Capital Levy 

This is a direct tax upon the capital rather than income of the tax payers.The government may retire its public debt by levying a heavy additional tax only once, or at the most twice. This special heavy tax to repay public debt is generally called a capital levy as it is assessed on the value of capital held by the rich people. Sometimes, when the heavy tax is levied on an index of ability other than capital, it is also known as special levy. It is also a capital levy over the sinking fund method it is that in the case of the latter method the government has to impose the burden of taxation to repay public debt over a period of years, whereas in the former case the burden of taxation is imposed once for all and, therefore gives some psychological relief to people that there will be no more taxation for the purpose of repaying debt. In times of war or emergencies, the money necessary for the redemption of the public debt is raised by imposing a special tax on capital. During and after the First World War, capital levies were frequently proposed and sometimes enacted either as a means of securing additional tax revenues or as a method of repaying government debts. 

Dalton recommended this method very strongly. It was advocated as a method of liquidating the unproductive war debts. Debt redemption by imposing a very high taxation on property has been advocated. They are usually advocated as a means of disposing of onerous debts. 

In the recent capital levies, certain property was often exempted, especially the property of less wealthy. The rates of the taxes were commonly progressive. It has sometimes been proposed that the capital levy should be laid only on wealth arising for war enterprise, but it would probably be impracticable to separate such wealth from all other property for taxation.

If such a capital levy were practicable, it might be utilised to provide enough funds to finance a war or some other emergency expenditure. But European experience with the capital levy shows that it could probably be employed only as a minor source of revenue, as suggested by Prof. A Comstyck.One of the best known capital levies was imposed by Germany in 1916 in the form of an emergency tax at rates that progressed from 10 to 65 percent on taxable capital. This had provided about 18 per cent of the total tax receipts in 1921, and then declined its importance. If a highly productive capital levy were used at the beginning of a war, it would lessen the need for borrowing and would tend to discourage the continuance of war, because the owners of the taxed property at least would immediately feel the effects of the war expenditures. In fact, it might have a demoralizing effect upon middle and upper income classes, as Keynes intimated.

The idea behind this is that increased levels of public debt are accompanied by mounting private wealth,which is increasingly concentrated on the wealthy elite. There is no burden on future generations because only existing wealth is subject to the capital levy.

Advantages of Capital Levy :

A capital levy, according to its advocates, would have several advantages.It would raise a large sum by a special property tax that might be assessed only once, although the tax might be paid in convenient instalments. A capital levy would fall heavily on the wealthy classes who generally have most of the resources to pay taxes. These classes usually buy large amount of government loans and a tax on their capital would compel them to bear the burden of the levy. A capital levy imposed in lieu of borrowing would tend to reduce debt and keep the budget in better balance. This tax should also, if collected at steeply progressive rates from property owners, tend to reduce inequalities in the distribution of wealth.

A capital levy could be employed to equalise the distribution of wealth on ethical grounds as weapon of economic warfare to combat over-saving and under-consumption, thus striking at what are popularly regarded as causes of economic instability. The proposal raises the issues of the capital levy primarily as a regulatory measure and of the validity of theory of business cycles that would call for its application.

As a result of the imposition of a capital levy, as R. N. Bhargava observes,it may be possible to reduce the level of taxation and this may give relief to earned income and may thus encourage work and enterprise. A very large national debt may also weaken the financial position of the government and may at some times make it difficult for the government to raise loans in an emergency situation when its financial needs may be very great. When a nation is engaged in a war, soldiers take lives for the sake of the nation and it may, therefore be necessary for political reasons to resort to a capital levy so that the sacrifice of soldiers and others during the war may be matched by the sacrifice of the capitalists who are asked to part with some of their capital to pay the public debt. It may, however, be noted that the payment of interest on internal debt is not a loss to the community. It is largely a problem of distribution. The government taxes one group of people in order to pay interest to another group, some of whom may belong to the former group itself. Since taxation is imposed in accordance with the principles of taxation and public expenditure is incurred in accordance with the principles of expenditure there is no inequity involved from the distributional view point in the payment of interest and the imposition of taxes to pay it. Further the advantage of reduction in public expenditure that used to be incurred in paying interest on the debt, would to a great extent, be balanced by a reduction in the future yield of taxes on income and wealth.

Disadvantages of Capital Levy :

However, as H.M. Groves mentioned, like the excess profit and the income tax the capital levy is weaker on its administrative side. Although the tax might be equitable, it is very difficult to apply. Probably, the most difficult part of a tax on capital is that of finding a fair value of property involved.

There are certain disadvantages of a capital levy or special levy which may produce extremely adverse effects on the economy. They force a relatively small section of the population to meet an expenditure that is theoretically undertaken for the general welfare. A general capital levy might also be so heavy as to exert a deadening effect upon initiative and enterprise and seriously penalize saving.

Another important disadvantage of capital levy is that it produces a concentrated burden on the community whereas in the sinking fund method the burden is spread over number of years. Thus, the capital levy is discriminatory because it imposes burden on those who own capital on that particular date and relieves those who are likely to acquire or build up capital in the future.

