Saturday, 19 April 2014

Thomas Piketty's "global wealth tax" nonsense.

Whatever the merits or otherwise of a general "wealth tax", it fails for practicalities, Tim W outlines some of them here.

Unlike most people who waffle on about this, I have actually prepared wealth tax returns for people, back in the early 1990s when I worked in Germany and they still had Vermögensteuer. I've still got the Beck-Texte handbook, 1991 edition, it's over 400 pages, just as long as the Corporation Tax handbook and nearly as long as the Income Tax handbook.

There were so many exemptions and exceptions that what it boiled down to was a surcharge on income tax, it raised as little money as you would expect (about DM 9 billion in its last year of operation in 1996 = approx. £3 billion), so they then got rid of it.

There's a favourable write-up of Mr Picketty's book in the FT; putting practicalities to one side, the author is stumbling along the right lines BUT he (and the reviewer, and indeed Tim W):

- assume that increasing inequality is inherently A Bad Thing. It is not, whether it is A Bad Thing or not depends entirely on why it is happening. If some people or businesses work harder or smarter than others, they get richer than those who don't. Fair enough, that's capitalism and benefits everybody overall. But if the government introduces a taxpayer-backed Help To Buy scheme to pump up land prices and mortgages, this increases inequality and is clearly A Bad Thing.

- fall into the trap which the Neo Classical Economists (early Faux Lib's) set a century ago, which is to confuse the difference between a) real personal wealth or capital on the one hand (which is a very good thing) and b) monopoly privileges (primarily freehold land titles, with a few bits and pieces like patents, barriers to entry etc).

If you make these two cardinal errors and decide that an annual wealth tax would help, you would then set the tax at a flat percentage on both kinds of wealth (real wealth and monopoly wealth). Let's say 1% to get the ball rolling, the same as the German Vermögensteuer.

The effect of that 1% tax on real wealth, which perhaps has no annual return (like a painting or jewellery) would be that people just don't declare it or spend years arguing about the value; the effect of that 1% tax on shares or cash in the bank (not directly wealth, but claims on underlying wealth) in an age where dividend yield is only 4% or so and bank interest is maybe 2% would be like increasing income tax on dividends from 25% to 50%, and increasing the income tax rate on bank interest from 20% to 60%.

The effect of that 1% tax on business capital (cars, lorries, machinery, buildings) on which the annual return is (say) 10% would be like increasing corporation tax from 20% to 30%.

The effect of a 1% tax on monopoly wealth might help a bit, but as the total return to monopolies is far, far higher than the return to anything else, at least 10% per annum compound, this would merely slow the rise of inequality at the expense of damaging the real economy to everybody's detriment, including those who live off their wages alone and own little or no wealth of either type.

And we'd still get all the bleating about Poor Widows In Mansions.

The total yield would be small (going by the German example), administratively it would be a nightmare, there would be mass evasion/arguments and it would harm the economy in much the same way as higher income tax and corporation tax rates.

However, a tax on monopoly wealth alone, primarily the rental value of land, would raise significant amounts of revenue because it can levied at up to 100% of the income/benefit arising. There would be no need to define all the stuff that wouldn't be taxed and think up all sorts of exemptions for them. There would be no scope for evasion and no damaging economic effects (as well as a lot of positive economic effects). It's the very opposite of Help To Buy.

In the UK, for example, such a tax would/could approximate to a flat 3% charge on the current selling price of land and buildings and would be enough to get rid of council tax, business rates, stamp duty, inheritance tax and capital gains tax just for starters; the remaining bulk of it would be enough to get VAT down to the EU-dictated minimum of 15% and eliminate National Insurance (super-tax on employment) and higher rate/additional rate income tax entirely.

So it wouldn't be downwards redistribution of cash, it would be a sideways redistribution of the cost of government from rent generators to rent collectors. Workers and businesses (and shareholders) would end up better off, not because they are being given money that the government took away from somebody else, but because less money is being taken away from them.

This also deals with the KLN that "Land Value Tax is a step towards a Wealth Tax". Clearly it's not, as you can raise more money from LVT alone than from a general wealth tax. If you started with full-on LVT and tried to extend it to all wealth (however defined, and that's impossible), the annual % rate would have to fall so steeply that total revenues would be lower (even ignoring the damaging economic impact).


UPDATE: Tim W refers us to an article by Matt Yglesias at who comes to much the same conclusion as I did. It's a longer article but nice and clear and step by step.


Tim Worstall said...

Matt Yglesias has made this point over at Which rather surprised me because he's not normally so perceptive. If you do indeed want to have a wealth tax then LVT (and possibly on patents etc) is the way to go.

Sobers said...

"which is to confuse the difference between a) real personal wealth or capital on the one hand (which is a very good thing) and b) monopoly privileges (primarily freehold land titles, with a few bits and pieces like patents, barriers to entry etc)."

There is no such thing as personal capital anymore, not now that the State allows (indeed demands) constant currency debasement and inflation. When capital meant gold, you have a point. When it now means bits of paper, or bytes of information in a computer, it is worthless in the long term.

