The invisible income and the wealth tax
Should wealth be taxed with a progressive tax? The debate is international. Some warn that it may encourage the relocation of the wealthiest taxpayers; others defend it to reduce the concentration of wealth and complement the taxation of capital in the personal income tax (IRPF). But what is it supposed to complement, if savings returns are already taxed through the savings tax rate?
Salary, bank interest, or a distributed dividend enter the personal income tax immediately. In contrast, retained earnings in a company, accumulated returns in funds, and unrealized capital gains can remain outside of it for years. They do not necessarily escape forever: corporate profits are taxed through corporate income tax and the owner may pay tax later, when receiving a dividend or selling the shares. Deferring payment already entails a financial benefit. In some cases, even, the accumulated income may never reach the original holder's personal income tax: in transfers due to death, the decedent's personal income tax does not recognize the accumulated capital gain, the so-called "stepped-up basis at death."
This poses a problem of horizontal equity. Two people with similar resources may bear a very different current tax burden depending on the source of the income, the legal form of the investment, or the moment in which they realize the return. If less visible income is concentrated among the highest net worth individuals, this difference between sources also transforms into a loss of progressivity and therefore weakens vertical equity. The annual income taxed by the personal income tax does not, therefore, reflect the economic capacity of all taxpayers in the same way, much less that of the wealthiest.
Having microdata from wealth tax returns allows us to quantify this discrepancy. In a study using an anonymized sample that links wealth and personal income tax (IRPF) returns, we estimate what portion of a reference return on declared wealth does not appear in the IRPF that year. In 2023, within the top half of wealth tax filers, the visible portion decreases as wealth increases. Among the 0.1% of taxpayers with the highest wealth, only 18.6% is observed: the remaining 81.4% is income invisible to the IRPF. When we compare the IRPF quota expressed as a percentage of declared income plus invisible income, the tax burden drops from 29.8% between the 90th and 95th wealth percentiles, where invisible income is 20%, to 6.8% in the top group. It is, therefore, not just that the savings tax rate is taxed less than the general one in the IRPF: a growing part of the return does not even enter the tax return that year.
This loss of visibility also reduces the redistributive capacity of the IRPF. Among wealth tax filers, the observed IRPF reduces the inequality of reference resources by 0.43 Gini points. If all invisible income were to enter the savings tax rate that year, the reduction would rise to 1.73 points. I am not proposing any reform, but rather measuring how much progressivity is lost because the return does not reach the annual personal base of the IRPF.
It is here that the wealth tax can complement the IRPF: it taxes personal stock, regardless of whether the return has been distributed or realized that year. This is the theory. But, according to the analyzed data, the complement obtained is partial. Between the 90th and 95th percentiles, the wealth tax raises the joint burden from 29.8% to 33.9%; in the top 0.1%, from 6.8% to 10.9%. Therefore, the distance from the 90-95 percentiles remains 23 percentage points, and the profile continues to descend at the upper extreme.
The partial nature of this supplement does not respond solely to the level of tax rates. The design erodes the capacity of the tax precisely at the top. In the top 0.1%, on one hand, exempt wealth represents approximately 81.6% of the declared wealth, well above its weight in other percentiles. On the other, the joint limit between personal income tax and wealth tax eliminates 72.5% of the gross quota; between the 90th and 95th percentiles, it eliminates 48.6%. Therefore, increasing rates without redesigning these mechanisms does not guarantee more effective progressivity.
Certainly, the relevant progressivity is that of the tax system as a whole. As we have suggested previously, the corporate tax acts as a partial counterweight, but only on business profits. In an extension that integrates the three taxes, the joint burden of personal income tax, corporate tax, and wealth tax reaches 18.4% in the top group. If the personal taxation of the identified corporate component were immediate, the joint burden would reach 37.4%; with twenty years of deferral, it would be 28.9% in present value. It is a partial sensitivity, not an estimate of the entire deferral, which can also occur through investment funds, other vehicles, or unrealized capital gains. In short, to correct the loss of progressivity associated with invisible returns, the wealth tax can be a key piece. It is, however, not sufficient: a good design is needed, with a sufficiently broad base, consistent valuations between assets, and a specific response to real liquidity problems. Only in this way can it complement personal income tax without losing progressivity precisely where wealth is greatest.
