Piketty’s wealth tax is real, and it works

As the Piketty-train rolls on it leaves behind it a trail of confusion in economic circles about the proposition to reduce inequality via a global wealth tax.

Economic thinking, it seems, floats on the political tide. The authors of this paper in 2006 noted that:r

…at present there appears to be little interest in the net wealth tax. In recent years this tax has been practically excluded from any discussion or doctrinal debate on tax reforms, and over time has fallen into disfavour.

Eight years and one financial crisis later, the tide has turned dramatically in favour of using the tax system as a tool for creating a desirable wealth and income distribution.

Many sceptics, however, argue that a wealth tax, either national or globally, is technically or politically infeasible. The basic reasoning is as follows:

…it is impossible within the U.S., never mind the world, as the top 0.1% own the political machinery. Why would anyone who owns the political process agree to tax themselves?

It’s a good question. But it merely suggests we look deeper at the heart of the matter. I like to use one of Matt Bruenig’s favourite lines,“imagine people did things they already do”, as a starting point.

The point being that if the top 0.1% control the political system, then it should be impossible at all points in time to tax wealth.

Unless you are Spain, and it’s 1977. Or France and it is 1981.

Both these countries brought in annual taxes on wealth, with progressive scales just like income taxes. In France 1.5% of tax revenue came from their wealth tax in 2007, while in Spain around 0.5% of tax revenues are raised from such taxes.

Indeed most countries already raise about 5% or more of tax revenues from direct taxes on property, which is essentially a wealth tax on a slightly narrower definition of wealth.

Not only are wealth taxes possible, they are already a feature of the tax system in most countries.

Implementing a shift towards greater taxes on wealth merely requires a minor tweaking of tax rates and/or qualifying assets for taxes that already exist. The institutional machinery is already in place.

The question of the political power of the wealthy is certainly valid. But this merely provides guidance on likely political avenues for change. The obvious follow-up question is, what political circumstances led to the implementation of current wealth taxes?

I’m no expert here, and I’d appreciate any detailed accounts of the political climate at the time, especially in France and Spain. But it seems that the wealth tax was part of the French Socialist’s Party’s platform in the 1981 Presidential elections; which the right-wing party abolished in 1986, for it to be reinstated just two years later.

At first glance it appears that breaking the link between political power and the interests of the very wealthy, via democratic processes, is one successful political path for change.

It may even be of some assistance, politically, if the economic profession would stop pretending to debate the possibility of things people already do. Wealth taxes are certainly possible and are effective tools for reducing inequality.

Another wildly successful tax on wealth is the inheritance tax. Inheritance taxes are again real things, that real countries have, but that fell victim to the political tide of the 1970s in the Anglosphere.

At their peak in 1968, taxes on inheritance made up 3.1% of Australian tax revenue, or 0.6% of GDP. In the UK inheritance taxes were 1% of GDP in the same year.

The chart below shows the massive shift away from such taxes at exactly the time inequality began to skyrocket across the Anglosphere:

InheritanceTaxComp

Australia, the UK and US all went through a political change in the 1970s that saw a dramatic reduction in revenue raised from this source, with Australia and the US abolishing inheritance taxation altogether in 1989.

Germany and France maintained these taxes, which have generated an increasing share of revenue since the 1970s. Australia however, chose to forgo this progressive tax and in doing so has forgone significant public revenues.  Last year alone the revenue from an inheritance tax levied as per 1968 would have raised over $9billion.

Not surprisingly countries that reduced or removed inheritance taxes saw the most rapid rise in inequality since the 1980s. Below I use the data from Alvaredo, Atkinson, Piketty and Saez’s World Top Incomes Database to show this relationship:

OnePercent

The top 1% share of income shoots up in the 1980s in the UK, US and Australia, while staying steady in France, and also Germany (at least till the late 1990s).

Once again the political tide is in favour of taxing wealth. The economic debate, however, is settled. Wealth taxes reduce inequality. Most countries already implement taxes on wealth to some degree, either through annual or inheritance taxes, and have institutional mechanisms in places to administer the them. The sceptics do raise an important political question, but we should learn from history and see that democratic processes, in which economists play a part, can provide avenues for change.

Comments

  1. The political challenges are greatly exaggerated and deliberately so by family owned media organisations and other large family businesses for obvious reason.

    Mr Howard demonstrated (with the GST which was a tax whose impact was on workers and low income earners) that all you need to do is make explicit the trade-off is with taxes on labour and that wealth below a sizeable threshold is untouched.

    People understand the merits of lower taxes on people for working.

    Probably best to leave inheritance taxes to last even with a sizeable threshold as they are more easily made the subject of scare campaigns.

    • I love the term “progressive” – thats how you cut proper discussion and take the high moral ground.

      Now you have rock-star French economist (Piketty) saying that the existence of the rich is bad for society because it introduces generational inequality (maybe French guillotine sales have slumped?) – and the Left have a new inequity champion, and Greens scream a cheer. Soon his thesis will be used to justify exorbitant tax rates targeting he wealth all around the world.

      The irony of course is that Piketty books sales have boomed in the US (number one I think), UK and elsewhere in Anglo-Saxon world. But funnily enough, never took off in France. Why? Probably because they have lived through these state induced policies that the book advocates – and clearly they don’t work. It just drives a good country into the ground.

