A system of governance needs to follow widely held principles of justice and “fairness” if it is to have any hope of being happily adopted. It is equally true that views as to what constitutes justice and “fairness” change dramatically between different eras and places. We currently have a cottage industry of economists and “think tanks” funded to persuade us all that handing over everything to their funding sources (largely the finance industry) constitutes the ultimate manifestation of liberty and freedom.

Perhaps one of the most startling examples I’ve seen of shifting viewpoints is an 1807 election poster from the campaign to abolish British participation in the slave trade. Bizarrely the abolitionists gave prominence to the point that the slave trade was advocated  for and conducted by self-made entrepreneurs whilst abolition had the supposed superiority of being backed by the landed aristocracy. From a modern perspective the inhumanity of the slave trade is ample argument itself and we now consider being a self-made entrepreneur to be a reason for pride whilst inherited aristocratic wealth is a shameful political liability. I was similarly struck by how the recent tearful resignation of the UK’s first police youth commissioner was forced as much by revelations of homophobic tweets as by her boasts about drugs. Only a generation ago homophobia was the respectable standard view point.

My views put forward in this blog are simply what seems fair to me now. I totally appreciate that most people will take a different view. I’m just trying to explain how I’ve come to the conclusions I have. This blog is largely based around the idea that our economy could be transformed for the better by replacing the entire current tax system with an asset tax (see bottom of this post for details). This idea typically does not go down well. A lot of the objections raised revolve around issues of “fairness” and so “fairness” is the focus of this post.

A major role for the state is enforcing property law; that enables property owners to benefit from the property they own as well as creating an orderly and prosperous economy for everyone. To a large extent the financial benefits from that state service accrue to each citizen in proportion to how much property she or he owns. Warren Buffett gains billions of dollars each year from the $53Bn worth of assets he owns. All of that is entirely dependent on the state enforcing law and order. The many people who don’t own anything much gain far less from that state enforcement. To me it seems fair that tax should therefore be paid in proportion to how much we each own. Even if we own something that does not provide an income, unrealized capital gains typically build in relation to the overall economy.  A valuable painting will increase in value each year due to increases in other forms of wealth providing potential purchasers with the means to bid more for it if it were sold. All the while that increasing value for the painting will be entirely dependent on the extremely costly maintenance of law and order by the state. Unrealized capital gains account for a large proportion of wealth increases.

A widely held view is that simply owning something has no economic impact and so should not be taxed. A painting or an unused plot of land may be rapidly increasing in value but that is merely a potential benefit for the owner if and when it is sold. As such, so it is argued, tax should only be paid if and when the asset is sold. This blog largely boils down to a refutation of that view. As I see it the critical factor is possession of financial power. The mainstream view would make more sense to me IF there was an overriding economic bottleneck due to insufficient potential for productive capacity in the economy. If all possible machines had been made and were whirring away 24/7, all production was sold without diversion of resources towards marketing and there was no involuntary unemployment –THEN a good case could be made that holding wealth simply meant deferring consumption – letting a limited supply pass on to other people; so it would seem unfair to constantly tax those assets. In the real world, that economic condition was actually approached during WWII. In peace time however, there is a HUGE gulf between what gets done and what could get done.

Most potential productive capacity is kept constantly untapped because there isn’t sufficient demand for it. Having the financial power to choose whether or not potential productive capacity is kept untapped or is made use of –that to me is the critical economic responsibility distributed amongst us all. Obviously productive capacity can be expanded tremendously by technological and organisational improvements BUT financial power is something totally different from that. What I am referring to is economic influence relative to everyone else. Clearly if productive capacity (or wished for leisure) is untapped and so goes to waste (or gets used wisely or unwisely) that is a consequence of people’s choices. Wealth amounts to having command over whether other people do sensible stuff, do stupid stuff or are left sitting on the side lines. That isn’t a power someone who acquires wealth necessarily wants or has any means of sensibly executing but nevertheless that is what it is. An asset tax is a tax on that responsibility to ensure that it is fully appreciated, wisely used and doesn’t just passively accumulate as money gathers more money.

In my view an asset tax is simply causing wealth to reflect the reality that every unused hour of machine time or human labour is permanently lost. To me a fair financial system is a financial system that mirrors reality such that doing best by money reflects what would be best if money were not considered.

