After reading this article you will learn about the arguments in favour and against capital levy.
Arguments in Favour of Capital Levy:
Usually the following arguments are put forward justifying capital levy:
1. During the war, the poor sections of the community suffer more in terms of risking their lives by joining the defence force and out of inflationary situation in the economy. Whereas the rich sections keep aloof from war efforts and accumulate larger and larger fortunes and speculative gains from war situations.
War brings a substantial appreciation in the value of capital and property possessed by the richer income community. Moreover, as business class, they reap big fortune out of war time inflationary situation.
Hence it is advocated that a capital levy on property and assets owners is a just method of distributing the burden caused by war. The propertied class emerging during war time has rich capacity to shoulder war debt burden than the poor section. Hence capital levy helps to distribute the burden of war debt equitably.
2. Capital levy helps the community to relieve from war debt at one single stroke. War debt is unproductive and is a dead weight on the community. Instead of imposing additional taxes for years, capital levy helps to wipe out the long term burden of war debt once for all, in a single stretch.
3. Capital levy is justified on the ground that it falls only on unexpected earnings, abnormal profit, unprecedently appreciated value of assets during war. Its burden falls only on property and asset owners, speculators, business class etc.
4. Capital levy as a tool of debt redemption is imposed immediately after the war. It is argued that it is the most convenient time for such a levy. Post war inflationary situation, generates economic fortunes and the same is reaped by businessmen and propertied class. The sacrifice undergone by the tax payers during inflation is comparatively low.
5. It is argued that capital levy function as an anti-inflationary device during post war period. It helps to take away the excess purchasing power accumulated during post war period in the hands of the richer income group.
6. Capital levy which is a once for all special type of tax helps to prevent the shifting of burden of war debt to future generation.
7. A single stretch repayment of public debt through capital levy provides psychological relief to the people.
8. It relieves the community from the adverse effect on incentive to work, save and invest resulting from additional tax burden for long years. If the war debts are not repaid immediately, the people will have to suffer additional tax burden for long years which may adversely affect their ability and incentive to work, save and invest. In this context, capital levy can be justified as the best method to wipe out war debt.
Moreover, the redemption of war debt through capital levy, provide relief to the exchequer from the heavy burden of debt charges. The funds saved can be better utilized for the development of social and economic overheads. Prof. Dalton even opined that capital levy should be used even for repaying peace time war debt.
Arguments against Capital Levy:
However, capital levy has been opposed by many fiscal theorists on the following grounds:
1. It is argued that capital levy will not help to distribute war debt uniformly. War time debt is an obligation of the entire society. Hence it is unfair to argue that burden of war debt should be borne by the propertied class alone.
2. There is an administrative difficulty involved in capital levy. It is difficult to find out a principle leading to the fair judgment of the value of property accumulated in war time. Hence, it is very difficult to tax property or wealth.
3. Capital levy may encourage the flight of capital to foreign countries.
4. Capital levy, being a levy on capital and other assets, retard the process of capital formation.
5. Capital levy also reduces the willingness to work, save and invest.
6. Sometimes, anticipating capital levy, the owner of these types of assets, may sell their assets towards the end of the war, to avoid the payment of levy. This will tend to depreciate the value of capital and may generate deflationary situation. Stocks, shares and other capital assets sold hurriedly towards the end of the war, generate unfavourable effect in the economy.
7. It may generate bureaucratic corruption and prejudice on the part of the government officials, in the process of assessing and evaluating the value of property.
8. Capital levy also retards the inflow of capital from abroad. The trustworthiness of the government will be shaken, because of this extra ordinary method of raising funds by penalizing the propertied class.
Moreover, the imposition of the levy may raise a genuine fear that it may be repeated in the future whenever the government wants to repay its fresh public debt. After the First World War some economists and governments seriously thought of a capital levy to repay the heavy debt incurred during the war.
The labour party in the United Kingdom stated in its election manifesto that “labour recognized the urgent need of lifting from the trade and industry of the country the dead-weight burden of the national debt”.
It therefore proposed the creation of a war debt redemption fund by a special graduated levy on fortunes exceeding 5000 pounds. Definitely, capital levy is a quick and equitable method of war debt redemption. But it can never be preferred superior to other means of debt redemption.
In this context, Mrs. Hicks has rightly remarked ‘A levy thus amounts to a major surgical operation on the body politic; it will either kill or cure and be very different in its effects from regular dosage or massage applied by the normal tax structure’.
Redemption of External Debts:
External debt can be repaid by accumulating foreign exchange. Generation of export surplus and minimization of import will help to accumulate foreign exchange. Utilization of foreign debt is also important in determining the foreign debt repayment.
Foreign loans should be prudently and economically utilized for productive activities especially in export oriented productive industries. This will help to accumulate export surplus and thereby to repay the foreign loans.
All the methods have its own merits and demerits. However, the government must properly plan its repayment schedule of public debt. It is advisable to rely upon the method of redeeming a part of the public debts annually. This will help to reduce the volume of mounting public debt burden on the present and future generation.