Proposal for tax revolution: 3% income tax, 4% wealth tax

http://rayhano.com/post/30672762834/solving-the-uks-tax-problem

by rayhano • 14 years ago

4 45 14 years ago

rayhano15• 14 years ago

Would really appreciate thoughts AND please do post results here from the new tax calculator at the bottom of the post.

teyc• 14 years ago

I can imagine several issues, but is hackernews the right forum to discuss tax reform? You can either go the respectable economic modelling route and be prepared to do a lot of work to justify it or perhaps try a tea-party forum where simplistic tax gets kicked around all the time.

Tax is complex because the more complex it is, the harder it is for people to reason and try to work around it. A good tax system is like a secure computer, with defense practised in depth. You might breach one layer but another will catch you.

Another issue is wealth is something that is difficult to assess and can cause severe disruption. Say for example you are a FB employee and get a nice asset boost in an IPO. You get a big tax bill, but your shares haven't vested. Now you owe the tax office a whole lot of money that you are unable to raise. By the time your shares vest, they might be worth a fraction of the tax bill.

How about if you start a business. You earn enough to feed your family and suddenly, your "business" is an asset which could be sold, so you get taxed on wealth you are now purported to hold. Is the tax office going to require you to assess how much your business is worth? What if they disagreed with you? You have a family home and its worth has gone up in a property boom. Now you have to pay 4% of the market value, but when the boom is over, you have been out of pocket of those extra amount without enjoying any benefit of it.

spullara2• 14 years ago

Everyone would just move their money out of the UK.

rayhano15• 14 years ago

I'm sorry, but I'm going to be harsh with you: that's an incredibly ignorant comment.

Everyone would not move their money out of the UK, because:

- £3trillion is in UK property - that is going nowhere - a small proportion have wealth - those few who try to relocate will be replaced by many more economic migrants because this taxation is cheaper for those who work and expensive for those who don't

So no, everyone would not just move their money out of the UK.

shyn36• 14 years ago

Capital flight is a really big risk with this idea. I don't see the ignorance in that comment but then I am not an economist.

Land wouldn't be moved but what about the other taxable wealth items such as insurance, corporate stock and bank deposits.

nhannah2• 14 years ago

A wealth tax? A good at 5000 with VAT is 6000 to buy that at 40% tax you need to earn 8400. With this system (assuming VAT remains, which in will because of EU law) you need to earn 6180 to buy the product a 2220 difference...but a 240 bill shows up every year for you owning said product (assume jewelry for 0 depreciation) so after 10 years you are better off on the old system.

Honestly this will simply encourage people to find loop holes in the system to avoid property ownership. And it's really what the right in the US mean when they say class warfare, it's just another clever way to shift the tax burden on the wealthy more. If that is what is wanted just shift up the 0 tax income limit and raise the top tax, no need to fuck around trying to seem like the goal is anything different.

rogerbinns9• 14 years ago

The value of those illiquid things will go down and you'll get less tax for them all. Which tax will you increase when there is a revenue shortfall?

If a rich person owns properties worth 100 million GBP, or even a regular person owns a 100k GBP house at the start of this tax scheme, the value will go down because tax is essentially writing off 4% a year. Economics already covers topics like this - see discount rate and net present value. Heck there is even a Black-Scholes formula for how to value things in these kind of scenarios. And people with liquid assets can move them out of the country.

You talk of economic migrants, but remember that they need to actually have the money in the first place to buy things. And since others would be reluctant to make investments (eg factories) or savings (which provide loans) it would reduce the overall amount of work available.

spullara2• 14 years ago

Sorry, but my comment is spot on. If you don't know how the wealthy manipulate the tax system and believe you can somehow "trap" their wealth in a country, you just haven't been paying attention.

adamjernst• 14 years ago

Why would I bother investing money at all then? You can expect an annual return of around 7% on the stock market, subtract 4% wealth tax and 2% inflation and you're left with nothing in real terms.

Everyone (even the super-wealthy) would spend all of their income as soon as they earn it. Sounds great ("imagine all the production it would stimulate!") until you realize that no one is making capital investments. Factories rot, infrastructure decays, and innovation stops.

rayhano15• 14 years ago

If you have wealth right now, you have two options:

Sit on it

Invest it

Currently, if you invest it you are penalised by income and capital gains taxes in excess of 20%. Under my proposal, you are taxed at 3% for investing.

rogerbinns9• 14 years ago

With current schemes you are only "penalized" for capital gains when you actually have them. If you buy an item for $100, and sell it ten years later for $110 then you pay taxes on the difference. With your scheme you would have spent $40 in taxes in the mean time.