Economists in the Modern Monetary Theory (MMT) tradition contest the idea that stocks of government debt (which constitute much wealth and underpin more) have much bearing on the economy. As MMT believers attest, extra resources are mobilised only if and when such stocks get drawn down and spent and in practice they  simply build up decade after decade (except for rare occasions when the entire monetary system is replaced). MMT economists such as Bill Mitchell claim that as the public fails to spend enough; government deficits can seamlessly remedy any consequent deficit in aggregate demand. The idea is that as humans we (or at least some of us) want to safely squirrel away purchasing power. It doesn’t matter what level of productive capacity there is relative to all those claims because in aggregate we will always want to squirrel away wealth more than we will want to invest or consume. Supposedly the best approach is to accept and accommodate that squirreling instinct by simply printing off government debt as fast as it gets squirreled away regardless of whether that results in a stock of paper wealth that amounts to a greater and greater multiple of everything real there is to buy.

That MMT approach is in my view extremely misguided. It might work if we were amnesic squirrels but we aren’t. Large accumulations of wealth accrue to those who have been most focussed in accumulating them. Guardians of such wealth do look at their account statements and take great consideration of what purchasing capacity they represent. A large stock of saved up government debt securities warrants a major effort and expense in political lobbying to maximise its value. Maximising the value of that paper wealth massively distorts the economy and the political process (see post Political consequences of risk free financial assets). From what I can see government deficits merely offer a short term palliative whilst the underlying issue of the distribution of financial power gets more out of hand. The distinction between the MMT and economic democracy views on taxation can be summed up as MMT viewing the proper role of taxation to be moderating consumer price inflation whilst economic democracy views the proper role of taxation to be ensuring dispersed financial power. The MMT view of taxation is actually somewhat aligned to the “Reaganomics” of Art Laffer since reducing the tax burden on the wealthy can actually reduce inflation by enticing inward capital flows (for a while anyway).

Another objection to asset taxes is that owning an asset does not necessarily mean that someone has funds immediately to hand to pay an on-going tax with. This issue could be particularly acute in the case of an elderly person living in a large house in an expensive district. They could be asset rich but income poor. In the case of personal residences, I’d be in favour of allowing an asset tax to be paid for by transferring partial ownership of the residence over to the state in lieu of the tax. The proportion of the house that was state owned would then be rented by the resident. Potentially the entire value of the house could become state owned whilst the resident kept uninterrupted occupation for their entire life. Of course the resident would be free to alternatively enter into a private equity release scheme to convert their home equity into liquid funds as many people now do. Overall I think an asset tax would actually help people to own their own homes because it would cause houses to be cheaper.

Another particular thorny issue is with small individually owned businesses. Such enterprises account for a large part of the economy of most countries. I’m not convinced that it would actually be much of a problem if much of the intangible value of such businesses slipped past taxation. If taxation were due on the sellable value of tangible assets of the business such as buildings, inventory and equipment and on debt taken on, then that would probably account for enough. If the value were disputed, then I think it would be reasonable to have a public auction of the assets where the current owner would not need to stump up the purchase price but would simply bid on the basis of what taxable value she was willing to pay the tax on.

Appendix -detail of the suggested asset tax (this is an excerpt from the pdf that I started this blog off with)

The most crucial reform would be to abolish all current taxes and replace the current tax burden with a single tax applied equally to all gross assets. Very roughly, the UK population has gross assets of about £10T. This amounts to about £160k per person but obviously is very unevenly distributed. Total annual government spending is currently about £700B or £11k per person, which is about 7% of that asset value per year.  In addition to such assets owned by households, other financial assets and liabilities are owed between financial institutions. For instance, if two banks each owe each other £100B, then that £200B of gross assets will net out and so not be overtly apparent as an asset for households owning shares of those banks. There is about £10T of such debt between UK financial institutions. There are also cross holdings of financial derivatives. The proposed gross asset tax would apply to assets before any such netting out.

A key purpose of the asset tax would be to ensure that paper assets are not concocted unless they can pay their way. Presumably a gross asset tax would lead to financial sector deleveraging (eg by loan write-downs) and that would reset the tax base to a lower level. The true purpose of taxation, however, is not to “raise revenue” but rather to maintain the true value of money. The aim is to re-align the economy towards providing true utility and away from monetary schenanigans.

