Sunday, January 7, 2007

The Asset Tax

For a very long time, I’ve supported a switch away from the income (“productivity) tax and toward some sort of consumption based tax (ie. The Fair Tax;

I’ve even opposed the Flat Tax as a “half measure” that still puts the complete onus on productivity, doesn’t touch those in the “off-the-books” black market, nor those who don’t depend on income for wealth (the truly “rich”).

But a co-worker of mine (Antonios Benetatos) came up with another tax plan that would probably more closely resemble that proposed by the late, great social reformer Henry George.

I've found Antonio's proposal so interesting that I decided to try and evaluate its pros and cons right here. Depending upon the input, this could be continue as an ongoing tax policy review. Since Henry George's ideas were reviled on the Left as much as on the Right, I expect that Antonio's will be no less controversial.

So in the spirit of an even more extreme idea making another one seem less extreme, by comparison, I figured I’d unveil the basic outline of this so-called “Asset Tax.”

Perhaps the reason I like Tony’s idea so much is that it embodies some of Henry George’s views, many of which I found very appealing. Ironically enough, Tony Benetatos is unfamiliar with George’s works, or even Henry George himself, so that made his “Georgist” idea that much more fascinating to me.

What Tony proposed is basically a “tax on money,” that is a tax on savings, pension plans, all manner of investment vehicles, even all fungible assets.

Tony’s plan allows the first $100,000 of accrued monies to be tax exempt, as well as the value of your primary (living residence) would also be tax exempt. This Asset tax would, of course, replace all current Federal taxes – the personal and corporate income tax, FICA taxes, etc.

Beyond that, the total of your assets would be taxed incrementally, maybe 5% on assets from $101,000 $10 million, 8% on assets between $10 million to $50 million, 10% on assets from $50 million to $100 million, 15% on assets between $101 million and $500 million 20% on assets between $501 Million and $1 Billion, 25% on assets of over $1 Billion.

Those who argue that this tax wouldn’t raise near enough revenue apparently fail to take into account that the richest 10% of Americans have accrued appx. 39% of the nation's real wealth.

This asset tax would, in effect, like Henry George’s “Single Tax,” put the onus or tax burden on the hoarding of wealth.

A Fatal Flaw?

Of course, the fatal flaw in this idea is that it makes no distinction between invested monies and hoarded monies...and THAT is indeed problematic.

The primary problem with this idea is that in taxing fixed assets and not growth it amounts to an unconstitutional taking by the government.

But like Henry George’s system that sought to levy a high, punitive tax on hoarded land, this tax would merely tax hoarded monies, but taxing an asset and not its growth results in a taking that could very well undermine the major investments that are the foundation of our economy. Consider that a fixed asset taxed at 10% per year would be taxed 100% of its value in just 10 years.

Proponents like Antonios argue, “That if you consider the extreme disproportionate distribution of wealth, note that the top 20% of American households control 83 percent of the nation’s wealth, while the bottom 80 percent of Americans control only about 17 percent of the nation’s wealth, to be a problem, then the asset tax may be the only vehicle that actually addresses that problem.”

Killing the Golden Goose (Investor)?

But at what cost?

Especially if the result is that mega-investors like Gates, Forbes and Buffet are forced to liquidate their invested assets to pay this tax meant to remedy the hoarding of wealth and deal with the extreme disparity in wealth noted above.

Certainly there is no doubt that the asset tax would be a grossly redistributive tool and one that would perhaps do terrible damage to the foundation of our economy – private investment.

We complain about our economy a lot in America and that’s probably because so many of us are blithely unaware of how well off we are!

Those who decry the “huge and growing” disparity in wealth, look at the fact that the richest 10% of Americans today control 39% of the nation’s wealth.

Well back in 1935, the richest 10% of Americans controlled 37% of the nation’s wealth.

That’s an awfully small amount of growth in that gap. Moreover, the gap in other countries is not significantly less than here!

Unfair America?

How about America’s so-called “disgraceful” poverty rate?

OK, how about it?

The United States poverty rate stands at 12% right now (appx. 36 million Americans), but our utopian neighbor to the north, Canada, has a poverty rate of 15.9%, even merry old England has a poverty rate of 17%, while Chile's (the jewel economy of South America), is 18.2%, and Argentina has a whopping 38.5% of its population living in poverty!

While Belgium has a significantly lower poverty rate than the U.S. (4%), it also has an unemployment rate nearly double ours (8.7%).

As a sidelight, the much ballyhooed economy of Venezuela, one often lauded by many misguided American Leftists, has a staggering 47% of its population living in poverty, an unemployment rate of over 12%!

Compare Chavez’ Venezuela NOT to the U.S., but to Chile (whose economy is still largely based on the Free Market Friedman reforms) and it comes up woefully short to its South American neighbor, with a poverty rate some 2½ X higher than Chile’s, with an unemployment rate more than 50% higher (8% for Chile to 12% for Venezuela), not to mention the huge difference in the inflation rates – 3.1% for Chile, to 16.1% for Venezuela.

Compared even to Chile, Venezuela is an economic basket-case!

Looking at things globally should make it clear that we Americans don’t have a bad economy at all. In fact we have a remarkably stable and relatively equitable one, compared to most other nations.

That’s why, when all is said and done, after considering Antonio’s proposed Asset Tax, I’d still much prefer a switch to a Consumption Tax. It wouldn't eliminate the natural disparity in wealth that seems to occur in all socities, but at least it wouldn't punish productivity and it would reach those currently avoiding their tax burden by working "off-the-books," and impose a much more representative tax liability upon the truly wealthy.


Aaron Drake said...

I agree with you on your conclusion that an Asset Tax just wouldn't work. One sentence in your last paragraph bothered me though, the one on eliminating the natural disparity in wealth. Doing that would eliminate everyones desire to work for something better.

John Rudge said...

In truth it doesn't really matter. Any system put in place would become exploitative and corrupt eventually-such is human nature. Besides the climatic and environmental chaos sprung from global warming should effectively devastate humanity within the next hundred years anyway.

JMK said...

That's true, anything humans touch DOES get corrupted.

I think the fatal flaw of the asset tax is that it would force many of the people who start businesses that go public (like a Bill Gates) to divest themselves of their stock, thus reducing their overall control over the businesses THEY created.

Who cares more about a given businesses success than its founder?

Who could possibly have a better vision for it?

The reason I support a switch to the Consumption Tax is that it would (1) take the onus off of productivity/income, (2) tax the "underground" or "off-the-books" economy and (3) tax the truly wealthy (people like Teresa Heinz-Kerry and Tom Kean Jr who despite immense wealth, paid only 5 or 6 percent of their income in taxes.

THANKS for taking the time to go through the various pieces here. I know I can be somewhat long-winded....I've got to work on better verabl economy.

Seriously, THANKS for coming by and reading and leaving some great comments!

Otto said...

There is a problem with the consumption tax. It would severely punish people who have paid income taxes on earned income and then saved some of that money in something other than a tax deferred account.

For example, a Roth IRA is funded with money that you have already paid income taxes on. You do this with the understanding that, once you retire and spend this money, you will not be further taxed. With a consumption tax you would be taxed twice. The same is true with any savings you have in a regular taxable account.

So even if the consumption tax replaced the income tax, it would penalize people who have already saved under the current tax system.

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