savings, are really in the hands of small private investors that cannot really live without them. Excluding these items, the wealth of families is much less exorbitant. According to Bank of Italy estimates, in 2009 the more liquid wealth (Treasury and non-Treasury bonds, listed shares and investment funds) totaled some 1000 billion euros, or 68% of National income. It is not little, but also applying an average tax rate of 30% (that would correspond to a withdrawal that is much higher on the richer, because it would be unthinkable to apply these rates to small private investors), the public debt would fall from 120% to 100% of GDP.

In addition to these forms of wealth, there are bank deposits (650 billion euros), securities and investments in non-listed firms (500 billion euros) and residential property owned by families (whose overall value is of some 1300 billion euro, excluding primary homes). But these items, even though taxable, are not liquid (real estate and stakes) or are necessary to fund daily consumption (deposits). Even thinking of an average tax rate of 10% on these forms of wealth, the State would collect another 240 billion euros, or some 15% of GDP.
In short, as aggressive as it may be, an extraordinary withdrawal on wealth cannot knock down debt much below 90% of GDP. But at those levels, Italy would remain a Country at risk. When the crisis began in 2010, Spain's public debt was at 60% of GDP and in Portugal it was slightly over 90%. The risk would become certainty if one thinks of the recessionary effects on the confidence of citizens. Italians already have little respect for national institutions. A surprise withdrawal of these proportions, instead of resolving the situation, could prompt a spiral of lack of confidence, recriminations, a flee towards the grey economy or abroad with unpredictable outcomes and from which it would be difficult to recover.

However, there is also a second way to conceive a tax on wealth: like a regular withdrawal, with a modest tax rate in the context of a reform project centered on re-launching growth and legality. With this second way of seeing things, the main objective would not be to make money to knock down debt, but rather to create a political consensus around an overall project to reform the State and the economy. To re-launch development, a profound transformation of the economy and the public administration is needed, and some categories have to give up their privileges. A tax on wealth would allow spreading the sacrifices on who can most afford it. Furthermore, an annual withdrawal would naturally go along with a fiscal reform that reduces social contributions and would set the base for a project to fight tax evasion and the grey economy that is based on changes in wealth and not just at assessments on income.
Considering the consistency of Italian wealth, even a modest tax rate (for example five per thousand) would collect significant resources, without creating liquidity problems and without recessionary effects.
As long as the tax rate, however, remains limited. In the past, other Countries introduced taxes on wealth with rates that progressively grew also very rapidly. The result was the flee of capital abroad and tax elusion. Sweden, for example, recently abolished a tax on wealth that reached up to 2.5% because the revenue was trivial and it mainly hit the middle class instead of the richer.

In conclusion, it is useless to delude ourselves: it is not a tax on wealth that will allow us to come out of this crisis. On the contrary, if abused it could open up uncertainties that are even more serious. At the most, it could help in the adoption of reforms, like those that are really crucial to give back economic prospects to our Country. Italy can come out of this crisis only if it resumes growing. But what we have to discuss is how to reach this objective, not whether or not and how much to tax the savings of Italian families.

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