There has been some welcome discussion of wealth taxation of late. Given the scale of wealth inequality in society this is overdue. But in this context, it is important to discuss the subject appropriately.
There is, of course, an economic concept of wealth. This, in my opinion, explains stores of value. What this concept does not do is explain capital, which is something quite different.
There is also a legal concept of wealth. This is the claim, backed by law, to exercise control over an asset.
And there is a metahysical concept of wealth. This relates to the power that the exercise of wealth affords to the person in possession of it, and the consequent reaction amongst those impacted by the decisions of those with that power.
What all three concepts make clear is that wealth is not a thing: it is instead a human construct that could not exist without the support of the society that sustains it.
This matters when wealth taxation is being discussed. A wealth tax is not a tax on capital. Capital is in this connect a stock. It is the as yet unconsumed production of an economy. I quite strongly suspect (although I cannot prove) that a wealth tax would have little impact on the total productive capital of a society. To provide a rather straightforward example: a wealth tax would not destroy housing. Housing is capital. It may even encourage more housing to be built. But what it will do is change the exercise of control over housing.
The same is likely to be true of other forms of capital, in my opinion. That is because if a wealth tax provided more people with the opportunity to participate in markets on a more equal footing (as I am sure it would) then the stock of productive capital engaged in real enterprise would increase.
In that case a wealth tax is, in effect, a change to the law on the legal claim people make over stores of value. In effect these stores of value are the opposite of capital. If capital is currently unconsumed production then wealth is an indication of the right to consume that capital in the future. To put it another way, capital and wealth offer as different perspetcives as do investment and savings, to which each is respectively related.
A tax on wealth is not then a tax on productive capacity. It is instead a tax on the unutilised capacity of some to consume.
No one would, I hope, wish to deny a person the right to consume to meet their needs. This logic is implict in the exemption of what are considered essential items, like food, from value added tax. This concept can easily be replicated in wealth taxation: simply permit sufficient wealth to be held before a charge to a wealth tax arises and in the vast majority of cases this problem is solved. Where it is not (the classic income poor, asset rich elderly person living in their valuable family home is the obvious example) deferred payment is always a viable option.
Seen in this way wealth tax corrects the obvious flaw in VAT, which is its regressive nature. The wealth tax collects what would have been due by those who would have consumed but for the fact that, firstly, they already have enough and, secondly, because they save, which is an act specifically excluded from VAT charge in a great many ways, from the exemption of financial services and second hand properties to the favourable treatment of items like works of art that act as stores of value.
In other words wealth taxes do fit into the architecture of normal taxation. They are consumption taxes: it is just that they tax deferred consumption, and they do so unashamedly progressively because those who are likely to be liable to them are saving, which is an act that economically is now known to be of little benefit to an economy that is suffering from a glut of such savings whilst simultaneously suffering a shortage of investment and weak demand because many cannot meet their needs without recourse to borrowing.
To put this in the framework of the six reasons to tax I outline in the The Joy of Tax: this tax is redistributive; does reprice market failure that has produced too much saving; does deliver fiscal policy to redirect the economy to more productive purposes and does support democracy by engaging people with the process of taxation for the common good.
I believe we need wealth taxation. I am quite sure it is now possible because new automatic information exchange regimes with tax havens now mean it is much harder for money to hide. And I think as a result that this issue should be high on the agenda of all political parties seriously seeking power in this country and who have the interests of its people at heart.
It's time to tax wealth.
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If I have understood you correctly I have summarised in my mind what you are saying like this : a relatively small number of extremely wealthy individuals ( oligarchs ) have the means by way of largely unregulated global capital flows 24/7 to either directly , or indirectly influence the decisions of governments throughout the world no matter what their political composition , and thereby distort the running of those countries for the greater good of their individual populations. I see three obstacles to be overcome for this situation to have any chance of being changed :
1. Politicians will have to stop believing in the myth that these people are ‘ wealth creators ‘ for anyone other than themselves.
2. Politicians will have to disenthrall themselves from wanting to emulate these people.
3. Populations at large will need to understand how money and tax actually work to service the needs of all the people of a country .
Just to be clear : I understand I may be crying for the moon here as the BBC reports this morning that Jeremy Hunt is considering a hypothecated increase in income tax to pay for the training of another 3000 midwives .