The UK economy is integrated with the global economy. Assets in the UK are owned by foreigners and UK citizens and institutions own foreign assets. Multinational companies have operations in the UK and in other countries. That allows a beneficial global pooling of expertise. This situation nevertheless creates complexity for the current tax system and would also be a challenge for an asset tax system.

GBP cash and government bonds would need to have the asset tax deducted at source. Crucially the asset tax would have to apply to GBP financial assets owned by foreigners as well as those owned domestically. A key purpose of the asset tax is to avoid long term sink holes for net financial flows. Hoarding of GBP financial assets by foreigners is just such a distortion. Discouraging such foreign use of GBP financial assets as a store of value would allow exchange rates to properly reflect and correct trade imbalances.  Holdings of any other sort of debt security by UK citizens would also need to be subject to the asset tax.

Real estate on UK territory would need to be directly subject to an asset tax whoever owned it. You cannot hide real estate and so direct taxation of real estate would provide an entirely inescapable core for the asset tax. Even foreign owned UK real estate would need to be taxed. If foreign owners were able to avoid paying, then all UK real estate would simply become foreign owned. If someone owned a £200k house with a £150k mortgage, that homeowner would still need to be liable for the full tax on the £200k asset. To a large extent such leveraged ownership amounts to a duplication of financial wealth (both the house and the mortgage are assets). Taxing the gross asset value is appropriate since a doubling of house prices would benefit the homeowner in proportion to the gross asset value irrespective of the mortgage.

Entirely overseas assets owned by UK citizens would be taxed at the level of the owner. So if a UK citizen owned £10k worth of shares in say a Brazilian mining company (or foreign currency or foreign real estate), then that citizen would pay the tax based on that value. Entirely UK based companies would be taxed at the company level.  So shareholders of an entirely UK based company would not pay any asset tax directly on that shareholding. As already stated, any UK real estate or GBP owned by that company would be taxed directly. The remaining value of the company would be taxed on the basis of the market capitalization plus debt liability with a deduction for any real estate holdings (that already would have been taxed). Including debt in the corporate asset tax liability means that a UK citizen would be (indirectly) paying more asset tax when holding shares of an indebted UK company than of an indebted foreign company. However since the foreign company would be paying the foreign country’s corporation taxes, there would probably be no overall tax advantage for ownership of foreign versus UK company shares.

A multinational company with operations in the UK would pay UK tax at the company level based on those UK operations. A real risk would be companies playing the system and so making use of the lack of corporation, sales and income taxes here whilst minimising asset tax liability here. As already stated, any UK real estate or GBP owned by that company would be taxed directly. Harder to pin down would be the tax liability from, for instance, having a large research and development program in the UK. Possibly the best approach would be to divide the tax liability on the basis of the proportion of cash flow attributable to the UK operations. So if a company had 25% of its cash flow from UK operations, then the asset tax due would be based on 25% of the corporate debt owed plus total company market capitalization with the tax already paid on UK real estate deducted. UK shareholders of multinational companies would have to pay the tax for the remaining “foreign” portion of the company that was not taxed at the company level.

Currently the UK hosts banks that hold colossal webs of financial derivatives. London provides a global centre of expertise for such activity and has a buccaneering, free-wheeling regulatory system that facilitates innovative financial engineering. Of the $707T USD notional value of outstanding financial derivatives held worldwide, $417T come from London. To put that in context, global GDP is about $70T USD. An asset tax system would be incompatible with hosting such activity. Obviously such derivative contracts could never hope to earn enough to pay an asset tax imposed on their notional value. Those banks would need to relocate to other countries and cease UK operations. In terms of loss of well-paid jobs it would be painful. Goldman Sachs is an archetypal example of such an institution. They hold $44T USD of financial derivatives. They have 5500 London based employees and pay each employee an average of £336k per year. To some extent having firms such as Goldman Sachs in London can be seen as a pure gain for the UK economy. The US government has spent tens of billions of dollars bailing them out, they extract money from the entire global economy and yet a good portion of what they extract and get bailed out with goes to UK based employees. Such considerations, however, have a corrosive, warping effect on governance of the economy. The role of our monetary system should be to facilitate the activity that everyone would want if money were not a consideration. A monetary system designed so as to facilitate gaming of the system is a bottomless pit leading towards ultimate system failure. Another consideration is whether such firms actually constitute a “brain drain”. People currently employed as elite financial engineers would presumably also be doing complex, ground-breaking, work if they were otherwise engaged.