Additionally with current schemes you can balance losses against gains (rules vary by country) and you aren't penalized for investing: eg money put into a factory doesn't incur taxes until it starts producing returns.

fiatmoney• 14 years ago

Most of that wealth (ownership of non-corporate businesses and real property, to start) is completely illiquid. You can't sell 4% of your house.

rayhano15• 14 years ago

But you can earn... surely you would earn and pay taxes, as you do now? The idea is to discourage those few who horde assets and do not participate in the economy.

There is a chance that some vulnerable people may be disadvantaged (like when losing a job).

rogerbinns9• 14 years ago

Lets take a regular person in a 150k GBP house. They need to pay 6000 GBP every year in tax on that "wealth". They lose their job. Where does the money come from to pay wealth taxes? While unemployed they are "hoarding" their house (and car, and TV set, and laptop etc) and not participating in the economy.

rogerbinns9• 14 years ago

There is absolutely no accounting for how people will react. The obvious example is that people will move their wealth elsewhere. It also isn't fair to the poorest, unless there is a separate mechanism enabling a minimum quality of life.

And it completely ignores how you would define things. For example if I have a bridge on my property, does that qualify as wealth? How exactly would I pay 4% of the bridge in taxes? If I invest in a new factory, am I going to have to pay 4% of that investment every year before the factory is even profitable? When I liquidate things to pay for taxes, is that going to count as income?

Since interest rates are less than 4% this completely discourages any form of saving unless the returns are at least 4% plus the rate of inflation. Although it isn't immediately apparent, savings are something that enables economic growth as the money is lent out again.

TLDR:

* People adapt around scheme you have so your numbers won't work in the real world the way your spreadsheet says they do

* It gets really hard to work out what actually constitutes wealth and income once people have to pay tax based on it - part of the reason for the complexity of the tax codes worldwide

* It will greatly discourage savings and investments

* People will avoid illiquid wealth since you'll have to keep coming up with 4% of its value each year

* You'll need an army of people to work out out how valuable things are.

Reducing tax rates is generally an admirable goal, as is simplifying tax codes. But if you start from almost nothing like this proposal you'll soon find yourself having to add lots of complexity back in, because it is complex.

rayhano15• 14 years ago

You are right about not being able to account for behaviour. I would love to sit down and model the macroeconomic possibilities, as well as the potential behavioural implications.

In response to some of your points, if you have little considerable wealth, the 3% income tax is an incredible incentive to earn.

But let's assume you have considerable wealth and will have a larger tax liability than you currently have (which is an incredibly small proportion of people - I have to work it out, but estimating that it is 3% of the population).

So you are part of the (estimated) 3% that will pay more tax. If you put those assets to work, then they earn an income to pay tax (which is what those who work have no choice in).

If you are sitting on your assets, then this encourages you to participate in the economy.

For those who are poorest, we have this problem in the UK where you have to earn £20,000 per annum to have the same lifestyle as being on social benefits. Why? Because of high income taxes. Those who are poorest will benefit from a massive increase in take-home-pay. That is the key aim of this proposal: encourage/reward people to work.

And yes, the spreadsheet is simplistic and implementing this would be much more complex. For example, economic assets like factories would have to be ringfenced as disposal of those would be detrimental to the economy.

Clarifications: wealth would be net (i.e. less debt)

When you say saving, do you mean sticking cash under the mattress or in a bank? Inflation is higher than interest rates right now; why is no one telling the US/UK governments to stop printing cash?

Investment in business yields a much better return than the stock market (which by the way is not investment - the investment happened when the shares were originally issued; if you buy shares on the stock market, you aren't an investor).

rogerbinns9• 14 years ago

> If you are sitting on your assets, then this encourages you to participate in the economy.

No, it encourages me to pay people to work out how to reduce my tax liability through every legal scheme possible taking advantage of every definition and ruling, and considering every alternative. Those alternatives include sending the money elsewhere, schemes where I pay myself with my own money, getting assets valued at less (after all they depreciate by 4% extra per year), moving to another EU country that doesn't tax wealth (instant 4% gain doing that), schemes that are (borderline) illegal weighing the probability of being caught etc.

> For example, economic assets like factories would have to be ringfenced as disposal of those would be detrimental to the economy.

And so begins the complexity of your tax code. And a loophole for people with wealth to exploit. And now you have to increase your tax rates to take into account the wealth that isn't being taxed.