I am not saying that
I am saying we need a wealth tax
This would be paid by6 many, many more people than oligarchs
It would also increase tax on income from wealth
And we need to abolish inheritance tax and replace it with capital gains tax at death – including on houses
If you want a capital gains tax at death, and to be honest it would seem rather more equitable albeit very difficult to calculate, then I think the current principle private residence relief would need to turn into a deferral. Otherwise two people in almost identical situations would be taxed at dramatically different levels if one of them simply moved house shortly before death.
I agree
My suggestion embraces cgt on all domestic sales, deferred if reinvested
Agreed! Can we start by taxing those wealthy in land?
There is static wealth, movable wealth and fluid wealth. Until the mid 19th Century most was static, the Landed Gentry etc. . Then it became movable and variable movable until into the later 20th Century and then much of it became fluid with the application of modern communications technology. In a way parallel to that of space and satellites. At present, we have a problem, Houston.
“Where it is not (the classic income poor, asset rich elderly person living in their valuable family home is the obvious example) deferred payment is always a viable option.”
Sorry, I thought this mechanism was already in situ in UK via the 40 percent IHT levied on death above 325k sterling.
Are you suggesting the threshold should be lowered to zero ?
Possibly in the more politically correct UK that would be entertained but opine that here in Djibouti and I venture your end would not be decorous.
I am suggesting a wealth tax
Not an inheritance tax
That does not work and needs to be replaced with capital gains tax on death, by and large
It is pretty clear in economics that to stabilise the wealth and income distribution you either have to tax wealth or (starting from a balanced distribution) tax income extremely progressively.
Wealthy elites do not like either and generally exert enough control to keep on kicking the can down the road, until the pressure becomes too great. A devious elite gives just enough to stop the lid blowing, whereas a wise elite would lead us to a much better place.
The questions we should ask are, what kind of wealth and income distribution do we think is desirable, how are we going to get there, and what can we achieve in the process?
Taxing wealth is by far the most sensible option but the as control lies in the hands of the wealthy
I think to get your proposal widely accepted there’ll need to be some considerable detail that the taxpayer will need. Just a couple of examples;
– does the capital gains tax on property on death extend to husband/wife etc which are currently IHT exempt.
– what’s the numbers where this wealth tax starts, how much is it and what is included in ‘wealth’.
@ J A Rank
“does the capital gains tax on property on death extend to husband/wife etc which are currently IHT exempt”
Currently, CG transfers between husband and wife are calculated on a no gain/no loss basis (s.58 TCGA92). So, effectively, nothing would change but the thresholds.
Agreed
Excuse my naïve approach and be assured this isn’t a thoroughly informed criticism – I’m just thinking out loud with a view to getting feedback on my own vague understanding of these issues….
Why are there any capital gains on objects like houses or old paintings?
The way I see it these things are subject to entropy and will crumble to dust if action is not taken to maintain them. They should constantly be depreciating as they get older and more worn out – not constantly “gaining in value”. Their gains in value are surprising and counter intuitive.
My understanding is the reason for this illogical state of affairs is we choose to create and distribute money in such a way that there’s an ever growing supply of it available to purchase these objects. It’s just inflation basically and it’s a mess.
It seems to my untrained eye that wealth taxes try to clear up the mess rather than stop the mess occuring in the first place.
It’s like having a major plumbing leak that’s flooding your house but rather than fixing the leak you opt to constantly mop up and bucket out the flood waters. Doesn’t seem to make much sense: you’re just accepting constant and unnecessary extra work for yourself while your house slowly rots in the damp conditions.
Looking at the reality of owner occupied housing from a layperson’s perspective: say a family owns an old house and the older generation dies off and leaves it to their children. The house is decrepit and in need of major renovation and yet it has “gained value” by an order of magnitude since it was originally built. Therefore the “gain” gets taxed.
The children face a choice:
1) Borrow, earn or use savings to pay the tax. Then borrow, earn or spend savings to cover the repairs (or take time out to do the work themselves).
2) Sell the house and use some of the proceeds to pay the tax and save or spend the rest. Then the purchaser has to earn, borrow or spend savings to purchase the house and cover the repairs.
