Wealth Taxes

Is a Wealth Tax a Possibility?

Because of the fast changing events worldwide and the serious effects thereof, first thing every morning over a cup of coffee, we have a watercooler discussion. The topics are varied and extremely diverse but we normally catch up on the news of the previous day and night and the zeitgeist of the times.

A topic which we have recently discussed, and keep returning to, was that due to Covid-19, many countries’ governments would be hunting for new revenue sources to make up for the costs both direct and indirect of the pandemic and to cover previous ill considered policies.

The temptation for governments to increase taxes or find new ways to tax the ‘wealthy’ and the general population in other ways as well is huge. A lot of people today look at wealthy individuals and assume that the funds were ill gotten, by taking advantage of some other group, and if not ill gotten, not being utilised in the “public interest”. 

Extreme income inequality can not be refuted and exists almost worldwide, and in our opinion it should certainly not be so stark, however we believe that the cause is not because some people have a lot of wealth, the pie will always be split in a pareto distribution, we believe the key is to grow the pie, not try cut the pieces more evenly.

We have a few ideas as to why the pie is so stagnant and some of those reasons include corrupt bloated governments, central banking, market manipulation, government and corporate corruption, nepotism, racism, favouritism, deep state interference, the political system, the justice system etc. These things are more subtle and difficult to fix as we need to adjust human nature.  It is much easier for the politicians to have us believe, it’s some minority group, or faction, or unusual circumstance. The list of excuses goes on and on and depends on the context and country. 

In particular our discussion centered around wealth taxes, as they are now being discussed more fervently in many countries. We wondered if wealth taxes will help or hinder the situation and in particular, will it assist in reestablishment of a “normal”, “fair” society.

A wealth tax, will require the ultra wealthy to pay additional annual tax on assets owned. It is often initialised as a once off taxation event, but rarely if ever does it remain that way. Imagine how difficult it would be for the Internal Revenue Service (IRS) to establish guidelines for assessing the value of an obscure painting or sculpture. Wealthy taxpayers are likely to challenge the IRS’ valuation of their assets in courts. Much of the valuation would be subjective and therefore subject to argument as valuations vary day to day.

A wealth tax differs from income or sales taxes in that it focuses on assets held at a point in time, “regardless of whether they’re sold, traded, earned or dividend.” This concept relies on the value of one’s assets assuming they were to be sold right now. Unlike general income or capital gains, wealth is reliant on the market value, unlike general income from wages. Think of a wealth tax along the lines of a property tax or an estate tax.

Wealth is not stagnant. For example, I may hypothetically own $5 million in shares of Amazon stock that I purchased for $1 million, but I do not have $5 million in cash on hand. A wealth tax requires the government to assess my current wealth ($5 million) and tax me accordingly.

A wealth tax not only violates the basic principles of fairness, but it is also highly impractical and difficult to enforce. I would therefore be forced to sell my shares or other assets in order to pay tax. This is not only ludicrous, but completely destructive to potentially productive capital.

An argument that has been put forward by a few prominent wealthy people is that they would gladly pay more tax. My belief is that no government will refuse any additional taxes they wish to pay, so let them pay as much tax as they feel like. I have an objection to additional taxes being added to the already onerous and oppressive burden that most businesses and individuals are already forced to carry. I have listed some taxes further down in the article.

Net wealth is the sum of all assets including businesses, cash, bank deposits, pensions, life insurance, property, bonds and stocks business interests, investments, yachts, fine art and other possessions less debt including mortgages, other loans, credit accounts or loans from friends, family and money lenders at a point in time. This must be accurately discovered, measured and valued in order to tax it.

The possibility of collecting additional tax revenue from those ‘most able to contribute’ has often been brought to the table. Our estimation suggests taxing the wealthy could raise significant revenues and it would allow countries to allocate the cost of collection on the least vulnerable. However we need to consider the possible consequences, short and long term, and its implementation i.e. how much would filter down to the really needy. In the opinion of some, and ‘in the spirit of solidarity’, a wealth tax could be part of the solution to safeguard long-run fiscal sustainability and inclusive growth.