      As Thatcher once remarked, “The problem with socialism is that you eventually run out of other people’s money.” and less known, but equally as important – “There’s no such thing as entitlement, unless someone has first met an obligation”.

      How the hell did we get in find ourselves in a dire situation that we are relying on a French socialist economist to give us general “progressive” economic advice????

      Answer is – we are not… So I suggest we ignore the Piketty.

      • migtronixMEMBER

        No that’s not why, its because in continental Europe — unlike the Anglo-media dominated world — the talk of taxing wealth was never taboo…

        The problem with Thatcheristism or neo-liberalism is you eventually suck up everyone elses money and the economy collapses…

        ReseachTime you need to spend more time doing research…

      • Continental Europe has a declining population. Their tax base is getting infinitely small. Germany will commence a Japan (who incidentally sells more sanitary pads to the elderly than it does for babies) inside a decade, Italy and many others not far behind. When we get to that situation – then maybe…

      • @Researchtime That’s everywhere sans the subcontinent, south america and parts of africa.

      • Ronin8317MEMBER

        Have you read the book? The problem is not wealth per se, but when the return on capital exceeding economic growth. Those with wealth don’t produce anything, and simply become richer through economic rent because they’re wealthy. The economic system has been distorted so being wealthy is enough to stay wealthy. This is both immoral and unsustainable.

        A wealth tax is only one solution, the other solution is to stop the distortion in the economic system. An example is taxi license. It was once given away for free, but subsequently the restriction on the number of license have seen the price rocket to 400K. It’s estimated each taxi plate earns a 16% return on capital per year (including capital gain), while the taxi driver earns below minimum wages. Another example is the restriction on zoning leading to real estate prices. When the return on capital is greater than economic growth, some things is wrong with the system. Since trying to fix up all the in built rent seeking mechanisms (e.g. patent ever-greening, copyright forever, etc) is too difficult, it’s easier to simply tax wealth.

      • “Their tax base is getting infinitely small.”

        No mindless exaggeration in pursuit of ideology in this sentence at all. I have a few US pennies in my pocket… I guess I should buy Europe now.

        As for Germany, yes its fertility rate is low (1.36), but unlike Japan, it has immigration worth a damn, resulting in net growth. Plus, France’s fertility rate is over 2. No shortage of Frenchies on the horizon.

        Face it ResearchTime, your wingnut wet-dream of a Euro implosion ain’t happening. In the meantime, more and more people in the US are noticing that although there’s more net wealth, they’re worse off than their parents.

        The change in voting patterns is happening and will continue. I fully expect the ‘born to rule’ wingnuts to resort to terrorism before this is through.

      • BTW – 16% return on equity is not great for a small business. Not sure how taxis got into this discussion, however, I would point out that banks probably wouldn’t lend on a margin like that – no matter how great the business model is. Especially when depreciation is >30% for the first few years. Hence, I don’t know how you derive capital gain from that? I guess thats why so many taxi’s are old and often in disrepair. And that is probably the real reason why they earn the minimum wage – in fact I am surprised they earn anything at all. Can I suggest (politely) that you are maybe not that literate with finance???

      • migtronixMEMBER

        Wow going all out now are you? Not literate in finance? Hmmmm…

        Maybe you need to see the reflection in a mirror — since when is 16% return, year-on-year, not enough to borrow against?!?!?!

        Dreamland meet researchtime.

      • It depends how much debt you carry!!! If it is an 80:20 split, then you are looking at a <4% margin (assuming we are talking about a net equity margin). There are a bunch of other measures you have to take into account too. Running a Taxi company is not like getting a mortgage with Defence Housing, with an implicit government guarantee, or something else relatively stable. Taxi business's are highly leveraged to the general economy. I could imagine a situation where demand could vary greater 30% over a year in a deep recession (saw such a correction in London in 2008-2009). You would be toast then!

        Seriously… why are we talking about taxis and finance???? Talk about something that we both know about – and is related to the above topic, please. This is boring me.

      • migtronixMEMBER

        LOL and all the massive leveraged mortgage books? They’ll pass with flying colours through a 30% devaluation will they?

      • migtronixMEMBER

        Dude if you’re bored no one keeping you here…

        I’m sure there’s a country club somewhere that you get your shoes-shined by the financially illiterate at a great discount…

      • It is best seller in France –

        En France, ses 950 pages d’analyse économique ont été accueillies avec intérêt par le grand public – il est bien parti pour franchir la barre des 50.000 exemplaires vendus, ce qui en fait un best-seller –

        http://www.latribune.fr/actualites/economie/international/20140422trib000826316/thomas-piketty-une-star-americaine.html

        Along with the other nonsense you spouted, it’s better to know what you are talking about rather than lean on Mrs T, a sure indication of no real ideas.

      • intertubernet

        ” Not sure how taxis got into the discussion”

        It was a simple example from Ronin of how existing wealth continues to capture more wealth into the future despite doing nothing truly productive – it’s economic rent. This sort of scenario is widespread (outside taxi plates as well) and one of the fixes could be a wealth tax.

        “Can I suggest (politely) that you are maybe not that literate with finance???”

        Please don’t do that! Most people here are very financially literate, or if not (like myself) already aware of their ignorance. If you think someone is ignorant or misunderstands it is more helpful to politely educate (summary argument with links is traditional on MB).

