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The Netherlands is an example of such a country which effectively taxes wealth, not income. Technically it does tax income, but it's an assumed fictitious incom

The Netherlands is an example of such a country which effectively taxes wealth, not income. Technically it does tax income, but it's an assumed fictitious income based on your net wealth that's taxed, regardless of actual investment income or the nature of your investments. There's definite pros and cons to this. The obvious pros is that it's relatively easy to administer as you don't need to record investment income or losses. You only need to measure net assets periodically, which is not easy but definitely a lot easier. It also means fewer loopholes are possible. On the other hand, those loopholes aren't set in stone, they're a human construct. Choosing to tax wealth instead of capital gains is a choice, just like the deductions and valuation rules and carryforwards and carrybacks are choices for capital gains taxes, which can be changed. But in general again here, taxing wealth is the simpler approach. The obvious cons is that it goes against basic principles of taxation that many people agree with (but seem to let go, at large amounts). The basic principle is: only if you earn money, you're supposed to share some of it to taxation to fund public goods and the less fortunate. That's why we tax added value, or profit, but not turnover. Taxing wealth means those with losses or no-income, still get taxed and lose money. In the Netherlands there've been many court cases against the state precisely because of this. People with $200k in savings, a zero-appetite for (risky) investments in stocks or bonds, are losing their own money (for which they've already paid either income tax or inheritance tax to gain) to taxes without any income. But it's more than that, even those who have large investment returns would feel it. (although here I would say, that's okay and entirely the point. Still it can be surprising to what extent). Paul Graham has written about how a small seemingly innocuous wealth tax (e.g. 1% per year) can really bite you over-time here: http://www.paulgraham.com/wtax.html http://www.paulgraham.com/wtax.html This is true essentially regardless of your average level of return, whether it's 0% or 5%. What the wealth tax does do is push you into riskier investments. If you pay 1% and have say a 1% savings account, your effective investment income tax is 100% and you slowly lose purchasing power to inflation. It almost forces you to invest in higher return, but riskier assets, like stocks. At the same time, people like me who average 20% returns per year so far, are very much undertaxed by a tiny 1% wealth tax (as there's no other capital gains tax in the Netherlands). It also very much favours leveraged investments, as it's a tax on net wealth, favouring heavy use of debt (particularly popular in Dutch real estate markets). Suppose you somehow borrow 99%, invest 1%, and average only a 1% net return on your total investments, you're still earning a 100% return which is then taxed at just 1%. It's a strange system indeed, not sure what system would be best, but wealth tax systems have some obvious flaws as well.

bestcoder69 5y ago
I feel there’s a rhetorical trick where detractors of the current US system are expected to create the perfect system, when the US one is very very far from ideal (e.g. generates little revenue, burdens the wrong people, any everyone hates it). No matter what we have to make arbitrary decisions just to have a workable decision. (This isn’t really a direct comment against your post, it just got me thinking.) That’s all to say, I’m dead curious how we could simulate the effect of the Netherlands tax system here and how much better/worse off the median family would be under it. Simple but too easy answer is “much better” by skipping the simulation and looking at the actual stats in the Netherlands and other Nordics.
- md_ 5y ago
  Well, all tax schemes are about balancing potential perverse incentives or other warping effects against the social interest of, you know, collecting tax revenue. I am a little bit skeptical of the assumption that a wealth tax encourages riskier investment strategies, though. After all, the effect of a fixed rate wealth tax is the same irrespective of your investment strategy; riskier strategies still yield both greater potential returns and losses.
  - IkmoIkmo 5y ago
    > I am a little bit skeptical of the assumption that a wealth tax encourages riskier investment strategies, though. After all, the effect of a fixed rate wealth tax is the same irrespective of your investment strategy; riskier strategies still yield both greater potential returns and losses. Yes you're fully correct, in principle it should be no different financially. But for people holding straight up cash, there's a psychological hit to seeing your nominal amount of money go down due to a tax bill. If you hold $100k and it turns into $99k, then $98k, then a few years later $95k, you'll feel some drive to compensate those losses. If you hold $100k and it stays that much, a lot of people feel very comfortable and safe with keeping it just like that. (particularly in Europe where many countries don't have as much of a direct stock-investing culture traditionally, and where stocks are still seen by many as a form of gambling, or a world full of scams where only a few clever people profit, particularly the older generation). For example in many European countries banks now charge minor negative interest (e.g. -0.5%) on your savings account (due to the negative deposit facility rate of the ECB). Suddenly there's an uptick of people who take their savings and invest it, because otherwise they'd 'lose money' and actually see their savings drop over time simply by holding it in a bank account. However, these same people happily let that cash sit for 10 years at an inflation rate averaging 2%, losing 20% of their purchasing power in this time, responding differently to a universe in which inflation was 0% but the bank or taxes took the same 2% a year. They also happily ignored opportunity costs of various low-risk assets (e.g. a 3y savings deposit) that they could've invested in but didn't. Compared to letting the cash sit idly, the 2% inflation or 2% opportunity costs on low-risk asset-returns were happily ignored, yet when a -0.5% interest rate is charged by a bank, many spring into action. It's likely because while it may not be financially as bad, psychologically seeing $100k turn into $99k, or literally seeing interest charges being deducted from your account, feels worse than if $100k stays $100k nominally but is only worth $98k in real terms due to inflation, even though that's worse. The fixed wealth tax works a bit similar. You have all these people who, every year, receive a tax bill, and are seeing a chunk of their savings having to be sent to the tax authorities. It inspires people to seek out financial advisers to help them compensate this. If at least you're compensating the fixed tax bill with a return on the stock market for example, it doesn't feel as painful. Anyway that's what I'm seeing among friends/family and cobbling together from various sources, but it's just a hypothesis.

