I’ve read about wealth tax and an idea struck me based on it. Why not tax wealth for all federal tax revenue (other than excise taxes)? However instead of simply taxing based on a certain percentage of wealth, tax based on a percentage of the total tax revenue budgeted for the next year.
Something like this: X (person or corporation) has Y% of the total national wealth so X must pay Y% of the total budget for the next year.
Total national wealth would be all the assets of all citizens, permanent residents or corporations. Corporate wealth would be ensured by forcing corporations to have a certain (say 25%+) of their total assets based in the US in order to conduct business in the US.
I think it is fair because the primary federal tax expenditures are military & civil order,which benefits the wealthy more than the poor because of the assets protected; & social services, which although directly benefiting the poor also greatly benefits the wealthy by reducing crime.
Now, I think this would force a few beneficial governmental changes. First, it would force Congress to pass a budget one year in advance - otherwise they could collect no taxes because they simply couldn’t calculate how much taxes they needed to collect. Secondly, it would require Congress to think long and hard about how much tax burden they want to place on the economy because too much and many corporations and people would have to sell assets to pay the tax (and Congress would incur the political fallout).
It would also encourage the wealthy to spend money on consumables, which would help stimulate the economy.
I think this would be a reasonably fair progressive tax, that would promote personal budgeting & political participation. Of course, I realize this idea needs more details, but that’s why I posted it.
The most unworkable part of this would be determining how much something is worth. Income is much easier since someone paid something for the work or object so we know how much they think it’s worth. But something that might not have been sold for decades is more of a judgement call. Witness the constant wrangling over tax assessments of real estate, which can deviate quite far from the sellable value if there are politics of various varieties inserted into the calculation.
You would have to eliminate corporate taxes. Otherwise, your numerator would be far greater than your denominator.
How do you value certain assets: real estate, equity in closely held companies, non-marketable securities, etc.
You would destroy the person that has most of their net worth in their house. What if an elderly person lived in a house that has massively appreciated in value but they have no disposable income? They would have no choice but to sell their house to pay their taxes.
This takes away incentives to grow businesses. Many people with equity investments in companies would not receive enough in distributions to cover the taxes they would owe. They would have to pull more money out each year in dividends/distributions in order to cover wealth taxes that they otherwise could have used to keep inside the business and grow and hire more people. Currently, a huge portion of immature businesses pay no dividends at all; this would have to change (Apple just started paying dividends this year for example).
It seems incredibly curious that you’re basis for entitlement programs is to keep the less fortunate satisfied enough so they won’t steal and commit crime. That’s a pretty poor opinion of the lower and middle class.
If I’m understanding the OP correctly, you’re essentially talking about a large-scale property tax. If so, the problem with such a tax plan is a lot of property is not easily translated into cash for taxes. LonghornDave pointed out that if your main asset is your house (which is true for many people) and you’re given a tax levy every year based on ten percent of your house’s value (which I think is a realistic figure if this is your main tax plan) you’re going to have a hard time coming up with that money every year without selling your house. And you’ll probably have a hard time selling your house when potential buyers would be liable to the same tax burden.
As I recall, no one (including me) was really able to come up with one.
One of my pithy comments on the topic:
“Back to taxing wealth instead of income: I think there is a fundamental unfairness beyond what the “right” amount of (income) tax is. Say I have $100 million. I borrow ten million and live on it, paying the juice out of the ten I borrowed. I leave the 90M in stocks/whatever that are never liquidated but which secure the loan. I pay no taxes. That, in a nutshell, is what the truly wealthy do. (I’m not talking about the specifics, but rather the basic point: they are rich enough to avoid having to live off their income, and b/c we tax income and not wealth, a fundamental unfairness results.)”
I wish people would start with Google or Wikipedia.
Let me summarize.
First, some countries do have wealth taxes already. None use it exclusively, and many have repealed those taxes in the last decade. So if you want to see how it can be done, and what the implications are, there are places to start.
Second, the US Constitution prevents direct taxes. We only have an income tax because of a Constitutional amendment. While a wealth tax might be favored by some states, I cannot imagine an amendment getting enough support, especially from those states with high real estate values.
Ludovic, I think GAAP would work to determine asset values and real estate taxes have been in place for centuries - despite the wrangling. The elimination of income tax (except see below) would make this bearable.
Longhorndave:
I do anticipate eliminating income tax except that it would still be collected and applied toward wealth tax or a tax return given.
See my response to Ludovic
I don’t think this would happen because the tax amount would be tied to the assets value as a percent of total national wealth and the total budget. i.e. the wealthy would pay much more and the middle-lower class would pay less.
Wealth means net wealth, money spent on wages & expansion would be valued according to GAAP & the elimination of corporate income tax would eliminate this problem.
It’s a realistic opinion - if you look at most crime (violent & otherwise) the lower class commits most of it. Although, the wealthy do commit most tax fraud and embezzlement.
Little Nemo, see my responses above regarding this problem.