        Also, the nationality of a person has nothing to do with the validity of their ideas – yes, even if they’re French.

      • “The irony of course is that Piketty books sales have boomed in the US (number one I think), UK and elsewhere in Anglo-Saxon world. But funnily enough, never took off in France. Why?”

        Because in Europe everyone knows and study the greatest philosophers and their humanist ideas and they don’t need to get crazy about something they already know. France is a very strong democracy, but just like the first child care for working people and 8 hours working day in Robert Owens business couldn’t succeed, because it was surrounded by very different exploiting business culture, where the kids were working 14 hours per day and even during night shifts, the same is the reason today why an isolated wealth tax in one or two countries will be futile.

        That is why today’s France policies of wealth tax cannot succeed neither, because capitals and wealth can fly free to other tax heavens. Isn’t it so difficult to understand that national tax policies today are doomed if they are not strongly coordinated on a global level? It is useful to read Joseph Stieglitz on globalization and the consequent lost of national sovereignty.

      • Flyingfox,

        You can’t exclude South America – Brazil’s fertility rate is below replacement and their population will likely peak around the same time as China’s.

        You also can’t completely exclude India, where live births peaked in 2004, owing in part to a strong government campaign to drive down fertility (likely to be at replacement-only level of 2.1 within the next decade.

        Just say ‘everywhere’.

      • casewithscience

        @Statsailor

        I understand the Punjabi governor believed that fertility could be pushed down by introducing electricity and televisions across the province, thus reducing the inclination to have 20 kids per couple because of MasterChef.

        (True story, except for the Masterchef).

      • @Statssailor Yes you are correct. Some places will just be much sooner than others.

      • Ronin8317 … +∞

        “The problem is not wealth per se, but when the return on capital exceeding economic growth…”

        Correct. A direct function of usury, as evidenced time and again throughout recorded human history (cf. Michael Hudson). Compound interest = geometric growth. Real (non-financial) economy = arithmetic growth. By permitting usury, the consequences are baked in.

        Usury is analogous to Baker’s Yeast.

        A single celled fungi, which converts carbohydrates into carbon dioxide bubbles, and ethanol. A tiny amount of which converts what would otherwise be simple hard “unleavened” flatbread, into the light, fluffy, tastier, “raised” bread with which we are now so well-accustomed.

        Pump up the volume.

        Thoughtful readers might do well to ponder the origins in tradition and religion for the eating of simple “unleavened” flatbread; (ie), at Passover, to commemorate the Hebrew exodus from slavery.

        “Those with wealth don’t produce anything, and simply become richer through economic rent because they’re wealthy.”

        Correct. Compound usury wins, every time. A mathematical certainty.

        “A wealth tax is only one solution …”

        Incorrect. A wealth tax is no solution, because it leaves the root causal problem wholly unaddressed.

        No wonder TPTB — who, in Oct 2013, via their IMF, preempted Piketty in calling for a 10% “wealth tax” (ie, a biblical “tithe” to the priest tribe of global usury/finance) — are gleefully fuelling so much interest in Piketty’s tome.

        “…the other solution is to stop the distortion in the economic system.”

        Correct. Eliminate the baker’s yeast, so that everyone — especially the bakers — must return to eating only simple unleavened bread.

      • Opinion8erd,

        Unleavened bread is the ‘bread of affliction’. It is eaten in bitter remembrance of previous tribulations, not as the principle component of one’s diet.

        Leavened bread, meanwhile is the prescribed peace offering and the prescribed thanksgiving for first fruits, suggesting it has its place when used correctly.

        It is not usury it toto which is the problem, but rather its excessive and incorrect use, along with a myriad of other confounding problems.

      • Statsailor,

        Respectfully, this is a misdirection.

        Throughout the bible, both OT and NT, “leaven” is consistently associated with the concept of sin (specifically, the sin of Pride or “puffing up”).

        The “bread of affliction” angle is attributable only to one verse, in the book of Deuteronomy. Scholars have long attributed the compilation of Deuteronomy to the post-Babylonian exile period, along with the reforms of King Josiah.

        http://en.wikipedia.org/wiki/Book_of_Deuteronomy#Composition_history

        An informed study of Babylonian Talmudic writings, on this and many other topics, shows that it is not unreasonable to suggest that the latter compilation of laws (and tale-telling) in Deuteronomy are (a) inconsistent with the accounts of similar purportedly historical matters in the earlier books of the Pentateuch, and (b) influenced by the 70 years exposure to Babylonian culture during the Exile.

        “It is not usury it toto which is the problem, but rather its excessive and incorrect use…”

        The classic rationalisation employed by the usurer, for millennia.

      • drsmithyMEMBER

        As Thatcher once remarked, “The problem with socialism is that you eventually run out of other people’s money.”

        Was that because she didn’t understand socialism, or because she didn’t understand money ?

    • Researchtime,

      “….I love the term “progressive”…..”

      Was that directed at me?

      Who said anything about progressive.

      If you think that land tax as an alternative to income tax is loony “progressive” nonsense than you are clearly on the lam from an ultra-libertarian pasture somewhere.

      Perhaps your objection was to my suggestion that there be a threshold for the taxation of wealth and thus an implied ‘progressive’ approach to taxation.

