A capital levy is a one-time tax on all wealth holders with the goal of
retiring public debt. This paper reconsiders the historical debate over the
capital levy in a contingent capital taxation framework. This shows how in
theory the imposition of a levy can be welfare improving when adopted to
redress debt problems created by special circumstances, even if its
nonrecurrence cannot be guaranteed. If the contingencies in response to which
the levy is imposed are fully anticipated, independently verifiable and not
under government control, then saving and investment should not fall following
the imposition of the levy, nor should the government find it more difficult to
raise revenues subsequently.
In practice, serious problems stand in the way of implementation. A capital
levy has profound distribution consequences. Property owners are sure to
resist its adoption. In a democratic society, their objections are guaranteed
to cause delay. This provides an opportunity for capital flight, reducing the
prospective yield, and allows the special circumstances prOViding the
justification for the levy to recede in the past. The only successful levies
occur in cases like post-World War II Japan, where important elements of the
democratic process are suppressed and where the fact that the levy was imposed
by an outside power minimized the negative impact on the reputation of
subsequent sovereign governments.
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