EKN 310 Chapter 15 Notes
Taxation of Wealth
Wealth and Types of Wealth Taxes
Wealth as a base of taxation
• Wealth can be used as a tax base, meaning government can tax the value
of what people own.
• According to Bird (economist): wealth can come from:
§ Self-accumulation → saving and investing over time
§ Luck → inheritance, sudden increases in asset values, natural
advantages
Definition of wealth
• Wealth is the product of:
- accumulated savings
- investments
- assets that increased in value
- inheritances
- free gifts of nature
• Example: if someone
- buys shares that increase in value
- inherits a house
- owns land that becomes valuable,
• THEN their wealth increases even if they did not earn more salary.
• Types of wealth include personal wealth, human capital and company
wealth.
Personal wealth
• Personal wealth = the net monetary value of assets owned by a person
• Net value means: Assets − Liabilities
• NB: Liabilities must be deducted.
• Example: If a person owns a house worth R3 million & car worth R300 000
& investments worth R700 000
- Total assets = R4 million
- But they still owe R1.5 million mortgage
- Net wealth = R2.5 million
, Human capital
• Human capital refers to education, skills, experience and knowledge
• It is an intangible asset.
• Economists debate whether it should count as wealth because it has
value but it cannot easily be sold or transferred.
Company wealth
• Company wealth includes fixed capital, floating capital and financial
capital.
• Fixed capital: buildings, machinery, equipment
• Floating capital: inventory, raw materials, goods in process
• Financial capital: shares, bonds, financial investments
Taxation of wealth
Taxation of wealth studies the economic effects of personal net wealth taxes,
property taxes and capital transfer taxes.
Types of wealth taxes
1. Annual wealth taxes
o Taxes charged yearly on wealth.
o Examples: personal wealth taxes and company wealth taxes
o Usually based on total net wealth owned
2. Property taxes
o Taxes on land/buildings/improvements
o Usually paid annually to municipalities.
3. Capital transfer taxes
o Taxes imposed when wealth is transferred.
o Includes: estate duties, inheritance taxes, gift taxes
Why Tax Wealth?
Governments tax wealth mainly for:
1. Equity reasons
2. Efficiency reasons
3. Revenue and administrative reasons
Taxation of Wealth
Wealth and Types of Wealth Taxes
Wealth as a base of taxation
• Wealth can be used as a tax base, meaning government can tax the value
of what people own.
• According to Bird (economist): wealth can come from:
§ Self-accumulation → saving and investing over time
§ Luck → inheritance, sudden increases in asset values, natural
advantages
Definition of wealth
• Wealth is the product of:
- accumulated savings
- investments
- assets that increased in value
- inheritances
- free gifts of nature
• Example: if someone
- buys shares that increase in value
- inherits a house
- owns land that becomes valuable,
• THEN their wealth increases even if they did not earn more salary.
• Types of wealth include personal wealth, human capital and company
wealth.
Personal wealth
• Personal wealth = the net monetary value of assets owned by a person
• Net value means: Assets − Liabilities
• NB: Liabilities must be deducted.
• Example: If a person owns a house worth R3 million & car worth R300 000
& investments worth R700 000
- Total assets = R4 million
- But they still owe R1.5 million mortgage
- Net wealth = R2.5 million
, Human capital
• Human capital refers to education, skills, experience and knowledge
• It is an intangible asset.
• Economists debate whether it should count as wealth because it has
value but it cannot easily be sold or transferred.
Company wealth
• Company wealth includes fixed capital, floating capital and financial
capital.
• Fixed capital: buildings, machinery, equipment
• Floating capital: inventory, raw materials, goods in process
• Financial capital: shares, bonds, financial investments
Taxation of wealth
Taxation of wealth studies the economic effects of personal net wealth taxes,
property taxes and capital transfer taxes.
Types of wealth taxes
1. Annual wealth taxes
o Taxes charged yearly on wealth.
o Examples: personal wealth taxes and company wealth taxes
o Usually based on total net wealth owned
2. Property taxes
o Taxes on land/buildings/improvements
o Usually paid annually to municipalities.
3. Capital transfer taxes
o Taxes imposed when wealth is transferred.
o Includes: estate duties, inheritance taxes, gift taxes
Why Tax Wealth?
Governments tax wealth mainly for:
1. Equity reasons
2. Efficiency reasons
3. Revenue and administrative reasons