      I can accept that though I think there are sound arguments from even the libertarian end of the spectrum for a lower taxation regime on low income earners in an environment of consumption and land taxes affecting the price of what they consume. Basically, encouraging people to get out and earn an income rather than passively accept distribution.

      As for the mechanics of wealth taxes I think there are good practical arguments against trying to tax wealth and to a lesser extent inheritance.

      Most of the important benefits can be reaped from land taxes, capital gains taxes and consumption taxes replacing to a large extent taxes on labour.

      • intertubernet

        “Most of the important benefits can be reaped from land taxes, capital gains taxes and consumption taxes replacing to a large extent taxes on labour.”

        Yes! So much yes!

  2. Tassie TomMEMBER

    Totally agree with a wealth tax, not too keen on an inheritance tax.

    I don’t think a wealth tax should be progressive – it should be (for example) 1% per year on all wealth for everybody. According to ABS wealth distribution data, 55% of households have less than $500,000 in wealth, and so would pay less than $5000 in wealth tax, whereas the wealthiest 20% would pay 61% of this tax (as they own 61% of the wealth). It doesn’t need to be any more progressive than this.

    This same ABS data estimates our combined net worth to be about $6.3 trillion, which at 1% would earn the government $63 billion per year.

    The wealth tax could be sold to the public by dropping (and preferably flattening) income tax rates: “Instead of taxing aspirational Australians so much that they can never accumulate wealth, we will tax them less to give them the opportunity to become wealthy, and only once they are wealthy and can afford to pay more tax we will tax them more.”

    One thing not mentioned is that wealth taxes encourage efficiency of capital allocation. If you make 4% on your wealth and pay 1% tax, you are up 3% (minus inflation). If you make 6% on your wealth and pay 1% tax you are up 5%. Buy if you merely sit on your wealth (family home, land banking, unoccupied investment properties), then you are down 1%.

    • Good point about allocative efficiency but extended it to include family homes of any value may kill it in its tracks.

      The offer of a high tax free threshold on income and very low income tax rates that cover 70-80% of workers and modest flat rates for those above that would be very compelling.

      The least painful way of introducing a wealth tax IMHO is to offer large income tax cuts paid for by a commonwealth land tax (with thresholds) like the one abolished by Menzies.

      • drsmithyMEMBER

        Good point about allocative efficiency but extended it to include family homes of any value may kill it in its tracks.

        How about a wealth-tax-free threshold of whatever the median value of a home is ?

        (EDIT: I suppose this does create a bit of a perverse incentive to pump house prices…)

        1% on wealth above that level.
        2.5% on wealth >10x median ?
        5% on >100x median ?

        Income tax free threshold of median wage ?
        25% on income from median 10x median to 100x median ?
        75% on >100x median ?

        Haven’t really thought that through. It’d be interesting to see how the numbers actually played out. Seems like it’d be a tax cut for most ?

      • How about a wealth-tax-free threshold of whatever the median value of a home is ?

        yes – something like that.

        Of course, a commonwealth land tax on all land including the family home would be a wealth tax.

        By limiting it to land over a certain value per sqm it should be possible to minimise its application to the lowest value land (i.e low income earners land and perhaps agricultural land). Using that approach it would be possibly for higher rates for higher valued land – though you would not want to discourage people from increasing the unimproved value of land.

        The question is whether the politics of a land tax are better than the politics of a wealth tax or an inheritance (death tax).

        I reckon a land tax is much easier to sell as a package with significant income tax cuts and compensation for pensioners etc

        Plus it should be easier to dodge the usual scare campaigns that would accompany a wealth tax or an inheritance tax.

        One other thing (which I know nothing about) is what would be the mechanics of imposing a wealth tax. At first glance it seems likely to generate a mountain of work for lawyers and accountants as people try to hide their wealth from the tax man.

        Very hard to hide land.

        Hard to understand why the ALP and the Greens are dead on the issue of a commonwealth land tax. It is a natural fit for their base and a compelling policy proposition.

        “Cut income tax – the best way of helping working families do what they do best”

      • Rumplestatskin

        There are tax-free thresholds and incremental tax rates on wealth in France, exactly as you suggest drsmithy.

        http://www.notaires.fr/notaires/en/solidarity-tax-on-wealth

        The catch here is to ensure appropriate gift taxes and other monitoring taxes place in order to reduce avoidance by the super wealthy. There are many finer details to these tax systems that are crucial to their success (in terms of fairly taxing people who genuinely fall into the wealth categories).

      • Rumplestatskin

        @migtronix,

        Yeah, sure, most super-wealthy from ANY country probably have a Swiss bank account.

        As I said, there are many details to consider.

        But I don’t see the ‘fleeing capital’ that the Swiss bank account represents as a problem per se. Who cares if some rich bugger has a few Francs. If they want a return they will have to buy some assets and when they do, if those assets are in a country with a wealth tax, they will be taxed.

  3. migtronixMEMBER

    Great post again rumples!

    In Spain at least it was a confluence of inflation and the dying years of Franco – much wealth had been concentrated through the fascist years and the anger was rising! It turned into a revolution after all…
    But 0.5% of the whole tax take is not a wealth tax it’s a joke. Revenge will be the real wealth tax.

