6 ms·

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

4 points by rayhano 14y ago

sjtgraham 14y 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.
- rayhano 14y 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.
  - sjtgraham 14y 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?
- shyn3 14y 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.
  - sjtgraham 14y ago
    One would still pay tax on any physical asset acquired with the money. The wealth tax is essentially a perpetual tax on possessions.
    - shyn3 14y ago
      Yes, sorry. I should have added if you blew it on booze and women. If you purchased anything of value you get screwed over by paying a higher tax rate.
rayhano 14y ago
Would really appreciate thoughts AND please do post results here from the new tax calculator at the bottom of the post.
- teyc 14y 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.
spullara 14y ago
Everyone would just move their money out of the UK.
- rayhano 14y 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.
  - shyn3 14y 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.
    - rayhano 14y ago
      There is no doubt that some individuals with massive wealth will consider leaving. However, looking at the history of tax rises and the competitive landscape, people don't move. Broken down: UK top rate tax was raised from 40% to 50% two years ago. They said people would leave. No-one did. Actually, more wealthy from BRIC nations came to the UK The US is the only competitive English speaking country for people from the UK to move to. And I'm sorry to say that US taxation is horrendous and massively uncompetitive. So while capital flight is a risk, it is improbable.
      - shyn3 14y ago
        There is a stark contrast between income and wealth tax. Income can already be circumvented by leaving money in corporations or paying out to subsidiary companies. There are so many ways people can declare lower income that the 10% becomes insignificant in the big picture. Capital flight/wealth tax is a different ballgame, I think.
deleted 14y ago
[deleted]
adamjernst 14y 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.
- rayhano 14y 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.
  - rogerbinns 14y 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.
    - rayhano 14y ago
      Interesting. Would you also not have suffered massive real loss from inflation over ten years eroding your return?
      - rogerbinns 14y ago
        Depends on the item. For example a car or a house also provides utility which is value extracted and not a loss. Most items should appreciate in line with inflation, all else being equal - after all inflation doesn't change real values, just the digits used to express that value. And in this example if I sold it for $100 then no tax would be due at all under current schemes. In your case I still have paid $40 in taxes in addition to the losses from inflation.
fiatmoney 14y 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.
- rayhano 14y 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).
  - rogerbinns 14y 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.
rogerbinns 14y 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.
- rayhano 14y 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).
csense 14y 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.
- rayhano 14y 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%?
rprasad 14y 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.

4 points by rayhano 14y 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.

rayhano 14y 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.
- sjtgraham 14y 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?
shyn3 14y 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.
- sjtgraham 14y ago
  One would still pay tax on any physical asset acquired with the money. The wealth tax is essentially a perpetual tax on possessions.
  - shyn3 14y ago
    Yes, sorry. I should have added if you blew it on booze and women. If you purchased anything of value you get screwed over by paying a higher tax rate.

rayhano 14y ago

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

teyc 14y 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.

spullara 14y ago

Everyone would just move their money out of the UK.

rayhano 14y 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.
- shyn3 14y 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.
  - rayhano 14y ago
    There is no doubt that some individuals with massive wealth will consider leaving. However, looking at the history of tax rises and the competitive landscape, people don't move. Broken down: UK top rate tax was raised from 40% to 50% two years ago. They said people would leave. No-one did. Actually, more wealthy from BRIC nations came to the UK The US is the only competitive English speaking country for people from the UK to move to. And I'm sorry to say that US taxation is horrendous and massively uncompetitive. So while capital flight is a risk, it is improbable.
    - shyn3 14y ago
      There is a stark contrast between income and wealth tax. Income can already be circumvented by leaving money in corporations or paying out to subsidiary companies. There are so many ways people can declare lower income that the 10% becomes insignificant in the big picture. Capital flight/wealth tax is a different ballgame, I think.

deleted 14y ago

[deleted]

adamjernst 14y 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.

rayhano 14y 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.
- rogerbinns 14y 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.
  - rayhano 14y ago
    Interesting. Would you also not have suffered massive real loss from inflation over ten years eroding your return?
    - rogerbinns 14y ago
      Depends on the item. For example a car or a house also provides utility which is value extracted and not a loss. Most items should appreciate in line with inflation, all else being equal - after all inflation doesn't change real values, just the digits used to express that value. And in this example if I sold it for $100 then no tax would be due at all under current schemes. In your case I still have paid $40 in taxes in addition to the losses from inflation.

fiatmoney 14y 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.

rayhano 14y 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).
- rogerbinns 14y 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.

rogerbinns 14y 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.

rayhano 14y 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).

csense 14y 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.

rayhano 14y 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%?

rprasad 14y 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.