That is why anyone who makes serious cash invests it in non cash assets within in a fairly short term timescale. Because to do anything else means the destruction of their purchasing power.

A small example - Viv Nicolson won 162K on the pools in 1961. It was enough money to buy a 1000 acre estate at the time (land was about £150/acre then). Now it wouldn't even buy you a detached house in most of the country.

Its a point I've made time and again - if the only alternative to owning assets (normally land and property) is a continually debased currency, no-one will want to hold cash long term. If there was a currency that held its purchasing power in the long run, many people would prefer it over property (as property has costs) and the whole 'You've got to buy land they've stopped making it' concept would die out. Rather as it had by the 50s and early 60s. No-one wanted land and property then. It was only the removal of the Dollar/Gold link in 1970 that has allowed the stupendous bubble in property and land (and currency debasement) to occur.

Mark Wadsworth said...

TW, ta for back up.

S, ah yes, but

a) there are plenty of other things besides cash in the bank. And a proper wealth tax (like in Germany) would allow a deduction for bank debts anyway, so the net yield from deposits minus loans is theoretically zero.

b) inflation is not something natural or even government-made, it is the secret weapon of landowners. It is an ex post facto justification of Home-Owner-Ism.

With land values depressed to negligible by the amount of the tax and with returns/rewards to everything else shooting up, the government would see no electoral advantage in transferring wealth from savers/workers back to landowners via taxes or inflation.

Bayard said...

If inflation is natural, how come the UK managed to avoid it for hundreds of years?

Bayard said...

"this would merely slow the rise of inequality at the expense of damaging the real economy to everybody's detriment"

Sounds just the sort of thing that a government is likely to do then.

Mark Wadsworth said...

B #1, a very good question.

B #2, they got rid of Wealth Tax in Germany, but they did the wrong thing for the right reason. The argument was, land and buildings were treated much more leniently than other assets, so the owners of other assets said it was unfair.

The Constitutional Court agreed, but instead of getting rid of it on 'everything else' and levying a slightly higher rate on land and buildings, they just got rid of it completely.

Sobers said...

"there are plenty of other things besides cash in the bank"

Not really. You either have cash in the bank, or you own a 'thing', whether that thing is a piece of property, a share in a business (which probably owns property, or monopoly rights such as patents/flight slots/government permits to operate etc etc), or an item like a painting, or commodities such as oil, copper, gold etc.

For most people the saving options are 1) cash, 2) shares (in some form or other) 3) property. Everyone has realised that (1) is for idiots - a retirement of 20-30 years will reduce a cash pension pot to pennies by the end. (2) has the chance of better returns, but also losses, as in the last 15 years. Which leaves good old (3), the default position for anyone in the UK who wishes to protect some savings.

"inflation is not something natural or even government-made, it is the secret weapon of landowners"

Rubbish, its almost entirely government made. If they didn't allow fiat currency creation at the press of a bankers computer keyboard, and tied currency to something of true value, then there would be considerably less inflation, as there was pretty much up to the point they made all currencies fiat in 1970. Politicians created the financial system we operate under today, and they could return to the old one if they so chose. But they don't.

Mark Wadsworth said...

S, perhaps you are younger than I thought.

A brief look at inflation in the UK shows that the highest rates of inflation were exactly in those periods when house prices were falling or threaten to fall.

The government, chained as it is to Home-Owner-Ism, does its best to ramp up inflation when land price bubbles pop.

So yes, inflation is government-made, but not for the fun of it, it is done on behalf of the Homeys - to mask real price falls; to bail out borrowers and banks; to give Homeys the benefit-of-hindsight excuse that they have to "invest in land because it is the only thing that beats inflation" and so on.

Under an LVT-heavy system, people would then believe that "land is the worst investment because its value doesn't even keep up with cash in the bank, let alone shares in productive businesses" and the landowners and bankers would be cursing the government for maintaining price stability, indeed they would be campaigning against it.

So there, you have much to learn, my young paduan :-)

Kj said...

Yup. We still have a wealth tax, with all the different treatments of assets as the old german one. Ofcourse property/land is treated most leniently. A tax expenditure report from govt itself has calculated that the loss from the reduced valuations of property is 25 bn kroner, while total revenue from this silly tax is 16bn kroner! The effect is to herd more money into property, and ownership of productive capital to other countries, often with the owners in the luggage. All in a days work of economically illiterate egalitarianism. There are those who believe you can reform this to be more neutral, but experience from all jurisdictions with wealth taxes shows this is simply not going to happen.

Mark Wadsworth said...

Kj, ta for background info. I suppose the Homeys quite like "wealth taxes" because they never raise much money, so they can say:

"Look, even a tax on ALL wealth doesn't raise much money, so a tax on just land would raise nothing.

"While being fantastically damaging to house prices and an unfair burden on Poor Widows, of course."

Sobers said...

Right. So first you say inflation isn't government made, then you say it is. Make your mind up.