A sliding scale of annual wealth tax is often mooted, whereby the wealthiest pay a higher rate wealth tax than the less wealthy. This to the uninitiated seems fair. Is it really?  Both feel the impact on total wealth. Sliding scale taxes may seem fair, but I am not so sure. Ten percent of 100 million is 10 million and on one million is 100 thousand. This seems eminently fairer to my mind, rather than a sliding scale. The other side of this is the broken window fallacy, what will not come into existence because these productive people have given their funds to a less productive system.

Capital flight, through offshoring or migration, is a real potential risk of the implementation of a wealth tax and in my opinion becomes more so as taxes become more onerous. This is usually excused by the government by making conservative assumptions about avoidance and evasion, and they still project sizable revenues, until such time as the taxpayers decide to move, at which point it is too late to salvage the situation.

I personally experienced this in South Africa when  Johannesburg raised the property taxes to ridiculous levels and now the city itself is an abysmal wreck, the largest employers and businesses immediately reacted and moved to areas with less onerous taxation. We also do not take into account the effect this has on people’s lives, the disruption of moving places, state or country is often a burden in and of itself.

Cooperation between tax authorities to clamp down on undeclared incomes and assets in foreign jurisdictions, including tax havens has made offshoring your hard earned wealth more difficult, but legal means to move to more advantaged regions do still exist.

Governments think that capital flight implies forfeiting opportunities that considerably enriched the taxpayer for the sake of avoiding a tax that barely makes an impact on their total wealth. The reality is that most wealthy people are able to, capable of, and in a position to make money anywhere, maybe even leaving assets in place while transitioning to a new location, so the impact is not instant thus insidious in nature as the ability to pinpoint a cause-effect relationship is weakened due to the nonconsecutive nature of the events.

A wealth tax, contrary to popular opinion, would not necessarily discourage job-creating investments initially, although capital investment would slowly drain out of the economy over time. Maintaining fiscal sustainability while supporting the most vulnerable is more important to ensure a quick recovery and attract investments.

The stark reality, that most governments refuse to acknowledge, is that capital will go where it is best looked after. Wristons Law of Capital states that: “Capital will always go where it’s welcome and stay where it’s well treated  Capital is not just money. It’s also talent and ideas. They, too, will go where they’re welcome and stay where they are well treated”.

No business man that I know or am aware of is in business to create jobs, he is there to create wealth and make many wealthy with him as a result of his product or services offered to mankind. His contribution is the provision of work and product or services valuable to all in his sphere of influence.

The best possible action any government can take for the businessman  is to get out of his way by removing red tape, make banking and compliance simple, make laws (as few as possible) that assist him rather than hinder him, and minimise taxes. Then sit back and watch real growth, employment and recovery.

Inherited wealth is also in our opinion,  an illegitimate target for taxation for many reasons but the most obvious being that everything that is inherited has already been taxed many times over. Of course the temptation is to tax it on the basis that the beneficiaries never had it before so will not feel the impact. What total and utter rubbish. What has to be destroyed, sold, mortgaged in order to pay the taxes? What jobs are lost in the process?

The astute inheritor will grow the wealth, one not so educated in the business will pass the wealth along one way or the other. It is believed that 70% of families lose their wealth by the 2nd generation and 90% will lose it by the third.  Only 13% of family businesses last 3 generations.

“Wealth taxes” already exist in the form of multitudes of taxes that are visible and many invisible to us, mostly hidden in the total prices we pay as we go along. 

A list of some of the taxes that are levied around the world:

  • Donations tax 
  • Inheritance tax
  • Estate duty
  • Income tax levied on all income and profit received by a taxpayer, which includes individuals, companies and trusts. …
  • Value added Tax 
  • Capital gains tax
  • Provisional tax
  • PAYE (Pay-As-You-Earn) 
  • Transfer duty
  • Customs and excise duty
  • Taxation on worldwide income
  • Company Tax
  • Environmental Taxes
    • CO2 tax on motor vehicle emissions
    • Fuel taxes
    • Airport taxes
    • Electricity levy
    • Health Promotion levy
    • Incandescent light bulb levy
    • International air passenger departure tax
    • Plastic bag levy
    • Tyre levy
  • Fringe benefits
    • Employer-owned vehicles
    • Interest-free or low-interest loans
    • Residential accommodation
    • Holiday accommodation
    • Entertainment 
    • Travel 
  • Interest taxation
  • Lump-sum pre-retirement tax
  • Lump-sums upon retirement tax
  • Mining lease and ownership taxes
  • Mining royalties
  • Municipal Property taxes
  • Property disposal by non-residents
  • Retrenchment packages tax
  • Retirement funds income tax
  • Securities Transfer Tax
  • Sin Taxes (alcohol, cigarettes, gambling)
  • Skills development levy
  • Stamp Duty
  • Standard income tax on employees (SITE)
  • Transfer duty
  • Turnover tax
  • Unemployment insurance
  • Value Added Tax (VAT)
  • Withholding tax
  • Diamond Export Levy
  • Mineral and Petroleum royalties
  • Vehicle licences
  • Drivers licences
  • Fishing licences
  • Business licences
  • Expatriates tax
  • Foreign entertainers and sportspersons tax