bestcoder69 5y ago

I feel there’s a rhetorical trick where detractors of the current US system are expected to create the perfect system, when the US one is very very far from ideal (e.g. generates little revenue, burdens the wrong people, any everyone hates it). No matter what we have to make arbitrary decisions just to have a workable decision. (This isn’t really a direct comment against your post, it just got me thinking.) That’s all to say, I’m dead curious how we could simulate the effect of the Netherlands tax system here and how much better/worse off the median family would be under it. Simple but too easy answer is “much better” by skipping the simulation and looking at the actual stats in the Netherlands and other Nordics.

md_ 5y ago
Well, all tax schemes are about balancing potential perverse incentives or other warping effects against the social interest of, you know, collecting tax revenue. I am a little bit skeptical of the assumption that a wealth tax encourages riskier investment strategies, though. After all, the effect of a fixed rate wealth tax is the same irrespective of your investment strategy; riskier strategies still yield both greater potential returns and losses.
- IkmoIkmo 5y ago
  > I am a little bit skeptical of the assumption that a wealth tax encourages riskier investment strategies, though. After all, the effect of a fixed rate wealth tax is the same irrespective of your investment strategy; riskier strategies still yield both greater potential returns and losses. Yes you're fully correct, in principle it should be no different financially. But for people holding straight up cash, there's a psychological hit to seeing your nominal amount of money go down due to a tax bill. If you hold $100k and it turns into $99k, then $98k, then a few years later $95k, you'll feel some drive to compensate those losses. If you hold $100k and it stays that much, a lot of people feel very comfortable and safe with keeping it just like that. (particularly in Europe where many countries don't have as much of a direct stock-investing culture traditionally, and where stocks are still seen by many as a form of gambling, or a world full of scams where only a few clever people profit, particularly the older generation). For example in many European countries banks now charge minor negative interest (e.g. -0.5%) on your savings account (due to the negative deposit facility rate of the ECB). Suddenly there's an uptick of people who take their savings and invest it, because otherwise they'd 'lose money' and actually see their savings drop over time simply by holding it in a bank account. However, these same people happily let that cash sit for 10 years at an inflation rate averaging 2%, losing 20% of their purchasing power in this time, responding differently to a universe in which inflation was 0% but the bank or taxes took the same 2% a year. They also happily ignored opportunity costs of various low-risk assets (e.g. a 3y savings deposit) that they could've invested in but didn't. Compared to letting the cash sit idly, the 2% inflation or 2% opportunity costs on low-risk asset-returns were happily ignored, yet when a -0.5% interest rate is charged by a bank, many spring into action. It's likely because while it may not be financially as bad, psychologically seeing $100k turn into $99k, or literally seeing interest charges being deducted from your account, feels worse than if $100k stays $100k nominally but is only worth $98k in real terms due to inflation, even though that's worse. The fixed wealth tax works a bit similar. You have all these people who, every year, receive a tax bill, and are seeing a chunk of their savings having to be sent to the tax authorities. It inspires people to seek out financial advisers to help them compensate this. If at least you're compensating the fixed tax bill with a return on the stock market for example, it doesn't feel as painful. Anyway that's what I'm seeing among friends/family and cobbling together from various sources, but it's just a hypothesis.