Besides as R.N. Bhargava observes, the capital levy may also hit industries by reducing the amount of capital that may be available for their use. So far as joint stock companies are concerned they will have to be exempted fromthe capital levy otherwise great inequity will result. If, however, the capital levy is imposed on joint stock companies it would adversely affect the operations of many of them as they would not be able to liquidate capital assets to pay the levy. This, in turn will produce adverse effect on national output and income. In the case of private business, the extent of hardship will depend upon whether the owners have any liquidating assets to meet the liability of their capital levy. Otherwise they will be forced to sell their businesses to people who are relatively less competent to manage them. It is sure that capital equipment will remain intact even after the imposition of a capital levy,but the existing owners may find it difficult to borrow in a dislocated money market and may be forced to sell their business at distress price to those who possess liquid cash but not business brains as the two do not always go together. The imposition of a capital levy may also dislocate the securities market as many owners of capital may be forced to sell their securities hurriedly to meet the tax liability. However, this difficulty could be overcome to a considerable extent if the government agreed to realize the capital levy in the form of securities or other assets. These could be passed on to a special institution to be created to hold such assets on behalf of the government and to liquidate them gradually so as to prevent the dislocation of the securities market.

Fiscal Policy and Redistribution of Income and Wealth :

In developed countries inequalities of income and wealth, while still substantial have narrowed down. This has been possible by a combination of increases in productivity and redistributive government.

The case do developing countries is quite different. There is worsening poverty with increasing GNP. Traditionally, fiscal policy has been considered to take care of income redistribution. For this purpose it is considered as "the most effective and least disruptive instrument of the state for bringing about distribution." The fiscal redistribution is brought about in two ways. The first instrument is progressive income taxes which take relatively larger shares from the rich than from the poor.The other is the expenditure programmes which transfer income to the poor through various measures.

Now, increasing doubt is expressed about the efficacy of the fiscal system as a weapon of social justice. It is now being realized that fiscal systems of developing countries have failed to redistribute income in favour of the poor. On the contrary, it has accentuated the inequality and the short term effect of economic growth on income distribution may cause greater inequality.

 Anti-Inflationary Fiscal Policy

Inflationary phase of trade cycle is the reverse order of unemployment and deflationary situation. Under inflationary situation, private expenditure go on increasing even after full employment is reached. Since there do not remain unutilised capacity and idle resources or manpower, the increase in aggregate expenditure cannot add to production but only raises the price level. However, due to increased incomes in society, government revenues would rise and would lead to budget surplus. But this surplus is often not sufficient to counter the inflationary pressure of over-investment. The normal budget surplus that could be created due to automatic rise in revenues and fall in deflation - oriented public expenditure is no

likely to be anywhere near the excessive rise in private expenditure. Therefore a deliberate budget policy and fiscal action must be evolved to meet the situation. The alternative fiscal remedies are :

(i) reduce effective demand to a level where aggregate expenditures become equal to the value of output at stable prices.

(ii) reduce private consumption by imposing new taxes or raising rates of taxes.

(iii) curtail all non-development expenditure of government.

(iv) combine tax-expenditure measures. If economy suffers from acute inflation, decrease in government expenditure should be combined with increase in tax rates and imposition of new taxes. Thus Budget surplus is the main instrument to check inflation. But the creation of budget surplus is not always feasible, when inflation arises due to war expenditures or compulsions of public expenditure for economic development in under-developed countries. Hence in such cases the revenue side has to provide the main fiscal measures. Taxation as an anti-inflationary fiscal device has also serious limitations.The fiscal policies must be supplemented by monetary and debt policy.

 Fiscal Policy Vs Monetary Policy

The divergent views on the relationship of money supply and level of economic activity resulted in the formulations of different sets of policies for the control of economic oscillations. The doubts have been frequently raised about the monetary policy from the angles of its effectiveness, the desirability of the ways in which the policy works and the value of the actual compatibility of its aims. 

A very significant factor which affects the effectiveness of monetary policy is the duration of the lags of monetary policy. In addition, there are certain institutional difficulties in the effective operation of the monetary policy. The effectiveness of the monetary policy is also limited by the decisions of the individuals and business units about the income, spending and assets. Still another factor to account for the limited efficacy of the monetary policy is inflation and particularly the cost push inflation. 

The fiscal policy too has its weaknesses. It is often considered to be quite rigid, insensitive and cumbersome.Anderson and Jordan laid down, tests to know the relative effectiveness of monetary policy and fiscal policy. On the basis of strength, predictability and promptness they found that monetary policy has a relatively greater effectiveness than the fiscal policy. 

Now the attitudes of the two divergent groups of economists have been considerably softened. An appropriate monetary - fiscal policy must be evolved for the achievement of different macroeconomic goals. 

During the period of boom or inflation, the fiscal restraints are likely to generate greater unemployment.

Therefore, the monetary action is likely to tackle the situation much more effectively. The expansion of income and output and the maintenance of price stability can be ensured through a proper mix of monetary and fiscal action. When the economy is in a state of recession or depression, the easy money supply should be supplemented by a policy of tax reduction and expansion in government expenditure. When the system is close to a boom, the greater reliance upon monetary rather than fiscal action can yield desired results. For achieving other goals fiscal policy is more powerful than monetary policy.