Either way there’s usually bank lending involved in order to effect sales, meet the tax obligations and cover renovations.
Most people don’t have tons of money lying around to buy houses, effect repairs or pay capital gains or inheritance taxes. Therefore they have to go to the banks and borrow money – and here we are at the root cause of the problem: the banks then lend ever greater sums of money for the purchase and repair of the same rubbishy old houses and the payment of inheritance taxes.
The “value” of the rubbish old houses goes up and the next generation incurs an even bigger tax charge and even more expensive renovation costs and the banks obviously lend ever greater sums of money to enable them to cope.
Logically the wealth tax will only be imposed if a significant capital gain has occurred therefore if the tax is being imposed then it has effectively already failed in its objective of preventing the pointless accumulation of phony and economically distortionary “value” in the system.
It seems a recipe for perpetually chasing our own tails.
My understanding is that the reason a tiny few have so much wealth is because their incomes are extraordinarily high so they accumulate piles of cash savings, can borrow incredibly cheaply and therefore can purchase more assets than they can personally use. These assets can then be put to use generating them more income which gives them more savings, allows greater borrowing and more asset purchases which pushes up the “value” of the assets they already own which in turn means they can earn and borrow more money even more easily and so on and on and on…
It seems to me that in the economy it’s the flows not the stocks that are the ultimate problem – just like in the damp house it’s the plumbing leak not the pools of water that are the ultimate problem. The excessive stocks (pools of water) are merely symptoms of excessive flows (a leak).
Obviously if your house is flooded you have to mop up the water after you fix the leak but even if you were lazy and didn’t bother the house would eventually dry out by itself anyway.
In the same way if you just fix the process of money creation and money flows in the economy then normal transaction taxes and repayment of loans will naturally deal with all the excessive stocks.
With the flows fixed capital gains would not occur and so the wealth taxes would never be imposed. Instead sensible (for the common good) money creation and flows would enable real productive activity and real value in the economy would increase. We’d know it because of all the shiny new technology and fun stuff going on.
Please tell me what I’m missing here.
I think you have the number of wealthy people grossly understated
Around 7% of estates pay inheritance tax, for example
And that leaves considerable wealth untaxed
Adam can you expand on your paragraph ‘ In the same way …… ‘ I sense you have something to say here, but I can’t quite get what it is.
There is no capital gain on houses, because, as you say, they wear out. It’s the land element which keeps rising in value because, as Mark Twain observed, “they ain’t making anymore of it” (although that’s just one reason).
There is no CGT because although houses as well as land rise in value long ago it was decided that houses as a whole would not be taxed and that is still true
John,
I can try to expand but I’m not an economist and I’m near the limits of my understanding therefore struggling to express what I mean (or know what I mean!) FWIW…
Our money creation is largely tied to purchases of existing assets – houses mostly – which are deliberately kept in short supply while the population is allowed to increase.
Huge flows of newly created money chasing the same old assets causes asset prices to increase far more rapidly than the prices of everyday goods and services.
This voluntary state of affairs creates both the incentive and the means for a sizeable minority of people to save money and “invest” in existing assets. It is a self reinforcing system – a positive feedback loop.
Wealth taxes could dampen this cycle but why not just put a stop to it entirely by changing the money creation process itself?
Remove the constant asset price inflation and you remove the incentive to hoard assets: just stop creating so much money to fund asset purchases. Reintroduce stricter mortgage lending rules. Only give mortgages for one home per household.
Why stop there though? Why should anyone own more than one home when so many are homeless or inadequately housed? Restrict ownership of domestic property to one house per household.
Land and homes are different to all other assets. They’re essential and ownership of them is, IMO, a human right and an irrevocable element of citizenship. Every citizen should own a bit of the country sufficient to support themselves. That’s what being a citizen is IMO.
That’s certainly how citizenship was conceptualised in classical antiquity and even medieval peasants were born with rights to their land. Most of us today aren’t really citizens – we’re landless wage-slaves totally beholden to others’ goodwill for our survival. We can’t all own a homestead on a farm and be self sufficient in the modern world. However, owning our own home and having access to a government jobs guarantee and quality public services would be the modern world equivalent. We’d all effectively have our fair share of equity in the national system of production in the same way our ancestors had their own actual private plots of land and shared access to the common land.
