Captial Tax - alternative more progressive tax system

[German-Lefty]

I'm going to propose a new tax and argue that it's better(less bad) than other taxes. I'd like some constructive criticism. I'd also like to know if anyone else has thought of it. If someone could find me an acurate value for total stock market capitalization, I'd be appreciative.

Capital Tax
A long time ago before we had income tax the government funded itself with property taxes. My suggestion is to update the property tax to apply it not just to land, but all capital in general.

Consider the objection to payroll and income tax that these taxes cause deadweight loss in the job market. Employers and Employees may not be able to find a wage that pays the employee enough and without costing the employer too much.

This tax would be even more socially just than progressive taxation. It is actually wealth redistribution. It's not taxing the rich for getting richer it's taxing them for being rich.

Another advantage would be that while profits may vary between boom and recession, a captial tax would generate steady revenue for the government unlike capital gains and dividend taxes.

How could such a tax be collected? We could dirrectly go to owners of large buisnesses, property, and other forms of captial, assess and collect like we do for land. This seems hard. A better option would be to let the market do the work. Take the trading mid price of public companies every year and tax that company based on that. This would allow Uncle Sam to assess the value of structural and intellectual property. It's a bit trickier for private companies, one option there might be to have Uncle Sam take tax as stock and auction it off.

I'm tring to get some numbers together to estimate how much revenue could be generated in this way. Acourding to US Department of Commerce Bureau of Economic Analysis the assets of industry they counted in 2001 was about 22,190,392,000. This maybe a floor since corporations are valued at more than the sum of thier parts. A 2% tax would just about balance the budget.

http://www.bea.doc.gov/bea/dn/faweb/FATableView.asp?SelectedTable=38&FirstYear=1996&LastYear=2001&Freq=Year

I'm not sure what the negative effects of the tax would be if it got too high. Perhaps it would discourage investment in captial. It would definately discourage people from sitting on capital. For example, if we tax unused farmland the owner will either plant something or sell to someone who would.

[Muddleoftheroad]

1. Massively complex, impossible to do

That's my take. Taxes based on income or spending follow the money. Money that moves leaves a trail. You seem to be advocating taxing money that doesn't move.

Sure, this is done in a small way on big purchases -- cars, boats, jewelry, but again, that follows the money.

What will you tax? Stocks and bonds surely. Bank accounts. Again, surely. Property, well that gets more complicated because there are no annual statements other than tax assessments. But I guess you would go for that. What about cars? Jewelry? Antiques? Homes? Collections?

If your "tax enforcers" come into my home, how are they to determine what is mine and what belongs to my children? I'm sure you will have some base under which things are not taxed, so that raises a problem. How do you tax property outside the U.S.?

This is a plan that seems like full employment for the IRS.

[leftyandproud]

2. and if you think job losses now are bad...

I'm afraid something like this will make starting a business in America even less attractive. I understand the principle behind it, and the need for fairness, but this is not the way to go about it. It will end up hurting those we want to help.

[German-Lefty]

6. Effects on investment

Yeah, that's my big worry too. I'd consider it like this: if I'm an investor and the going rate of returns on investment once you factor out risk is 4%, and the Captial tax is 2% than as an investor I'd say "Why should I invest Uncle Sam takes half the profits? I'll only get 2%." On the other side 2% is better than 0%, which is what I'd get if I hid the money. There is an important point though: the capital tax should never be above profitablity, or else the investor does loose money and would never invest, and companies would go bankrupt pay the tax.

Then again as you raise the tax the values of stocks would go down since the companies would be able to pay out less. If the stock values did go down though, the tax on the company would go down too. I'm not sure if this cancels out the other effect or what.

Let's say a company profits at 4% of stock value. Say you raise the tax to 2%. For international investors (big can of worms) they'd see the company as half the worth as before and the stock prices might be worth half then, but then the 2% would only generate 1% of the original value and the thing would pop up to 75%?!? Arg, I'm going to half to do some math here. Sorry I'll figuar it out and then post.
:hurts:

[trotsky]

8. Doesn't most of Europe have a "wealth tax"?

And how would that differ from what was proposed above?

[German-Lefty]

9. I can speak for German only

I've been here about three years. No they don't have this. They just have a dividend and captial gains tax. You can make a profit of up to 1600EUR before the take anything from you. If you buy stock and hold it a year or more there's no capital gains tax!!!

There's another problem. Banking privacy laws are such that the government that most people never bother to declare thier profits and hence don't pay taxes. You can also hide your money in Swizerland, Lichtenstein, and Luxemburg for example and never pay.

Acually property taxes on realastate here are low. I remember talking to a guy who wanted to buy a summer home in Florida. He said "Wow you guys pay like 8% (I think) poperty tax! It's like you rent your land from the government."

Over here they have a very high sales tax and income tax. I only see about half my check. In exchange though I don't need a car because there's good public transport; if I loose my job I get 70% pay for unemployment; college is pretty much free; health care is guarenteed.... :-) It's a good model for where progressives could take the US, but do try to do it more efficiently.

