

Proposal for tax revolution: 3% income tax, 4% wealth tax - rayhano
http://rayhano.com/post/30672762834/solving-the-uks-tax-problem

======
csense
> 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
> 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%?

~~~
rogerbinns
> Not true, in the slightest

Your opinion differs from the field of economics where they actually study
this sort of thing. <http://en.wikipedia.org/wiki/Inflation#General>

> Inflation benefits those with income producing assets, like rental property

Huh? The value of an asset is determined by what it produces in the future,
both actual income and utility. Inflation adds risks to that - for example for
the income to remain constant, the rental prices charged have to go up by the
rate of inflation each year which people hate. Inflation introduces volatility
in the face value of money which makes things riskier (eg loans to buy/build
the rental property have to take that into account).

> Inflation is a trick to make the rich richer. All the evidence points that
> way.

Inflation devalues savings which is what the rich have and the poor don't
have. If you could produce any of this evidence (let alone "all the evidence")
you'd completely revolutionize economics. (Or you could be wrong.)

> You pay 40%+ in income taxes right now

No. You pay it once at the point you earn it. With your scheme you keep paying
the taxes over time. The longer you save it the more goes away in taxes.

------
rogerbinns
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
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).

~~~
rogerbinns
> If you are sitting on your assets, then this encourages you to participate
> in the economy.

No, it encourages me to pay people to work out how to reduce my tax liability
through every legal scheme possible taking advantage of every definition and
ruling, and considering every alternative. Those alternatives include sending
the money elsewhere, schemes where I pay myself with my own money, getting
assets valued at less (after all they depreciate by 4% extra per year), moving
to another EU country that doesn't tax wealth (instant 4% gain doing that),
schemes that are (borderline) illegal weighing the probability of being caught
etc.

> For example, economic assets like factories would have to be ringfenced as
> disposal of those would be detrimental to the economy.

And so begins the complexity of your tax code. And a loophole for people with
wealth to exploit. And now you have to increase your tax rates to take into
account the wealth that isn't being taxed.

> Clarifications: wealth would be net (i.e. less debt)

Cool another loophole. Have a look at Larry Ellison sometime. What many people
don't know is that he doesn't sell his shares in Oracle. Instead he borrows
money against the value of his shares and is at over a billion dollars in
debt.

> When you say saving, do you mean sticking cash under the mattress or in a
> bank?

Saving as in economics. <http://en.wikipedia.org/wiki/Saving>

> Inflation is higher than interest rates right now; why is no one telling the
> US/UK governments to stop printing cash?

Huh? When interest rates are low it encourages investment because the cost of
money is low. It also encourages finding places with higher returns (remember
housing bubbles?)

Money printed by governments that is at a higher rate than economic growth
results in inflation, and less results in deflation. Neither is particularly
desirable, although most aim for a little bit of inflation due to human
nature. The US and UK central banks are independent and generally target an
inflation rate which is why nobody has told them anything
<http://en.wikipedia.org/wiki/Inflation#Monetary_policy>

> Investment in business yields a much better return than the stock market

It doesn't work that way. In general returns are correlated with risks. There
are greater returns where there are greater risks. It would be rather foolish
to take lower returns for greater risks or to offer greater returns for lower
risks. Under your plan investments lose 4% per year all else being equal which
reduces the potential returns. (Unless your tax code has yet more complexity.)

> 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).

You aren't even trying now. It is true that the share issuer only gets money
when the shares were first invested, but that does not mean that everyone
buying shares after that point are not investors. At the simplest case a
company produces dividends, so purchasing a share gives you access to those
dividends. Your expectations are that the value of those dividends are greater
than the NPV of the money you use to buy the shares. It is of course more
complex than that - shares also reflect the assets of the company, dividends
can be "paid" by increasing the share price instead of payouts, profits
reinvested defer dividends and asset increases to the future etc. Going back
to the original share purchasers, part of their investment reasoning is that
they can sell in the future when their opinion of the risks/rewards do not
match their desires. And finally the current price of shares set expectations
of what value the company would get if it sold newly created shares. Note that
most larger companies are constantly creating new shares such as through
employee and manager incentive plans.

------
adamjernst
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
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
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
Interesting.

Would you also not have suffered massive real loss from inflation over ten
years eroding your return?

~~~
rogerbinns
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
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
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
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.

------
sjtgraham
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
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
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?

------
spullara
Everyone would just move their money out of the UK.

~~~
rayhano
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.

~~~
rogerbinns
The value of those illiquid things will go down and you'll get less tax for
them all. Which tax will you increase when there is a revenue shortfall?

If a rich person owns properties worth 100 million GBP, or even a regular
person owns a 100k GBP house at the start of this tax scheme, the value will
go down because tax is essentially writing off 4% a year. Economics already
covers topics like this - see discount rate and net present value. Heck there
is even a Black-Scholes formula for how to value things in these kind of
scenarios. And people with liquid assets can move them out of the country.

You talk of economic migrants, but remember that they need to actually have
the money in the first place to buy things. And since others would be
reluctant to make investments (eg factories) or savings (which provide loans)
it would reduce the overall amount of work available.

~~~
rayhano
So currently £340bn of tax is taken from people. At the moment it is all in
the form of income taxes.

With my proposal, we allow people to keep vastly more income (and therefore
spend more).

The intention is:

Low-middle class pay much less tax

Upper middle class pay about the same

HNWI pay more (which is universally accepted as more fair, but never
instigated with effective policy)

~~~
rogerbinns
We already have progressive tax rates which try to capture this.

The problem that is being struggled with is that HNWI don't have frequent
taxable events, generally because they hold assets and make savings. However
there is a perception they aren't providing value (which is mostly wrong).

Generally any scheme you come up with to get at them will also affect everyone
else, and to a far greater degree since they have less money and diversity to
start with. And the HNWI have far greater incentive to move their money and
themselves, as well as pay people to work out how to retain their money. You
can move to almost any country in the world by plonking down a lump sum as an
"investment" or as savings. (eg see how Dotcom ended up living in New
Zealand.)

The usual solution to this is to try tweaking the tax code, seeing what the
effects are and repeating. However scumbag politicians and the people who vote
for them distort that process, so it doesn't have the intended effect.

An actually representative democracy would be a good first step rather than
tax rate changes. Watch this talk about the US - the UK pretty much follows
behind a few years later <https://www.youtube.com/watch?v=Ik1AK56FtVc>

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

~~~
teyc
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.

------
rprasad
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.