To achieve this I’d have the state compulsory purchase all rental properties and onsell them to the tenants. Their rent will in all cases be sufficient to cover a mortgage so just give all the tenants lifetime fixed rate mortgages instead of rental agreements. (I own rental property BTW – I’m not an angry/jealous frustrated would-be home owner).
To make it fair I’d buy up all existing home owner mortgages and replace them with the same lifetime fixed rate loans as all the tenants received. In fact I’d regulate the banks to cause them to do this in house.
Then we’d only create new money to pay for useful activity: building new property and infrastructure and renovating the old – and lots of entrepreneurial activities. These activities need to be assessed in a vastly expanded value system where things beyond simple materialism are valued and externalities are properly taken into account.
The result would be a huge injection of cash into the economy as all the existing owners have their assets purchased and find themselves with no options for easy passive incomes from hoarding assets (myself included, maybe this isn’t such a great idea after all!) This risks general price inflation.
I’m not entirely sure how you deal with this but…
The fact is these people have not spent their money because they didn’t need to so I guess they won’t rush out spending it the minute their assets are sold off. In addition they largely wanted the passive income because they intended to spend it. When their passive income disappears they’ll be forced to spend carefully to make their pot of cash last or they’ll need to find new investments.
There will be new investments available but they’ll be in actually entrepreneurial activities. They’ll have the choice of slowly spending their savings or taking actual gambles on real activity.
For those who really need a passive income (elderly retirees who aren’t able to reinvest their lump-sums) then specially personalised lifetime government bonds would match whatever income they previously gained from lettings. On their deaths the bonds would mature and their children would inheret the cash only – not the income bearing asset.
Once the former hoarders of assets are spending those savings then normal transaction taxes will see that those stocks gradually get destroyed. Meanwhile all the former tenants and homeowners gradually pay off their mortgages and end up owning their own homes. Wealth is significantly redistributed over a single generation without doing anyone an injustice. Incentives to work and earn remain in place but incentives to be creative and innovative are actually enhanced over the existing system.
The flows of newly created money would then be accumulating in stocks held by everyone. The grotesque imbalance of stocks seen at present would not be allowed to develop again because the system of taxes and money creation would, by design, not facilitate such unbalanced accumulation.
Capital gains wealth taxes would be in place to catch anyone who slips through the gaps but on the whole they’d rarely be imposed because the system would avoid such accumulations occurring in the first place.
I’m guessing this will, in addition to being critiqued for erroneous logic, draw a “keep dreaming” response from Richard 😉
That’s fair enough – I’m glad to have changed from a hopeless pessimist into a naïve dreamer.
Please do keep dreaming
There is nothing wrong with that
“Housing is capital”. No, a house is both capital and land – and most of the value lies in the land element. I’m happy with the idea of taxing wealth. LVT would be an easy start but I have an idea of a wealth tax on the fabric of big houses too – and that would be easy too, with low collection costs. The key to taxing wealth per se is to make it self declararable with the onus of valuation of the owner, plus random, deep checks.
Land is a store of value
It is capital in that sense
[…] Cross posted from Tax Research UK […]
Are we a bit fixated on big houses? And how much is “sufficient wealth” before a tax charge arises? After all, saving is also prudent – for retirement, care, depreciation, the grandchildren, holidays. My “sufficient” may be someone else’s “if only I had half that”. Taxes should also give a nod to fairness and equity, the ability to pay and redistribution.
Are we all happy to have our “wealth” redistributed? or is only other people’s wealth that needs redistributing?
I think wealth taxes should start at levels that create change
I would like to start at £1m
I suspect politicians would prefer £2m
How do you differentiate between money earnt and saved and inherited?? If you can’t you will kill any entrepreneurial ambition in the economy.when you add up income + ni + council tax auxiliary taxes they are already high don’t yoy think? Under your regime where is the entrepreneurial drive going to come from?? The state??
You clearly know nothing of real entrepreneurial activity which exists wholly independently of tax
And if you cannot tell a stock from a flow you also know nothing of accountancy either
Jason says: “where is the entrepreneurial drive going to come from?? The state??”
Yes, to a considerable extent. Mariana Mazzucato: “The Entrepreneurial State” …and read how the totemic iPhone was built largely on research funded by the State. Of course, the profits went to Apple.