  4. I’m not a fan of wealth taxes, although I do favor land taxes.

    The difference as I see it is that land taxes target rent-seeking behavior whereas wealth taxes unfortunately capture the capacity of those few in the economy that could really make a productive difference and redirect their capital into unproductive distribution. It takes committed capital and an over-sized ego to believe you can make a difference. Guys like Twiggy risk everything they have to create FMG, good a lot of it is not their money BUT I guarantee you if they were not 100% personally committed the venture would never have gotten off the ground. Unfortunately wealth taxes capture their cashflow and redirect it away from their plans.

    • migtronixMEMBER

      Disagree! They do not “risk everything” to get on the debt bandwagon at limited liability FFS! Working chumps risk everything by having their “super” go into the WorldWideCasino known as fiat-based usury

      • For the first 5-10 years you are exposed.

        Most lenders demand personal guarantees on top of the legislated ltd liability at the beginning.

        Also, Twiggy risked more than that. Real risk is not a second mortgage to punt on a business.

        Real risk, the type that Twiggy took is more personal. It’s leveraging up his network for potential failure. So he’s not only balls deep, they are exposed too.

        He risks his family relationships, his health whilst chasing something that may not work, or some 3d1khole lender will flick off and claim for the bank at distressed prices.

        No social life, no holidays, missing benchmarks of your childrens development. The simple pleasures of life come to a standstill.

        And with no guarantee of success, it could be 2..3..10 years for nothing.

        Gina is deservedly worthy of derision, disgust…and probably assassination.

        Twiggy, despite his personality flaws, is someone who took a major risk, something that very few of us are capable of.

      • migtronixMEMBER

        @Rus

        Oh Noes!! Twiggy might get brown-nosed by his private school mates if he loses some equity in the venture — what a risk-taker!!

        Those refugees putting their children into a leaky boat to escape the devastation caused by the worldwidebanking cartel should really take a leaf from the Book of Twiggy and prostrate themselves at the feet of this bastion of Risk Taking!?!?!?!?! WTF?!?!?!?!?

      • Hey, I’m not denying many refugees take risks themselves.

        They too have very compelling motives.

        But Forrest didn’t inherit daddy’s mining leases, where Rio does all the work for you anyway, nor started Roy Hill 5 years after someone else started FMG…. at the to of the market because he was a slow mover.

        In terms of creating enterprise, Forrest did a hell of a lot. It’s not a costless venture on his behalf.

      • migtronixMEMBER

        Big deal! He found backers to dig up the pilbra. Wow. No one’s ever done that before. Not like those pikers at atlasian who spent 10 years developing the best s/w dev support tool on the planet…

      • Big deal! He found backers to dig up the pilbra. Wow. No one’s ever done that before.

        People have done that before. They are projects however about timing and scale.

        Not like those pikers at atlasian who spent 10 years developing the best s/w dev support tool on the planet…

        Are you of the belief I am holding Atlassian in a lesser light than Forrest?

        I’m not. I holding them in greater light.. Forrest was the example raised.

        But they are all entrepreneurs none the less.

        I agree, the Libs are the party you elect when you want to syphon away wealth from enterprise to the bogan, and Australia is pretty anti-enterprise.

        But Forrest is not the cause, nor even a symptom.

        Frank Lowy, Gina Rinehart, Harry Tribugoff, Reg Kermode, Soloman Lew, Gerry Harvey, Eddie Obeid…. these are all people who should be rallied against, not Forrest.

      • migtronixMEMBER

        I never railed against Forrest but I don’t think a silver spoon banker turned miner the apogee of risk taking either

      • No one ever made that claim.

        The guy who starts a small business as cleaning windows in an industrial estate isn’t an apogee either.

        But his enterprise is valued.

        The government bureaucrat who inteferes, or

        the vocational body that such as the chartered window cleaners of Australia, that seeks to lock him out without an higher membership fee, or

        powerful private sector players that seek to undercut his wages due to a power disparity, or

        a fat oligarch who seeks to have him work for 42 a day, or

        a 3d1k who seeks to import 457 visa labour to undercut his wage

        are the people whose actions are degenerate, not Twiggy.

      • migtronixMEMBER

        whose actions are degenerate, not Twiggy.

        No one ever made that claim! I don’t think Twiggy is degenerate — far from it — but I don’t think that particular enterprise is anything to shout to our future about…

    • I agree.

      The wealth of ‘land’ isn’t created.

      The real wealth in enterprise is processes, systems, intellectual property…. stuff that guides human resources.

      Goodwill in otherwords, and we should incentivise to maximise this where possible.

      In a perfect world of no inflation, the only increase in the value of a company is its goodwill.

      If you could effectively tax wealth sans goodwill.. so tax the book value of stuff, that could work.

      Of course the rational thing to do is disguise everything as goodwill.

      An unimproved land value tax is probably the closest proxy

      I would also assert a very low income tax (to a hours exerted threshold) is probably best for salaried workers, and society.

  5. Nice thinking. I think the key challenge is to convince the wealthy that they benefit ( in many many ways ) from a more equal society.

    • intertubernet

      Not having your kids kidnapped for ransom. Not being car-jacked in broad daylight.

      Both common in countries with large wealth divides.