> Clarifications: wealth would be net (i.e. less debt)

Cool another loophole. Have a look at Larry Ellison sometime. What many people don't know is that he doesn't sell his shares in Oracle. Instead he borrows money against the value of his shares and is at over a billion dollars in debt.

> When you say saving, do you mean sticking cash under the mattress or in a bank?

Saving as in economics. http://en.wikipedia.org/wiki/Saving

> Inflation is higher than interest rates right now; why is no one telling the US/UK governments to stop printing cash?

Huh? When interest rates are low it encourages investment because the cost of money is low. It also encourages finding places with higher returns (remember housing bubbles?)

Money printed by governments that is at a higher rate than economic growth results in inflation, and less results in deflation. Neither is particularly desirable, although most aim for a little bit of inflation due to human nature. The US and UK central banks are independent and generally target an inflation rate which is why nobody has told them anything http://en.wikipedia.org/wiki/Inflation#Monetary_policy

> Investment in business yields a much better return than the stock market

It doesn't work that way. In general returns are correlated with risks. There are greater returns where there are greater risks. It would be rather foolish to take lower returns for greater risks or to offer greater returns for lower risks. Under your plan investments lose 4% per year all else being equal which reduces the potential returns. (Unless your tax code has yet more complexity.)

> stock market (which by the way is not investment - the investment happened when the shares were originally issued; if you buy shares on the stock market, you aren't an investor).

You aren't even trying now. It is true that the share issuer only gets money when the shares were first invested, but that does not mean that everyone buying shares after that point are not investors. At the simplest case a company produces dividends, so purchasing a share gives you access to those dividends. Your expectations are that the value of those dividends are greater than the NPV of the money you use to buy the shares. It is of course more complex than that - shares also reflect the assets of the company, dividends can be "paid" by increasing the share price instead of payouts, profits reinvested defer dividends and asset increases to the future etc. Going back to the original share purchasers, part of their investment reasoning is that they can sell in the future when their opinion of the risks/rewards do not match their desires. And finally the current price of shares set expectations of what value the company would get if it sold newly created shares. Note that most larger companies are constantly creating new shares such as through employee and manager incentive plans.

anamax• 14 years ago

> If you are sitting on your assets, then this encourages you to participate in the economy.

Ah yes. Old people living off their savings in a house that they own need to get out and participate in the economy.

Speaking of that house, suppose its value goes up $100k one year, goes down $100k the next, and then goes up $50k the third. How much tax have they paid cumulative at the end of that third year?

Also, companies don't pay taxes. They collect them.

As to inequality, it isn't the evil that you assume. Rich people buy things from poor people. They employ poor people, and so on. Pretty much everything started out as a luxury that only rich people could afford.

I note that you didn't consider the possibility that the tax revenues that you're trying to maintain are too high. > if you buy shares on the stock market, you aren't an investor).

So what? Folks who buy in the market are what makes investing profitable. They're the means by which investors get their profits. And, if investors can't get profits, they don't invest.

But I quibble. It doesn't matter that you don't understand people's behavior, incentives, and so on.

You had three numbers and a goal and came up with a table, so, so surely it's a worthy idea. You, or rather, "the engineers", will just have to work out a few details.

rayhano15• 14 years ago

And thank you for the considered response.

sjtgraham3• 14 years ago

What is this other than deferred taxation? If one earns 100k in year one, it is taxed as income at 3%. I put the net 97k in the bank and from next year onwards it will again be taxed as wealth at 4%, in perpetuity.

rayhano15• 14 years ago

You're kidding me, right?

Currently, you would be taxed 40% of that 100k. So immediately you would only have 60k. Whatever you do with that: spend it, invest it, you only start with 60k, even though your earned 100k.

And most likely, you will diversify... spend some, invest some, save some.

sjtgraham3• 14 years ago

Firstly, not everyone pays PAYE. Having an accountant and structuring your finances in a tax efficient manner is not the preserve of the super rich.

What you describe is a perpetual tax. Cash exchanged for goods of value or other financial instruments still have intrinsic value. Anything classed as an asset would be taxed in perpetuity. I'm sorry, right now I think your proposal is absolutely absurd.

If you earn and invest in the same tax year would you be taxed twice? How does your model handle depreciation? What about property? Can debt finance, e.g. a mortgage, be offset from your taxable assets?