” you will kill any entrepreneurial ambition in the economy”
Oh dear, that died long ago when everything became corporatised. All that’s left is the occasional start up idea that gets itself going and waits for the inevitable corporate offer that it can’t refuse – at which point that little enterprise dies as it becomes co-opted into the dull, generic mass.
Creative, individualist entrepreneurs have gone the way of horses. They are romanticised in collective memory so you mostly see them in movies and on TV. In real life there are not many left. They are mostly a thing of the past.
Richard, do you have firm proposals in this area? For example:
How much would the wealth tax be seeking to raise?
Would it replace existing taxes e.g. inheritance tax?
What would be the base, threshold and rate?
Would illiquid assets such as property be included? What about main residences?
Would pension funds be included? If so, how would final salary pensions be taxed?
When would tax be payable – annually? What about asset rich, income poor individuals – this will be a major issue if property is included?
The amount raised is open to question: other assumptions determine that
It would replace inheritance tax, so long as there was capital gains tax on death as well
I suggest starting at £1 million: others think more
I would have bands between 1% and maybe 4%
I would include illiquid assets
I would include housing
I would not include pension funds that were likely to pay less than medina pay – but thereafter think they are fair game
Final salary can have an imputed value
The tax would be annual and subject to self declaration
Cash poor could roll up payment with a charge on land and buildings being applied: they would have to pay for the charge to be registered
Just a thought re pensions.,
The government actuaries already have a method of NPV’ing final salary defined benefit calcs for the purpose of seeing if you are over lifetime limit on AVCs etc, so I’d expect it all to be caught in the net.
The scary thing is with annuity rates at around 3-4% of NPV, if the wealth tax is 1% of NPV, that has the same economic effect as an additional 25-33% tax on the income stream which will of course have income tax applied to it as well. Could end up with equivalent marginal rates of up to 75% on the income stream derived from the NPV.
So, large pension pots are not a good idea…
“You clearly know nothing of real entrepreneurial activity which exists wholly independently of tax” – are you saying there is no relationship between entrepreneurial activity and tax?
“And if you cannot tell a stock from a flow you also know nothing of accountancy either” – If you are taxed on assets you cannot realise like property & a pension fund then a wealth tax will be paid out of income. So back to my point that, collectively, the taxes are already high.
The super wealthy won’t stick around to pay a wealth tax..neither will affluent europeans particularly with Macron going the other way.
I advised hundreds of entrepreneurs
No one who starts a business agonises over wealth taxation
They don’t even much agonise over tax because the options are usually pretty clear
But I stress I am talking about entrepreneurs, not those who set out to arbitrage the tax system. The two are wholly unrelated. The latter is rent seeking, and not entrepreneurial activity
And as for high taxes – the top few per cent in the UK have, overall, lower than average rates of tax, and the rates are low. Just look at CT, CGT and so on
But you really give your game away by saying they will leave. So where are they going? Please tell, especially after Brecxit closes down many options and most countries you would want to live in have higher tax rates?
Is there a relationship between entrepreneurial activity & tax? yes or no?
France, Portugal, Switzerland..for starters
Do you know what entrepreneurial activity is?
Please define it
“The super wealthy won’t stick around…”
The old race to the bottom game. How very dull. I don’t know about you Jason but most of us here are already well aware of that old trick.
Read Picketty. Just about everyone else has.
That old fraud Ayn Rand wrote a nonsensical novel ‘ Atlas Shrugged ‘ fantasising about such a possibility . Unfortunately she couldn’t work out where they were supposed to shrug off to.
Hi Richard – just ordered “The Joy of Tax” – look forward to reading it.
Land is a store of value?
Only if we allow rich people to use it as a means of speculation or as collateral for bank loans.
In fact land and all natural resources (provided free by nature) are a necessity for life.
We need to recognise that the private ownership of land is theft.
By speculating with land – holding it out of use – charging rack rents from people and companies that need land to produce wealth or live in a home – landowners hold the rest of us to ransom.
To share land wealth we need to collect the economic rent of land and natural resources to pay for public services and reduce or even abolish taxes on incomes, production and/or trade.
If we were to collect ALL of the economic rent there would not be a housing ladder any more than there is a secondhand car ladder.