These are taxes that I easily found in a couple of minutes looking on the internet, and trust me, there are many many more if I were to do a deep dive into each country or each industry.

Several insidious taxes increase the average tax rate paid by top income recipients without necessarily raising their marginal rates or imposing a wealth tax, like scaling back on tax deductions, fringe benefits, carried interest, treaty shopping, etc. most are already in place and furthermore, used. 

We all understand that the wealth gap is horrendous and we feel desperate for the people struggling at the bottom end. Making the wealthy poor is not the answer. Incentivising the wealthy to create more may well be.

I believe that a complete overhaul of the system is probably required to reduce the problem, growing the pie bigger is more important than distributing it more “fairly”. Further to this, when wealthy people make their money it does not disappear into the ether, it is either invested, saved in a bank (which lends most of it out back into the economy), consumed (again boosting the economy) or flows back into the system.

Even if these billionaires put their money in cash in their underground basement, the respective central banks would be able to print additional money into the economy to counteract the deflationary nature of the removal of that money from the system, without causing immediate inflation.

Worldwide the burden of tax already falls on the wealthy. In the USA, the top 1 percent paid a greater share of individual income taxes (37.3 percent), than the bottom 90 percent combined (30.5 percent). The top 1 percent of taxpayers paid a 26.9 percent individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.7 percent). Nov 13, 2018.
Source: www.taxfoundation.org

A September 2017 study by the Federal Reserve reported that the top 1% owned 38.5% of the country’s wealth in 2016. Looked at in terms of the taxes paid above that is not way out of line. It would be great to see a narrowing of the gap and I would be excited to see a free market unmanipulated plan to narrow it.
Source: Wealth inequality in the United States – Wikipedia

The larger issue is the ability of the extremely wealthy to protect their monopolies through special interest loopholes and regulations paid for by lobbying or corruption or influence peddling, their ability to bend the laws in their favour and crush competition through a biased and unfair political and legal system. This is a global phenomenon and something that requires systemic repair and a will from uncorrupted politicians and governments. 

The best way to broadly increase tax revenue, improve the situation of the poor and reduce the burden of taxation on the taxpayers is to reduce costs of government, and broaden the tax base.

Looking at poverty trends worldwide, the World Data Lab now estimates that on New Year’s Day 2019, just under 600 million people across the world (excluding Syria’s 82% who live below the poverty line), will live in extreme poverty. I wonder how the 2030 Agenda for Sustainable Development goals will be set back by The Covid-19 virus. 

It is clear jobs, education and economic growth are needed to truly lift people out of poverty and thereby broaden the tax base rather than simply looking for more ways to transfer wealth via the tax system. Fiscal policy can play such a key role in helping stimulate the economy and demarcating between growth and poverty if managed well. 

Making more and more people dependent on social handouts is not a sustainable solution to fix growth and income inequality, in fact it is a disservice to humanity. Also, one should question the efficiency of this process. It is our opinion that the free market should be allowed to exist with less regulation to drive down the prices of goods and services all the while improving their quality and usefulness to society.

This should be the framework in which business operates. By allowing business to focus on business and by removing all the unnecessary burdens, we would increase global innovation, drop prices and generate more net benefit for society. As always these are simple statements to cover extremely complex issues. The complexities and difficulties of implementation are not lost on us, but in general we feel that we should be moving in a direction, opposite to the current one. 

It is most unlikely that the wealth taxes would collect anything close to the loss that society would experience by pushing the wealthy out of the state or country. It is an extremely difficult tax to implement and as a result, collection costs likely will further diminish the net value of taxes collected. 