There are so many unanswered questions (and these are what popped into mind with 5 seconds thought) I have to ask, is it you who is kidding?

shyn36• 14 years ago

It would be a deferred taxation but over 13-years instead of 1-year for the same amount of money earned, if and only if you haven't spent it all.

sjtgraham3• 14 years ago

One would still pay tax on any physical asset acquired with the money. The wealth tax is essentially a perpetual tax on possessions.

csense• 14 years ago

> 4% wealth tax

We already have a wealth tax. It's called "inflation." If the government wants to tax wealth, all they have to do is print money. The culture of living within your means and saving for the future basically died before I was born, so the point that this kind of policy punishes responsible citizens who are capable of living frugally, within their means, and saving the future is essentially moot.

Sales and income taxes are easy to implement because they're based around money actually changing hands. Property taxes are easy to implement because the physical thing that's being taxed is clear. General wealth taxes rely on accounting and valuation of illiquid assets, which is easily subject to gamesmanship.

If this was implemented, you'd just cash out your bank account every day, then tell the tax authorities you "spent" the money (in reality you keep a suitcase full of large bills under your mattress, but they have no way of knowing that). As long as you don't make a ton of money, and could conceivably be spending it on living well (vacations, movies, good food, alcohol, flowers for the significant other, etc.), how are they going to prove otherwise?

If you have more money, it gets more difficult to use that particular trick, but you'll also have more political power to get loopholes written into the law, and pay accountants to figure out how to make the loopholes work for you. And it'll also become more worthwhile to go to the trouble of keeping money overseas out of the range of taxation, or set up exotic financial structures like life insurance policies, trusts or derivatives, which don't have a definite value until they become payable.

I'm not an accountant, so some of the details might not be one hundred percent right, but it feels like that's a fair first approximation to what would happen.

rayhano15• 14 years ago

> We already have a wealth tax. It's called "inflation." If the government wants to tax wealth, all they have to do is print money. The culture of living within your means and saving for the future basically died before I was born, so the point that this kind of policy punishes responsible citizens who are capable of living frugally, within their means, and saving the future is essentially moot.<

Not true, in the slightest. Inflation benefits those with income producing assets, like rental property. Inflation is a trick to make the rich richer. All the evidence points that way.

And let people be vague with wealth valuations. This is about being more fair, not being burdensome. Those with obvious wealth will finally pay a fair share of tax. Those who work hard will finally have some reward for their work.

The comment about cashing out your bank account every day is absurd. You pay 40%+ in income taxes right now. Would you not like to keep 97% of what you earn instead of less than 60%?

rogerbinns9• 14 years ago

> Not true, in the slightest

Your opinion differs from the field of economics where they actually study this sort of thing. http://en.wikipedia.org/wiki/Inflation#General

> Inflation benefits those with income producing assets, like rental property

Huh? The value of an asset is determined by what it produces in the future, both actual income and utility. Inflation adds risks to that - for example for the income to remain constant, the rental prices charged have to go up by the rate of inflation each year which people hate. Inflation introduces volatility in the face value of money which makes things riskier (eg loans to buy/build the rental property have to take that into account).

> Inflation is a trick to make the rich richer. All the evidence points that way.

Inflation devalues savings which is what the rich have and the poor don't have. If you could produce any of this evidence (let alone "all the evidence") you'd completely revolutionize economics. (Or you could be wrong.)

> You pay 40%+ in income taxes right now

No. You pay it once at the point you earn it. With your scheme you keep paying the taxes over time. The longer you save it the more goes away in taxes.

rayhano15• 14 years ago

And if you spend money on 'living well', that is a massive increase in GDP through money being recycled in the system... which is what fuels the economy. i.e. it's a good thing

rogerbinns9• 14 years ago

Why don't I go around breaking all the windows in my town every night? All the extra money spent and being recycled through the system would fuel the economy - it must be a good thing?

This is known as http://en.wikipedia.org/wiki/Broken_window_fallacy

rprasad• 14 years ago

TLDR: author lacks basic understanding of both macroeconomics and the reasoning underpinning the complexity of modern tax systems (here's a hint: tax codes always start off simple and get more complicated to minimize evasion and loopholes.)

The idea would not work anywhere unless adopted everywhere; a perpetual 4% tax on wealth in one nation would lead to the immediate or near immediate flight of capital to other nations.

On the flipside, a 3% tax on income is generally too low to be meaningful except in ridiculously small European countries. At 3%, you might as well just not bother with an income tax because the cost of calculating and collecting the tax (both on the government and on taxpayers) would in most countries exceed the revenue brought in.

Proposal for tax revolution: 3% income tax, 4% wealth tax

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