If NICs and vat were abolished more jobs would be created and both workers (and employers) would keep more of their hard-earned cash – what’s not to like?
Cash from land owners and land speculators – who create nothing – cash to to public services, workers and employers.
Just imagine how this would help the finances of our biggest employer – the NHS!
Dave
There is sim0ly no way on earth LVT van replace VAT and NIC , et al
There is not that much rent
Nor do I agree property ownership is theft: the evidence is land ownership, like limited liability, is theoretically wrong but delivers value, so long as well regulated
LVT can be part of that regulation but there are wholly insufficient rents from it to act as a functioning tax base for much of the modern economy and you harm the case for LVT by suggesting it can do more than is possible.
Richard
So am I right in thinking that you see “wealth” as stunted capital? Also would people be able to pay the capital gains tax on their house each time they bought and sold them so that the amount on death would be less? If so would this affect the housing market?
I address all this in The Joy of Tax
I have also reproduced it on the blog – it’s searchable so you can find it
If we did not allow inheritance beyond x could this improve the productivity of the excess? I feel this stored value which is inherited is just never used.
I have no desire for 100% inheritance taxes
Let’s do something more appropriate
Thank you. Is there an economic reason to limit inheritance tax?
No
There is a political one….
Perhaps you should start with places which already have high wealth taxes and see how well those work and how cohesive the societies are which have them. The example of France comes to mind.
When the UK had high taxes (and for the sake of this comment I won’t distinguish between the types of tax) was also when the offshore system exploded in growth.
Would add that it might be helpful if interest rates were normalised first as negative real interest rates have caused enormous asset price increases. Many things discussed such as a wealth tax are attacking symptoms not the cause.
If you follow reasons for QE and low interest rates you end up at high savings rates in emerging markets. And for more radical solutions recipient states such as the US could look to restrict capital flows in. Economists like Michael Pettis argue this would be more effective in restoring imbalances than reducing the trade deficit for example.
A more useful result may come from addressing high global savings rates rather than their effects.
Normalised so that millions of households have their mortgages foreclosed and banks go bust?
Have you thought this one through?
Perhaps you should read Thomas Piketty
I’m all for the CG version much simpler and fairer ….if we sell (by the way would you tax inflation in this scenario). What tax could you use if we don’t sell and instead just die.
M
Sorry I meant to add instead of waiting as in your deferred scenario.Could we not get something now as a payment on account?
M
I am not following this….
WordPress does not show me the comment you are responding to when I moderate comments
CG
It is charged on transfers of ownership and gifts, not just sales
This is the case now for gifts during life
Entrepreneurial activity , dictionary version is good enough..,”used to describe someone who makes money by starting their own business, especially when this involves seeing a new opportunity and taking risks”
So is there a relationship between this & tax?.. bearing in mind that small/ medium & large private companies would have to have as imputed value applied to them and taxed accordingly.. to be consistent this would also apply to companies who might not yet be making a profit or have positive cash flow.
Yes, the relationship is that entrepreneurial activity on the is entirely dependent upon the state providing the infrastructure that supports it including the training of people, the supply of services, the maintenance of law and order, the enforcement of property rights, the provision of contract law, the registration of companies and so very much more.
I agree with you: there is a relationship between entrepreneurial activity and tax. One is entirely dependent upon the other, and the dependent here is entrepreneurial activity.
You state the obvious.. I wii be clearer. Tax is high already and wealth taxes for the most part will be paid from income. So from today, do you think increasing taxes from todays level will increase or decrease entrepreneurial activity?
Not to pre judge your answer but as an owner of a small private business I think it will..not least because some State accountancy body will apply some valuation on my business and together with owning a property in the south (and taking your threshold of 1m) I will be taxed much more..less income means less ability to reinvest and grow the business etc etc.. also why take any further risk
I am sure it will increase them
I am absolutely sure of it
Well said Richard.
@ Jason –
“less income means less ability to reinvest and grow the business etc etc..”
I don’t know where you’re getting this “Less Income” thing from. You’re getting things the wrong way around. Tax is charged on profits. Profits are what you’re left with once you’ve deducted all allowable expenses from income. If you take the money coming into your business and use it to expand the business, you’ll be able to reduce your taxable profit either because your expenditure will be an allowable revenue deduction or you’ll get the benefit of capital allowances on items such as plant and machinery. Not to mention a ridiculously generous R&D regime.