Currently trivial asset classes such as collectables would also need to be covered. Doing so would ensure that they did not become significant speculative stores of value. Legal ownership of anything would be dependent on being up to date with the asset tax.

Trusts are currently used to hold assets for collective pension saving schemes, charitable endowments, and some households and institutions.  Assets held under trusts under UK jurisdiction could be subject to the same asset tax as if they were held directly by a UK citizen. So taxation would be at the level of the trust and administered by the trustee. Ownership of UK assets by foreign trusts could be subject to the same taxation as ownership by a foreign citizen. UK citizens owning shares in a foreign investment trust could pay tax just as if they were shares in an entirely foreign company. That would lead to tax inefficiency for foreigners owning shares in UK trusts and for UK citizens owning foreign trusts that held UK assets but minimal economic disruption would result. A UK citizen transferring assets out of UK jurisdiction by transferring them over to an offshore trust could be subject to a one off “expatriation of assets” tax of say 50%.

Regulatory restrictions on land use etc would reduce the asset value and so the tax liability. If some land was a nature reserve with a public right of access, then it would have a minimal asset value and so the tax would be affordable for community groups, ancestral owners etc. Asset prices would reset to being whatever people who wanted to own an asset were willing to support through exposing themselves to the tax. For “consumer assets” such as houses, cars, paintings, leisure boats etc that price would be a function of what people felt able to afford as personal consumption. For “working assets” such as company shares, debt securities, farmland or commercial property, the price would set to a level where yield justified the asset tax exposure.

Currently, asset values are assessed for inheritance tax purposes. The same process would need to be applied universally for an asset tax system. It would be burdensome, however the same is true for the current myriad of different taxes that it would replace. If someone disputed the valuation set for taxation, then they could put the asset up for auction. If they could buy it back for a lower price, then that would be the taxable value.

People often choose to live and work in different countries at different times of their lives. It is important not to impede mobility but also important not to induce counterproductive tax avoidance migrations. That provides a challenge for taxation systems. The USA, for instance, currently has a complex expatriation tax system and taxation is based on US citizenship not simply US residency. Under an asset tax system, tourists and short term (eg two month) working visitors could be tax exempt. Perhaps foreign citizens resident long term in the UK could be largely subject to the same tax system as UK citizens whilst they were resident here. Any assets already owned before the UK residency could be tax exempt. An exemption on the asset tax could also extend up to the value of the citizens’ dividend (which they would not receive). Upon leaving the UK, a foreign citizen could choose to either continue to pay the asset tax, for any assets obtained whilst resident, or to pay a one off exit charge (much like current US expatriation taxes) of say 50%. UK citizens would need to be subject to the asset tax irrespective of where they lived. However, UK citizens living abroad could be exempt from the asset tax up to the value of the citizens’ dividend (which they would not receive). A UK citizen choosing to revoke citizenship could choose either to continue paying the asset tax on the assets they had obtained up to that point or to pay an exit charge of say 50%.

Related stuff on the web:

To Reduce Inequality, Tax Wealth, Not Income -New York Times

The Conservative Case for a 3% Annual wealth Tax -Ronald McKinnon

Want a Flat Tax? I got a flat tax for you -Steve Roth

A Theory of Commodity, Income and Capital Taxation -Michal Kalecki 1937

Tax on wealth is true to Tory principles -FT

Goldman’s Top Economist Explains The Worlds’s Most Important Chart -Business Insider

Briefly Revisting S=I+(S-I) -JKH

Now they want to tax jewellery: New Lib Dem wealth plan to target ALL assets – including buy-to-let homes -Daily Mail

The Three Ways ‘Old Money’ Holds on to its Riches -James Rickards

Modern Monetary Theory Means We Shouldn’t Have A Progressive Tax System – Forbes (link added 23May2013)

On the Phenomenon of Bullshit Jobs -David Graeber (link added 22Aug2013)

Taxing Times -IMF (link added 12Oct2013)

MMT stabilization policy -some comments and critiques -Interfluidity (link added 24Nov2013)