I was reading a small blurb in The Atlantic that mentioned forgoing the income tax in favor of a wealth tax, the idea being, I guess, to put money to work. However, unless that money is under the mattress, it is being put to work. So how would such a tax work? Who has given the matter serious thought (I am willing to bet that the Atlantic contributor didn’t make up the idea out of whole cloth)?
Property taxes are a sort of wealth tax and they’re probably the best model to use if you want to envision it in a broader sense. Most people are used to property tax on real estate only, but many states tax cars and business assets in the same way.
One problem with a wealth tax is that it goes contrary to one of the underlying principles of the current tax code - that tax is generally due when the taxpayer is most able to pay for it. So, for example, if you own stock, you’ll pay no tax on the stock itself until you sell it. At the point of a sale, you probably have cash in hand and could afford to save some of it to pay the tax on your gains. Dividends are also taxed when they’re paid because, again, you have some cash in hand. A wealth tax would apply to the stock while it is still in a non-cash format. Thus, you either need an income stream to maintain your ownership of it, or you have to sell a little off every year. But at least you could sell off a little stock. You can’t exactly sell off 1% of your house or 1% of a factory.
There are excise taxes in some places as well that tax you for the value of your car and maybe other forms of transportation like boats on a regular basis. That is a form of a wealth tax even if you own your car outright. I think it is stupid because you can’t sell X percent of your car either. You may not have the money to pay the tax on something you own outright. At least mortgage payments usually have property tax built into them.
Would, in fact, a wealth tax apply to stock? How about business ownership where the owner/stockholder was directly involved with the company versus holding stock purchased on the secondary market? How about stocks purchased at IPO? How about exercised options? What about bonds? I wouldn’t think so since that would not encourage investment.
I don’t think that’s the motivation. It’s a variant of progressive taxation. The reasoning is that those most able to afford tax should be the ones who pay more of it. A low income does not mean low wealth, and there are people with very low income and very high wealth.
It would apply to whatever they wanted it to apply to. Florida used to have an “intangibles tax” that applied to stocks, bonds, and loans amongst other things. I don’t think that it would work to encourage investing rather than just spending and is more likely just a new and exciting way to tax people.
The idea would presumably be that a person who owns $10 million in shares that don’t pay any dividend would still have to pay a percentage of the $10 million each year, and not just when the shares were bought or sold.
Stocks are worth zero dollars and zero cents until they are sold unless they pay a dividend. It is all on paper. Ask the former shareholders at Enron and Worldcom about that some time but variations of paper losses like that can apply to any company. The entire NASDAQ crashed during this recession. It doesn’t matter if you have $10 dollars or $10 billion dollars in stock. It has no value at all until you sell it so there is no justification for taxing it at any particular market value. That is what short-term and long-term capital gains taxes are for anyway so it shouldn’t enter into this picture.
Please explain. A stock price is simply a what if scenario if you sold it today. I am playing by the way both theoretically and in real life. An 8 word response for a complex topic on the SDMB generally doesn’t cut it.
If “Stocks are worth zero dollars and zero cents until they are sold unless they pay a dividend.” then explain to me how private equity as a business concept is content to take an equity position in a startup company that hasn’t made its equity stock available to the market.
The future convertibility into dollars and cents has real, current, worth.
Stocks - for financial reporting purposes - are valued a variety of ways. You’d just write the wealth tax code with instructions on how to value them. You could use Current Market Value. You could use Original Purchase Price. You could use lower of current market value or original purchase price (which would be the most likely scenario, in my opinion). You could even say that for the purposes of a wealth tax, it would be XX% of the lower of current market value or purchase price.
But there are guidelines in accounting for valuing unsold stock. It wouldn’t be coming up with something NEW (although I think the guidelines for valuing investments are probably changing - I’m not up on current GAAP).
And if you are unlucky enough to own Enron for five years, paying wealth tax on it every year, and it tanks, that’s a risk to owning stock under a wealth tax.
(I think its a lousy idea, btw. But not because stocks have no value - stocks have value).
Most asset value is “on paper” these days. If a stock is being actively traded on a stock market, you can value at the last selling price. If it’s not, then you might look at the corporation’s last balance sheet, and divide the net assets of the company by the number of shares issued to give a value for each share. I’m sure that accountants can devise more sophisticated measures than these, but these have the advantage of being reasonable valuations in both theory and practice.
For tax purposes, income = change in wealth. So a capital-gains tax is NOT a wealth tax, it’s an income tax (the tax basis is the increase in value, not the total value). Strictly speaking, unrealized gains ARE income, but we don’t usually tax it for a host of reasons. A wealth tax on stock would take the total value of the stock as its basis, regardless of what it was worth last period. And once your Enron stock plummeted to zero, it would have a wealth-tax basis of zero and you would owe no more taxes on it.
Property taxes were very popular when wage income was rare or hard to verify. Today, they make some sense at the local level – whoever owns the most real estate should pay the most for fire protection, etc. – but the only real use I can see for a wealth basis beyond that would be for redistribution. You don’t need a wealth basis for that; just tax income and use it to fund government programs for the poor. Most of the serious debate I’ve seen has been about the merits of an income base vs. a consumption base, not a wealth base.
There are real tax law folks on here who can explain this better than I am, IIRC.
I am listening to the three of you believe me but it seems like these are more like established accounting principles that that might have to be modified to prevent an insurrection among the masses who also commonly own stock. My point was that there is the very real chance that the company could go bankrupt and the stock could go to near zero screwing over every stock holder in the company if they had to pay taxes on it every year. That seems like a disastrous risk that could affect the market as a whole. I think it is a terrible idea also. I don’t want to get into my personal life but I am being faced with trust tax bills for money that I don’t get or even know the details about for a similar scenario. It would bankrupt me and my brothers instantly if my family didn’t pay them so I see first-hand the consequences of taxing assets to get money for things that only exist on paper.
Tax bills for trusts are no where near the same situation as a wealth tax, or a discussion on the value of intangible assets. I think you (understandably) may be conflating your predicament with a more normal kind of issue.
But, as a rejoinder to your final sentence: housing values circa 2006 existed merely on paper. There aren’t disastrous consequences merely by the taxing authority raises tax assessments by 20% because of the run-up in housing prices.
There are always going to be disastrous consequences by one’s failure to adequately account for the costs of an asset you’re purchasing in the long run. These consequences exist regardless of the taxation regime, though I’ll agree they’d be more acute in a wealth-tax situation.
I appreciate your elaboration from someone that seems to know what he is talking about. I am not sure just how long you have been active here on the SDMB but most of us are here to learn as well as give comments, me in particular. I still think the stock wealth tax is a terrible idea though but the housing price run-up caused a more minor version of the same thing in some places.