The collection of taxes that typically affect the wealthiest in a society have fallen over the last few decades, economists blame tax avoidance which is perfectly legal. It is in our opinion logical to pay only as much as one legally owes, no more or less. The reality is that the ultra wealthy companies and individuals have almost unlimited means to reduce their taxation to the point they feel comfortable and are able to move themselves, their money, their assets or the corporate structures to places that they feel, treat them better. I believe it is a cautionary tale to not kill the goose that lays the golden egg.

Evidence from countries that have tried introducing wealth taxes points to the conclusion that these wealth taxes are largely failures. Twelve European countries had wealth taxes in 1990, yet today only three of these remain, Norway, Spain, and Switzerland, with those taxes accounting for only 3.62% of total revenue in Switzerland and 0.55% in Spain.

The socialists in France introduced a wealth tax on individuals with assets over $1.5 million in the 1980s; however, this tax was repealed in 2017 because this tax led to thousands of rich French families moving to other countries to avoid paying the tax. Approximately 42,000 French millionaires left the country between 2000 and 2012.

Sweden had a wealth tax of 1.5 percent on households with over $200,000 in wealth. The Financial Times noted that Sweden’s repeal of the tax will have virtually no effect on government finances. No surprise that the tax has been blamed for “massive capital flight from the country” with estimates up to 1.5 trillion Krona.

Germany, Sweden, Austria, and the Netherlands have all abandoned their wealth tax programs. The common grievance with a wealth tax is the difficulty in enforcing it.

In the end, the unforeseen consequences of a wealth tax will inevitably come back to haunt the government, the country and the public. 

Careful consideration needs to  be given to the short and long term effects of inflation whereby taxes aimed at the wealthy trap the middle class as the currency’s value is eroded. What Poor Zimbabwean thought he would be a trillionaire and starving?

Indirect, financial consequences of a wealth tax:

  1. Most wealthy people have illiquid assets. While the wealthy are often framed as hoarding cash they are in fact often not doing so. Most of their assets are invested in the economy, their businesses, stock and bond investments etc..
  2. A wealth tax would increase the cost of capital, as investors subjected to this tax would seek a higher rate of return.
  3. Investors, unable to preserve capital by investing in government bonds, would require higher-yield investments, making it harder to fund deficits.”
  4. A wealth tax will produce an incentive to invest in illiquid assets rather than in publicly traded stocks and bonds. Reducing the valuation of the overall market.
  5. As the value of the stock market decreases because of disinvestment in stocks as a result of forced sales in order to pay wealth taxes, investors will be forced to find new sources of growth. The new avenues of growth may be less open to the public, leading to less prosperity for all.
  6. The wealthy already use an array of financial tools to avoid the full effect of taxes, such as trusts. More innovative schemes will ensure legal avoidance of the tax. 
  7. The wealthy can afford to hire professional expertise, lawyers and accountants.

The popular image of the super rich is that their wealth is in megayachts, private jets, jewelry, or artworks. But according to a recent study from the libertarian Cato Institute, those baubles comprise only 2% of billionaires’ wealth. In contrast, 73% of the wealth of Americans in the top 0.1%  is in equity in public or private businesses, with another 5% in the value of their homes.

Many of these assets, however, especially private businesses, are difficult to value and illiquid. Their owners would likely have to sell assets to pay taxes. The lion’s share of the wealth of the wealthiest is in business assets that produce economic growth, and forcing their owners to sell them to pay taxes could hurt growth. 

With the zeitgeist of the times being for HNWI paying their “fair share”, the world is moving closer to socialism, we all know how that story ends, with this in mind and the wild currency responses to Covid-19 world wide, it may be prudent to have a back up plan for the rapidly changing times.

We have built a safe haven for your timeless assets in the form of Fort Kobbe Vaults, a private, fully insured vault located in the Panama Pacifico freezone of Panama, offering a bespoke service to any size client, assisting with the  movement of assets and all other services one would expect from the premier vault in Latin America.

If you are interested in protecting your wealth and assets or would like any other information, please do not hesitate to contact us.

Larry Simon
Larry Simon

Larry Simon was educated at the University of Witwatersrand, Johannesburg, South Africa and is an experienced businessman specialised in management, investment and finance.

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