Long story short, if you spend your money improving/expanding your business, you shouldn’t suffer tax on it.
If you increase your overall worth as a consequence and Richard’s proposed Wealth Tax kicks in, then hey. That’s life. You’re worth a fortune so you pay more tax.
What you’re actually arguing is “It’s not fair that I can’t make a fortune for myself without giving any of it back”. To which the counter argument it “Don’t be stupid. You’re worth a fortune and the state helped you get there. That’s what the tax is for. Dry your eyes and pay your dues.”
Simple.
“also why take any further risk”
Imagine you’re an entrepreneur and an inventor and you’ve got a design for… I dunno… a battery that fits in the palm of your hand and can power an electric car for 6 months between charges. You believe – no, you KNOW you idea will work and you can see the potential to pretty much change the world. Clean, portable, affordable energy for all… Tesla is popping in his grave at the very thought… this is gonna be HUGE!!
“But wait – They’ll only charge me tax on the profits my company makes and the wealth the enterprise brings me. I’ll just not bother then.”
SAID NOBODY EVER.
Many thanks
Great argument and spot on
Geerkay has it oddly right here, but I think because the typical business-owner is a driven, unhappy individual. in my view, many would benefit more from diagnosis and treatment than elevation into a position where the beneficial effects of normal social checks and balances are tempered by the misplaced authority running a business gives them. Many are, in plain language, bonkers. They won’t stop; they can’t, yet they’re lauded for their ‘success’. This sorry state of affairs continues because demand is increased for the bank’s product, money, and as we’re continually reminded lately reading of RBS and GRG and the similar operations run by Lloyds and more recently the Clydesdale Bank, owned by the National Bank of Australia, the banks run things.
Quick question, why not impose capital gains tax on all property sales?
In my view this would be fairer than an inheritance tax because in the rare instances where a family wants to keep living in the same family home (for convenience and emotional attachment to it reasons) they could do so across generations at no cost but if they want to realise the gain at any time they get taxed fairly.
For instance myself and my father, sadly now passed, put enormous amounts of our own time and energy into renovating and extending the family home and it seems unfair to have to raise a mortgage just to be able to continue living in the same place I’ve lived most of my life and helped build with my own hands.
If it were part of a holistic and positive economic adjustment I’d have no problem having the property I let out compulsory purchased or taxed more heavily (though my father and I also rebuilt that entirely from the derelict shell). That is because there’s less emotional attachment to it.
However, the family home is more than just an asset…
Adam
Your situation is odd
But there is no cgt now
I think there should be on gifts as well as sales
I cannot see why not: otherwise wealth is concentrated and that is not the intention of IHT
Richard
Richard,
your situation is odd” – I’m a bit odd so it suits me 😉
I guess it is something that more often affects farming families but even then it must be rare these days. Nevertheless, I think there is something not quite right about taxing a family home when it is passed from one generation to the next purely to be used as a home.
My reasoning is twofold:
1) There’s not always the income to pay the tax so it can force families into remortgaging to keep living in the family home.
2) If the tax system is not preventing exponential increases in property prices, which necessarily would be the case if CGT were to be frequently charged on transfers of family homes, then the next generation cannot actually afford an equivalent home with the inheretence.
Because all property values have risen more or less together the next generation has to basically rebuy the family home or a new equivalent. It just doesn’t seem quite right.
Also wouldn’t it cause a problem if too many people end up taking mortgages to pay CGT on homes? The tax would immediately destroy that money and then you’ve got a bunch of people chafing their tails to earn the money to pay back the bank when that money doesn’t exist? In the absence of increased government spending it would surely cause a disastrous decrease in aggregate demand in the real economy?
Anyway, I know we all need something to motivate us to do useful stuff for others but I’m not completely convinced continuously repurchasing the land under our feet is the best way to do that.
Maybe it’s just impossible to stop asset price inflation without controlling population growth? Maybe we’re stuck just trying to clear up the mess after it happens?
However, if the environmental scientists are correct, if we don’t control population, consumption levels and alter our systems of production then we’re all doomed anyway. Therefore it makes sense to me to find a permanent solution to the cause of the problem as well as policies to ameliorate the symptoms.