Chief Pedant, I read your thread and I agree with the unfairness issue & I think this solves it. The key is that the budget would have to be passed the year before and I forgot to add that the total national wealth would need to be measured several months before the tax return date so that the amount owed could be determined.
This is not a flat % tax of assets. It’s a tax based on the budget and the % of total national assets owned by a taxpayer. E.g. X owns 2% of the national wealth so X pays 2% of the $1000 budget for that year or $20.
dracoi, you have a point about the Constitution. It would require apportionment between the states and you’re right that those states with high property values compared to population (i.e. the wealthier states) would oppose such a tax. Although since the lower class vastly out-numbers the rich, education would probably result in the law passing - especially with the strong fairness argument.
I’m not talking about corporate income taxes. I mean there would be no corporate wealth tax, which conflicts with this statement in your OP.
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Total national wealth would be all the assets of all citizens, permanent residents or corporations. Corporate wealth would be ensured by forcing corporations to have a certain (say 25%+) of their total assets based in the US in order to conduct business in the US.
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Corporations are owned by people. Therefore, the shareholders would be paying that wealth tax as a percentage of their ownership in the company rather than the company directly. Otherwise, your ratio of the sum total of the wealth of all individuals plus corporations divided by total wealth of the country would be greater than 100%. You would be double counting all wealth in corporations since it would also hit the individuals.
People/companies don’t pay taxes based on GAAP as it is. This is an absolutely unworkable solution. GAAP comes up with all sorts of ridiculous values for things that would be absurd to try to pay a tax based on. For example, you currently don’t pay income taxes on unrealized gains on marking an asset to market. However, you seem to be proposing that we pay a wealth tax on the marked to market value of an asset. The volatility of these types of assets (and liabilities) can be huge.
It absolutely would happen. There are elderly people that have lived in homes for decades that have no form of income other than social security that pay lower property taxes now because they are seniors. They simply have no ability to pay taxes on their true net worth because they have no disposable income and all of their wealth is in their house.
Again, valuing things based on GAAP is seriously problematic. Corporate income taxes are not paid based on GAAP. GAAP based net worth would dramatically over value some people and undervalue others (probably overall would significantly undervalue the total population’s wealth). The wealth type taxes we currently have (property taxes) do not use GAAP, and you seem to want to keep that system for real estate.
Let’s say I own shares in Microsoft; the GAAP net worth is $66 billion and the market value is $240 billion. The market value on something like shares in a publicly traded company is extraordinarily easy to calculate, but are you instead proposing we use the GAAP value? There are all sorts of companies with a negative GAAP equity but a positive market value; don’t you see that as a huge problem with your approach?
If education in the US would result in passing a Constitutional amendment, how do you explain the fact that half a dozen European countries repealed their wealth taxes in the last decade?
Recall the bank job in Marsielles where they tunnelled into the vault from the sewer and spent the long weekend breaking open safety deposit boxes. The story goes that due to France’s wealth tax, people hid their wealth in Safe Deposit Boxes rather than declare it. After the heist, they never did find all the details on what was stolen.
A solution to wealth taxes would be a lien that builds rather than annual taxes when applied to a primary residence. This however, becomes a different form of golden handcuffs - you can’t sell your house and move (i.e. trade down to a condo and cash) because the bulk of your equity is actually tax.
The trouble with a wealth tax is that it discourages investment and “quality” spending. WHy buy an expensive house if you have to pay 10% of its value each year? WHy buy a new car? Get by with crap, stash the cash in safe Deposit boxes, and blow it on fancy meals, alcohol, trips overseas, cheap trinkets and other lifestyle choices that can’t be tracked and don’t produce permanent value. Don’t buy a big-screen TV, buy a table-top projector that you can hide in a box in the basement…
As tax options go, a wealth tax is the worst choice.
Maybe the Bill Gates of this world will have the corporation buy a fancy house and they rent it as part of their employment. Is the corporation exempt from wealth tax? What distinguishes a house from a factory or the employee cafeteria when it comes to assessing value and charging a fee?
Are you going to send federal property inspectors overseas to valuate Apple’s Chinese factories?
I understand your point now. The corporate wealth would be double (somewhat see below) counted & double taxed just like it is now with corporate income tax & capital gains tax.
If necessary, it’s called a reverse mortgage. But still, I think the percentage of wealth owned by such people is so small that they wouldn’t owe much.
The shareholders would be taxed according to market value while corporations would pay according to GAAP. I know this would over-value the wealth, but so what? If a corporation had negative GAAP, but positive market value, then the shareholders would still pay.
Md2000, I thought of the lien approach, but discarded for the reason you state. As for people hiding money, well that would be illegal (as it is now for paying cash and evading income tax). I realize it would encourage poor investments to a certain extent, but not as much as you think. The tax isn’t a flat tax so as wealth increases the percent of wealth any one entity owns decreases. It would encourage more disposable purchases, but that helps the economy because more must be produced.