And the main reason for governments to create inflation has nothing to do with house prices, its because governments are massive debtors, and inflation wipes away their debts at the expense of savers. Thus governments can spend money they don't have now (to buy votes), safe in the knowledge they will never have to pay the true value of the money back because they'll effectively nick it from anyone stupid enough to leave cash savings in a bank for a long period of time.

Of course the public have cottoned on to this little game, and are now working the same thing for themselves, taking on as much debt as they can possibly manage 'to get on the property ladder' safe in the knowledge that house prices will never fall long term because governments will always need to inflate their debts away, and anyone owing money will ride on their coattails. Of course allowing a certain % of the public to make huge capital gains for nothing is good for politicians as well - people vote for someone who makes them richer for free.

But thats just a side effect - modern fiat currency States need constant inflation to destroy the value of their debts, and could not operate under a system whereby they could not steal the value from savings via inflation. Thus if you think any fiat currency State would ever switch to a LVT system alone you're mad. The whole current method of govt finance and public sector spending would collapse in a short order. And thus it will never be allowed. All that will happen is that 'Mansion taxes' and the like will be applied on top of all existing taxes, to try and raise more revenue, or just for class based spite.

No high tax/high public spending social democratic state will ever operate a pure LVT tax system - it would be instigating its own destruction.

Ben Jamin' said...


Under an LVT only system, I'm not sure debt would be desirable or necessary.

It's seems to me Politicians end up believing their own BS.

So, when there is a boom, they really think they created it, and have ending bust.

LVT=no more boom and bust. Well, it would act as a natural damper on it at least.

Ben Jamin' said...


LVT isn't a tax. Certainly not one on wealth.

Mark Wadsworth said...

S: "So first you say inflation isn't government made, then you say it is. Make your mind up."

Apologies: just to clarify: Inflation is not something inherent in "government", it is not an inevitable by-product of having a "government" it is a conscious and deliberate decision of some governments some of the time.

And neither are deficits. There are plenty of countries which have not run big deficits or had significant inflation for long periods of time. That is also a policy decision.

"Thus if you think any fiat currency State would ever switch to a LVT system alone you're mad."

Why? What you call "fiat currency" is very much asset-backed. The underlying asset is future tax revenues, in effect, the government is a 40% or 50% shareholder in all businesses.

There's no reason why you can't have a "fiat currency" backed by LVT receipts. Instead of being a 40% or 50% shareholder in every business, the government would be a landowner.

"The whole current method of govt finance and public sector spending would collapse in a short order."

No it wouldn't, see above.

"No high tax/high public spending social democratic state will ever operate a pure LVT tax system - it would be instigating its own destruction."

Whether or not we could fund current expenditure levels with LVT only is irrelevant.

But we could certainly fund a large chunk of it, i.e. replace a large chunk of taxes with LVT.

BJ, ta for back-up, agreed LVT is not really a tax.

DBC Reed said...

Getting back to the point: I feel land taxers should not attack Piketty because i) it will make us look like purist eccentrics ii)Piketty has succeeded in shifting the debate from taxing income to capital assets iii) we can let him take all the flak while we present ourselves as moderate traditionalists (for once) calling for a tax on land only.
Frinstance:Guardian has an editorial "Unthinkable? Capital gains tax on homes" (This Saturday)
This clearly reflects some thinking on taxing the capital value of houses to address the problem of "appallingly unequal wealth". Piketty's influence can be inferred.So this influence has moved the whole tax question sideways onto our ground where we can do the patronising bit : "Brilliant young chap. Perhaps a bit too enthusiastic. Traditional LVT will do the trick with half the bother ,doncha know etc ". All the stuff that has come land taxers' way for generations.Which is the point: we land taxers have got nowhere over the years.We should be using Piketty as a stalking horse to get our ideas across: he has done the difficult thing in shifting the terms of debate off an obsession with income tax.
(I am also surprised everybody has finished reading his 600 page book: I am only half way through)

Mark Wadsworth said...

DBC: "we present ourselves as moderate traditionalists (for once) calling for a tax on land only"

Good point.

Physiocrat said...

Picketty has set off a red herring and his arguments will just serve to confuse the argument. Land taxers have got nowhere in Britain but many other countries have some kind of LVT. The main reasons it gets nowhere in Britain are (1) the Brits are not keen on analytical thinking (2) there is lots of vested interest and (3) so many people aspire to get on the land bandwagon.

There is no point in cosying-up to piffle-spouters. There is also no point in watering-down LVT with things like homestead allowances to make it acceptable to the Home-Owner-1st crowd.

What we do need to do is to be effective at demolishing the nonsensical arguments that are put up against LVT.

Mark Wadsworth said...

Phys, broadly agreed, but I see no harm in having a welfare and pensions system, or personal allowances, or universal tax rebates.

Whether or not you call this "homestead allowance" is a secondary issue, for example you could get rid of £10,000 income tax personal allowance and instead you could exempt everybody from the first £2,000 Domestic Rates they have to pay (or the first £4,000 for couples).