[German-Lefty]

3. I think I can answer that

Well the already have a tax assessor/collector. In Texas that's how schools are paid for, but yes it's not a very good system. You paint your house and the value of your property goes up, and you owe more.

I'm not suggesting going into people's houses and trying to count how much everything is worth. I'm suggesting for big captial -- corporations, the stock market tells us how much the stuff is worth. Plain and simple take the volume wieght average price of the year and mutliply by the number of outstanding shares; that's how much the company was worth. Let's do it for microsoft.
Mkt Cap = $284.5 Billion
http://finance.yahoo.com/q?s=MSFT&d=t

Say the tax is at 1% a year. They owe 2.840 Billion. That was easy! :-)

You're right in that it's hard getting at money that's not moving. Stocks move. Sure Bill Gates can burry a ton of gold in the desert, but Bill won't profit out of it as much as he would if he had a company. I'd be redistributing the wealth that was generating more wealth.

[German-Lefty]

4. Sorry reply was meant to go to:Massively complex, impossible to do

[Muddleoftheroad]

5. No problem

So, how does that impact the MASSIVE amount of money in retirement accounts and 401(k)s? Do you tax the company, in effect taxing the retirees, or do you let them off the hook by taxing only those who own the stock in other accounts?

[German-Lefty]

7. 401Ks

Do you tax the company, in effect taxing the retirees, or do you let them off the hook by taxing only those who own the stock in other accounts?
I've thought about that. We could leave it as a flat tax on wealth, which would still be pretty progressive, or we could try to be progressive about it and maybe kill two birds with one stone.

Right now you can open an offshore account and invest from there to avoid US taxes altogether. It's not legal, but the US is powerless to stop it. We could tax at the company and the kick back some of the money to investors who "disever it". Perhaps we'd say taxes on the first $20K you invest gets paid back or shield 401Ks and IRAs.

This would take care of the problem without dealing with sovreignty issues. :-)

[rogerashton]

10. Good idea in principle

and the problems can be solved. However --

the tax should fall on net wealth -- net of indebtedness.

It should fall only on fortunes above some limit -- high enough so that most retirement funds would be exempt.

The property tax is not a good model. It violates both of those standards, and in addition is very capricious -- assessments are highly random and often politically biased.

Equity in corporations should probably be valued on a basis of discounted present value of cash flows averaged over several years, rather than stock market value, and in that way could be assessed against the corporation with a rebate for the individual taxpayer. Commercial real property is also best assessed on a discounted present value while residential property can be fairly valued using statistical techniques. (I have a research paper on that if anyone is interested. I didn't do the actual work -- pretty much supplied coffee for the brainstorming sessions -- but it is a good paper anyway).

Now, suppose the tax rate is actually greater than the rate of profit. Is that a problem?

Suppose I have a fortune of 50 million (don't I wish) and the rate of return is 5%. Suppose the tax falls only on the amount over 10 million and is 10%. My tax bill thus is 4 million. If I invest my 50 million, then my profit is 2.5 million and, if I consume 500 thousand and reinvest 2 million of it, at the end of the year my wealth is 50 - 4 + 2.5 -0.5 = 48 million. If I do not invest, and still consume 500 thousand, then at the end of the year my wealth is 50-4-0.5= 45.5 million -- simply less by the amount of the investment return I have given up. Is it really rational not to invest in these circumstances?

Of course, I would not want to gamble too strongly on the idea that people act rationally in these circumstances.

[German-Lefty]

12. Thanks, I'm glad to get it the attention.

I liked your model there's just the one problem with it: we have to assume that people can squirl away money. If the guy has 50 million he could bury all but 10 million in gold bars to avoid the tax. Let's simulate that:

He can make his 5% on the 10 million which is exactly the 500,000 he wants to live off of.

I'm not sure how you can keep people from squirling their money away, so I think you'd have to keep the tax under 5%. Then again, I don't care too much if someone hides $40 million in gold somewhere. I'm more worried about people abusing corporate power, turning the majority of people into wage slaves.

Maybe someday most of the valuables in the economy will be things visible. Land is an excelent example of something you can't hide. I would say whole public corporations as are too. I think in the future more and more of Das Kapital is going to be intellectual property which is highly visible too.

[On the Road]

11. What About Donald Trump's Idea?

During his flirtation with running as a Reform Party candidate, he proposed a one-time 14% tax on all assets of over $10M. That would generate enough money to pay off the national debt.

Got to hand it to him -- he thinks big.

[German-Lefty]

13. Holy Crap - that's harsh

And I though my idea would piss the rich off. I was think slowly phase the thing in while decreasing payroll taxes to offset some of it.

Going after the debt is an important long term goal. Gee I wish the fiscally responsible democrats were still around :-).

The debt in the long term looks like Uncle Sam taxing normal people and handing the money to the rich for no reason. Completely anti-progessive.

I was suggesting something more suddle that could be phased in over the long term. That idea kind of reminds me of the Zimbabwe land reform. I perfer slow gradual change if possible. There's some saying if you took everything away from the rich many of them would become rich again. If that's the order of things fine, but make sure others still have something.