And yes, companies wishing to sell in the US would have to allow tax inspectors overseas or forgo selling/conducting business in the US.
Company A owns a gold brick. Company B owns A. Joe owns 50% of B. the gold brick is worth $1M. Say your tax rate is 2%. So, A pays $20,000 and B and Joe also pay 20K?
All that happens is that apple becomes a Bahamian Company that owns 100% of AppleUSA that rents a few stores and has a worthless franchise to import and sell Macs and iPhones at inflated prices so no profits accrue. Note “import” the parent company does no business on US soil. If the 100% is an issue, they sell 51% to other holding companies. The software and design are done under contract, so no Apple employees work in the USA - but they’re elcome to relocate to the Bahamas… Congrats on destroying the US economy one company at a time…
How would a reverse mortgage work? You mean the owner finds a bank to front the money instead of a lien owned by the Feds? Huh? What happens when the house is not worth as much as the money owed? Boot the 80yo out on the street?
Yes, they all pay. Of course Joe pays less. I don’t think you understand the proposed tax system. The tax rate is not fixed; it depends on total national wealth, the national budget, & the percent of the wealth owned by an entity.
The total national wealth is $1Tril. The budget is $1Bill. The brick is worth $1M.
$1M/$1T = 0.000001 or 0.0001% which means A & B owe 0.0001% of the total national budget of $1B which equals $1000.00. Joe, of course, owes $500.00
This would be illegal because the parent company does business in the US through shell companies it owns. The parent company may own whatever percent it wants of the shell companies, but it must locate (or pay tax on) a % (exact % to be determined) of its net assets in the US to do any business in the US, including the business of owning companies. An individual foreign stockholder would also be required to do the same thing.
The principal is that to profit from the US, one must pay US taxes on one’s net assets.
A horrific idea. It would destroy the economy. Unless your investment pays a higher rate than the wealth tax (10%) in this scenario, accounting for risk, you are better off putting cash under your mattress and not reporting it.
Rental rates on apartments and retail space get raised by 10% to pay for the wealth tax, making stores less profitable and more likely to put said cash in mattress. Interest rates rise by 10% because nobody would put their money in the bank otherwise. New car sales plummet. Even if you exempt primary homes from the tax, nobody can afford them at these interest rates. Home values plummet and make the current foreclosure mess look like chump change.
I think you missed my point.
“Future Apple Inc.” (A Bahamian company) owns nothing in the USA except a few stores and warehouses. All the Chinese factories, intellectual property, etc. is copyright in the Bahamas. What wealth is there? It’s no different than BMW, which owns nothing in the USA (except the factory in Kentucky). The dealerships are independent companies. Or Lego, whos sells American distributors its products from out in Sweden. Minimal American presence, just collects income from sales.
The incentive will be to hold assets outside the USA, create an arm’s length holding company to do minimal business in the USA. Why would Microsoft claim the asset “Windows copyright” in the USA when they could hold it in Lichenstein instead and pay no taxes? Or are you going to tax every copyrightholder in the world, regardless of connection to the USA?
If “Fred’s Contracting Inc.” buys Windows licenses from Microsoft of Lichenstein at $99.99 each and sells then in the USA for $100, there’s practically no profits, no assets, and no Microsoft to tax. If Microsoft of America sells all its portable assets to Gates Inc of Lichenstein, then they are no longer residing in USA to be taxed. Or are you saying some stuff can now never leave the USA? (Let’s put the gold brick in a Bahamian bank).
So how do you define “shell”? Every company is owned by someone. The problem with Joe and the gold brick is that the value of one brick is being taxed 3 times. Basically, unless the shares get “credit” for taxes already paid, it will discourage share ownership (and wealth in general); it will reinforce the incentive to remortgage any house to the hilt, making the housing market as vulnerable as it was 4 years ago.
US GDP is about $15T, the federal budget is $3.5T.
(3.5/118)= 0.0297 or about 3% tax.
However, this does not include double-counting as we see in the gold brick scenario above. The question is, where is all the money? I assume you subtract, for example, mortgage principle from house value to get net worth.
You are essentially taxing the same item/money year after year. There is now a huge disinsentive to save. That money I’m putting into a retirement plan? I’m going to take a hit to it, every single year. I started putting money into a 401k in my late 20s. That’s 40+ years of taxes I would pay on it. My kids’ college fund? Same thing. Using md2000’s numbers, my savings would be mostly gone before I retire.
My 401k is in stocks. So my savings is being taxed both at my level (since I own the stock) and at the company level (since they own the store/factory).
Meanwhile, my slacker sister is making the same as I am, but spends it all on hookers and blow. No savings, no wealth, no taxes. Andin 40 years, she’ll be looking to live with me, because she didn’t save.
You realize that many on the left would contend that your sister is a better citizen that you are for economic purposes because she is stimulating the economy with her money. The prostitute and drug dealer use the money to buy food and big screen TVs and give people jobs.
When you invest in stocks, the rich execs just put your money in their Scrooge McDuck vault and swim in the gold.