I admit I don’t buy the logic
Why should homes be exempt?
Tax favouring them is the whole reason why the young have no chance right now
Richard,
I think it’s just different perspectives:
A family having to raise a new mortgage on the same land each generation seems unfair.
An individual receiving an enormous gift havimh to pay some tax on that gift doesn’t seem an issue.
These days we are brought up to see ourselves as individuals, well most of us are. Personally I feel I’m first and foremost one part of a family and therefore only a temporary custodian of family assets. We’re just back to me being odd again now!
If I had waited to move into my father’s home I would still be witing at 60
Does that make sense?
Richard,
Well the way things are going millennials aren’t going to be able to move OUT of their parents homes till they are in their sixties 😉
Income taxes were brought in to tax the wealthy but ended up taxing the slower moving plodding middle classes. The unintended consequence.
Its the practical application that is difficult although if there was adopted the Wimbledon tennis type maxim of ‘preferring to be roughly right rather than predominantly white’ putting the onus on the wealthiest to justify NOT having a large tax then go for it. The Forbes list is a starting point.
Oddly enough the four old accounting principles are better than the US style proscriptive rules because they required an awkward judgement and justification of a ‘true and fair view’. Most hide behind opinions including accountants and valuers these days,
Expect valuers would have an interesting time down valuing items and putting put/call option scehemes in place to muddy the waters of transparency.
As for the wealthy the tax evenly applied shouldnt worry their game as at that level the game is about comparitive wealth vs actual and with their skill they will extract a replacement wealth from the poor anyway.
There are a couple of interesting points in this post that remain somewhat unresolved or open ended.
The first involves the difference between productive capital and wealth. I would have thought that “wealth” was not capital itself but the ownership thereof.
The 2nd point concerns thresholds for taxing. If wealth is the ownership of capital it begins at the point where the possession is no longer personal but something that affects others (means of production, business assets, that general idea)
By that measure your family home would not be wealth for tax purposes but your investment property would (it affects the people that rent it as a business or home). If you have shares in a corporation or some other business then that business affects its employees and/or suppliers and customers.
A potential problem with this approach is that someone could “personally” own (live in) a ginormous mansion and have fleet of personal cars that would escape tax as they were not capital by definition.That’s where a defined amount threshold such as the £1m or £2m mark that Richard has suggested would be useful.
Still, I like the idea of wealth as the ownership of capital, conceptually, as a guide at least. Its pertinent and it keeps things simple.
Except as you will note it makes no sense in this context in my opinion
A Picasso is not capital
It is a store of value
It should be in a wealth tax
So that cannot be a tax on capital
And cash is likewise not capital: it is savings
Yes I know that’s why I had already conceded that, for practical purposes (tax in this context), your concept of a stored value with a defined threshold amount would have to prevail.
At a more abstract level as a concept or thought experiment it may possible to argue that wealth is actually the ownership of capital (productive or non-productive).
The Picasso for example. Most high value art works are bought as “investments” that have been and will be traded for the purpose of making capital gains. Saved cash usually attracts some sort of interest payment etc etc.
At any rate its not important. I suppose I was more interested in the idea of what wealth is than the practical specifics of a wealth tax which is something that you seem to have figured out well enough.
“So large pension pots are not a good idea”.. instead let’s all become dependent on the state instead, or work till we drop dead!
And you really believe higher taxes from here will increase entrepreneurial activity – upon that we disagree!..A cursory look at academic studies on google also suggest otherwise though I much prefer anicdotal evidence after all academics observe and write rather than do..
As a matter of fact we are all dependent on the next generation in retirement and if your pension pot has denied them any real chance in life you’ll be in deep trouble however big it is
You really do need to see beyond petty micro economics
Oh, and I did enterprise
As far as I know I am the only UK professor with an economics post who is also a practising chartered accountant
” I much prefer anicdotal evidence”
Jason,
For you, that excerpt is highly indicative although the word “evidence” is stretching it a bit.
Taking the top 1000 wealthiest as the threshold so that when they all reduce their assets they remain in the same relative position.
A true and fair view of Facebooks advertising profits would be 500mil to billions as a result for the UK.
Sorry: that just does not work
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