  6. Stephen Morris

    The principle of wealth tax is easy to explain. But, as always, we must go back to the beginning and start with Coase:

    “. . . what are traded on the market are not, as is often supposed by economists, physical entities but the rights to perform certain actions . . .” and those rights are protected and enforced by the state.

    Property is simply a bundle of such rights. It does not exist independently of the state. Property is a creation of the state. With no state, there is no property. With no state, every individual would be required to defend his or her claims against those who would oppose them with violence.

    To fund this most basic service the state must raise money. Not just for the police force – the last thin line of defence – but for maintaining the social stability which is ultimately what allows rights to be protected and enforced. Without social stability, no police force would be up to the job of enforcing property rights. Or, if it were, it would need to be so brutal and intrusive that it would destroy all other commonly accepted human “rights”.

    And for the insurance of property rights by the state it is only reasonable that the amount of insurance premium paid should be in proportion to the value of the rights thus protected. That is a basic principle of insurance.

    That – in a nutshell – is the theory of wealth taxes.

    The democratic Swiss cantons – which are governed on behalf of their citizens rather than by corrupt politicians on behalf of their patrons – use wealth taxes to keep down income taxes. Thus there is little disincentive to engaging in productive work, but accumulated wealth (which often comes not from work but from the exploitation of market power) is taxed.

    Wealth subject to the tax includes (see http://www.pwc.com/us/en/hr-international-assignment-services/assets/switzerland-folio.pdf) not just real estate but:

    – immovable assets (real estate);

    – movable assets (securities and other investments);

    – cash, gold, precious metals;

    – cash value of life assurance policies;

    – shares in undistributed inheritances;

    – business capital, shares in a partnership; and

    – motor vehicles, boats, etc.

    Pension funds are not considered as assets, and all liabilities can be deducted in order to determine net wealth. In some cantons there is an allowance depending on the status of the taxpayer (married, single, number of dependants) while in others an allowance is made in the tax rate.

    Taxpayers must declare worldwide assets belonging to all immediate family members. Foreign real estate and qualifying business interest are exempt but made be taken into account in determining the tax rate. Liabilities are allocated according to the location of gross assets.

    Typical assessments for 2010 on CHF1,000,000 owned by a married couple were (from the same source):

    Zurich 0.2% (CHF2,000)

    Basel City 0.58% (CHF5,800)

    Geneva 0.62% (CHF 6,200)

    Of course, all this is predicated on democratic government. With democratic government citizens may structure their society as they wish. In the absence of democratic government no such reforms can be achieved, or if they are achieved they will soon be reversed by corrupt politicians beholden to their sponsors.

    Everything begins and ends with Democracy. With Democracy everything is possible. Without Democracy all other battles are ultimately futile.

    • Democracy is a concept that has taken on a very peculiar definition in the Anglosphere. By design. People are not educated about the fundamental concept of what an elected leader and representation truly mean. It is now degraded from a collective decision making instrument into an exercise by individuals in selecting which feudal lord they might tolerate.

      • migtronixMEMBER

        Which is astounding considering that the Protestant victors of the English Civil War, and the one who set the paradigm under which we still live — an inherited monarchy that gives allegiance to the British parliament and cannot act outside the bounds of the articles which gave a freedoms to all protestants (meaning you are in protest against the demands of Rome!).

        How it came to pass that these freedoms were rendered neutered via the passage of “legislation” is a travesty.

      • But the feudal lord has to capture the majority of votes (through primary and preferences) every 3 or 4 years.

        And often the Feudal lord doesn’t control the senate which in that case can stop most things that don’t get bilateral support.

        (Much legislation in the senate is passed with support of the opposition, but often after some amendment. In reality the opposition has the balance of power as much as the cross benches.)

    • migtronixMEMBER

      Man I’ve missed you SM! Another great post.

      I disagree with the notion of insurance being paid to the “government” and beside with a government most of the time you are trying to defend your “property rights” against government encroachment, eternal vigil is still necessary to demand an protect your rights… but yes an accountable form of government (not the House of Reps 3d!!!!) would go a long way…

  7. The statistics that Pikkety’s book cites actually reveal that the return on capital does not, historically, trend higher than the return on labour. And the concentration of wealth has improved over the last 200 years.

    So his contention that wealth will become more and more concentrated is actually undermined by the data sets he selectively picks from.

    • intertubernet

      Maybe, but in Australia the return on capital has clearly outstripped labour.

      In 1982, Australian GDP was around $193 billion, with wage share of around 61% ($117 bil), vs profit share around 19.5% (($37 bil).

      In 2013 with a $1.525 trillion economy, wage share of 53.5% (($815.9 bil) vs profit share of 26.5% ($404 bil)

      For labour it’s grown 693%, for profits it’s grown 1074%.

      * thanks to Rusty Penny for these figures.

  8. If you want a meritocracy then it is death duties that ought be considered, subject to some exemptions that allow some benefits to offspring and surviving spouses.

    Being fabulously wealthy because your parents were fabulously wealthy is not a meritocracy.

    In a meritocracy, every opportunity would be given to the young up to say the first year of tertiary study to set themselves up for life through education, including broad based subjects at introductory level to give context. This would be paid for through death duties.

    At that stage they would choose what they would pay for, if anything, using a HECS/HELP scheme.

  9. Many if not most economists are captured by the wealthy and capitalist institutions and think tanks. Anything that might conflict with the intersts of the employer is an inconvenient truth. Career risk is the risk on which money mangers and economists focus most attention.

    Read “Economists and the Powerful: Convenient Theories, Distorted Facts, Ample Rewards”.

  10. The problem with the inheritance tax was that it was the top one per cent of the population who could afford to avoid it.

    So, while it did raise revenue, that was mainly from the middle income earners. Effectively just another tax for the middle to pay, while the very rich had trusts and overseas tax havens, or simply over the years gifted assets to their heirs. A boon for lawyers, but nowhere near as efficient a tax as land tax.

  11. In the era of cheep money with 0 capital price, e.g. abundant credit and unlimited leverage, taxing net wealth is a not a radical solution. It will be welcome by many wealthy, because it is so easy to avoid by leveraging themselves even more.

    The debt tax is in Australia is targeting the wealthy, e.g. the people who are not paying much taxes because of negative gearing. It will be a joke and just hypocritical smoke hiding the extinction of all benefits for the middle and lower class, when preserving all entitlements and benefits for the FIRE ruling class behind the smoke screen.

  12. migtronixMEMBER

    You might want to check this one out Rumples…

    The redistributive consequences of economic adjustment following the great recession of
    2007/09 have been at the center of policy discussions in both advanced and emerging
    economies. Social discontent has been brewing even in economies with a positive track
    record of sustained growth and reductions in poverty and inequality. In this context, there has
    been an increased policy interest in the macroeconomic determinants of income inequality
    and, in particular, the link between inequality and fiscal policy. While the empirical literature
    on the microeconomic determinants of inequality is vast, especially in Latin America, much
    less attention has been paid to the underlying macroeconomic setting. This paper attempts to
    bridge this gap by combining fiscal data with household survey information at the state level
    for Brazil over the period 1995-2011 to assess the links between sub-national fiscal policy
    and income inequality.
    The rich data available for Brazil provides a unique opportunity for assessing this issue.
    Brazil is organized politically and administratively as a federal system consisting of 26 states
    and one federal district. The states are characterized by heterogeneous levels of inequality
    and fiscal outcomes, but share common institutions and federal regulations. The period under
    analysis is marked by important changes in fiscal institutions as states had to increase their
    primary balances in order to comply with debt renegotiation programs agreed with the
    federal government in the late 1990’s. Even those states that did not have significant debt
    levels were bound by new fiscal rules. This fiscally-constrained environment reshaped
    revenue and expenditure policies at the sub-national level after 2000.

    http://www.imf.org/external/pubs/cat/longres.aspx?sk=41553

    • intertubernet

      Is this part of your “mess with their minds by growing the download numbers” campaign, Mig?

      Because I am reading it now, and if it’s really boring I will want revenge! 😉

      • Nah that is our plan for making World Bank obscure reports top the NYT best sellers list.

        The IMF has a much broader and enthusiastic readership.

        Mig probably reads them via Google Glass (carefully they are monitoring you) while jogging around Albert Park. 🙂

        EDIT: Though I must admit I had no idea that Brazil was a federation. Mig do you know where there is an English translation of their constitution? I couldn’t find one. My Portuguese is limited to ordering charcoal chicken.

        Found one

        http://english.tse.jus.br/arquivos/federal-constitution

        Yikes that is chunky. Might be too much effort to assess the original distribution of powers between the centre and the states and the extent to which that has been ‘fiddled’ with by an activist court (even if they are strict legalists).

        Anyone know the answer to that question?

      • migtronixMEMBER

        Really? You find this boring:

        Yi,t = ρyi,t-1 + ΨΔpbi,t-1+ Σ(m:1…M)βmXm,i,t-1 + ui,t

        Where ui,t = α + λi + εi,t

        ?????????

        There’s no hope for you Intertube…

      • migtronixMEMBER

        Yes I DO know the answer Pfh007 — much as Brasilia is to Canberra (Lets rename it Australia huh?) the Federal govt is to the States here.

        Here’s a hint

        The first administrative divisions of Brazil were the hereditary captaincies (capitanias hereditárias), stretches of land granted to Portuguese noblemen or merchants with a charter to colonize the land. These captaincies were to be passed from father to son, but the crown retained the power of revoking it, which the king indeed did in the 16th century

        Sound familiar? Once you establish your hereditary claim (think Twiggy Forrest!) everything else is just gerrymandering…

      • intertubernet

        I dare say there is little hope for most of us!

        The mechanics of the analysis was interesting, but I will always be frustrated by the inevitable challenge of policy comparisons in economics – there are no true experiments because every scenario is unique.

  13. The personal income tax captures (at least in principle) the (actual) returns on wealth. A wealth tax would capture an imputed return on wealth. Why not just make sure your personal income tax works effectively?

    Bequests should be taxed as income in the hands of the recipients. This would address Piketty’s concern with inherited wealth.

    Accumulated wealth comprises in large part land and, increasingly, intellectual property. A comprehensive land tax should be applied as a complement to personal income tax on capital to keep the rate for the latter low given the associated costs from distortions to saving/investment decisions.

    As for intellectual property, reforms to make IP laws less restrictive would reduce the significance of IP as a vehicle for accumulating wealth.

    • migtronixMEMBER

      IP is rent seeking and that’s all it is, does nothing for innovation. For that you need competition and the ability to fail (go bankrupt with out the cost and stigma)

    • Stephen Morris

      “Why not just make sure your personal income tax works effectively?”

      A good point.

      The answer is that much wealth never makes its way into personal income tax. It is retained within corporate structures.

      And what is wrong with that? What does wealth matter if it hasn’t been distributed in the form of personal income?

      The answer is: “Because wealth is power.”

      The political power exercised by billionaires (think of some of them in Australia) does not flow from their high personal incomes. It flows from the favours which they can bestow from the companies they control. Policy is subverted to their wishes even if they never distribute a cent to themselves in the form of dividends.

      This wouldn’t matter so much if it weren’t so easy to buy corrupt politicians.

      But that brings us full circle back to the problem of non-democratic government.

      Everything begins and ends with Democracy. With Democracy everything is possible. Without Democracy all other battles are ultimately futile.

      • Agree corporate tax shelters are a problem for the personal tax system. But isn’t that what the company tax is for? The Australian company tax is effectively a withholding tax on company profits that is credited to shareholders when those profits are distributed.

      • Stephen Morris

        Most wealth of this magnitude is NEVER distributed as personal income. It stays within the corporate structure forever.

        James Packer – to take an example at random – didn’t pay out his father’s empire to himself as a dividend. He simply inherited control of the empire.

        And what is wrong with that? What does wealth matter if it is never distributed in the form of personal income?

        The answer is: “Because wealth is power.”

        The political power exercised by billionaires does not flow from their high personal incomes. It flows from the wealth they control within their corporate structures. It flows from the favours they can bestow from the companies they control. Policy is subverted to their wishes even if they never distribute a cent to themselves in the form of dividends.

  14. The “principle” (origin) of a “wealth tax” goes back to the Hebrews — and in turn, before them, the Babylonians — imposing a 10% “tithe” on everyone else’s wealth, paid to the “priest” tribe who, of course, were divinely “entitled” to lay about doing zero productive labour by which to support themselves.

    http://en.wikipedia.org/wiki/Tithe

    Note that 10% number. Precisely as per the IMF’s call.

    Where do all you naive fools reckon the proceeds of any “wealth tax” will ultimately end up, ‘eh?

    *shakes head*

    • Where do all you naive fools reckon the proceeds of any “wealth tax” will ultimately end up, ‘eh?

      Exactly …

      • migtronixMEMBER

        10% like the Catholics? Why one tenth? Well the ancients pre Romans used a 12 or 6 or 60 base numeric system – tenths were sort of unfathomable.

      • “At least as early as the Old Babylonian period c. 1800 BC, and probably even earlier, each major deity was assigned a number which was a fraction of 60. As chief of the pantheon, Anu was symbolized by the sign for “1″ (or alternatively 60/60ths), and was assigned 22 “children,” that is, fractional numbers that divide roundly into 60: 30, 20, 15, 12, 10, 6, 5, 4, 3, 2 and of course 1, and their reciprocals (in our notation a half, a third, a quarter, a fifth, a sixth, a tenth, a twelfth, a fifteenth, a twentieth and a thirtieth). The Sumerians called these fractions “children of 60″ or sometimes the “children of Anu.””

        http://michael-hudson.com/2000/03/how-interest-rates-were-set-2500-bc-1000-ad/

        http://en.wikipedia.org/wiki/Tithe#The_masretu_.E2.80.94_the_Ugarit_and_Babylonian_one-tenth_tax

        The number 6 (ie, a tenth of 60) has far-reaching significance. Think 666.

        EDIT: “Here is wisdom. Let him that hath understanding count the number of the beast: for it is the number of a man; and his number is Six hundred threescore and six.”

        Hudson also ascribes the “tenth” to classical Greek culture / economy.

        How the Hebrews settled on the “tenth” for their priestly “tithe” system, I’m not sure; haven’t thought to look.

        There are probably some cryptic clues associated with the OT references to the Ten Plagues of Egypt (where they were slaves), the Tenth of which (the “passover” of the angel of God, slaying the first-born children [think “interest” as offspring / “birth” of money, from money] of their captors) resulted in the Hebrews being set free in “The Exodus” (hence, a perpetual commemoration, via imbibing only unleavened bread in Passover week).

      • migtronixMEMBER

        @Op8

        Quite right! I think we should revisit and rewrite Shakespere’s Henry VI’s injuction:

        First thing we do, is kill all the bankers.

      • Mig,

        One could argue that there may be a biblical, “Divine” injunction to do something along those lines 😉 —

        After these things I saw another angel coming down from heaven, having great authority, and the earth was illuminated with his glory.

        And he cried mightily with a loud voice, saying, “Babylon the great is fallen, is fallen, and has become a dwelling place of demons, a prison for every foul spirit, and a cage for every unclean and hated bird!

        For all the nations have drunk of the wine of the wrath of her fornication, the kings of the earth have committed fornication with her, and the merchants of the earth have become rich through the abundance of her luxury.”

        And I heard another voice from heaven saying, “Come out of her, my people, lest you share in her sins, and lest you receive of her plagues.

        For her sins have reached to heaven, and God has remembered her iniquities.

        Render to her just as she rendered to you, and repay her double according to her works; in the cup which she has mixed, mix double for her.

        — The Apocalypse (Revelation) of John, chapter 18