patrick.net

Net assets? Talk about a way to encourage borrowing...

Not net assets. ALL assets.

So if you borrow to buy a house, you still do pay the 2% on the house each year.

So if you borrow and buy a house, you pay the 2% on the house each year.

How would you value those assets, purchase cost or current market value ?

Current market value.

A 2% tax on all assets is simple and fair, and pretty easy to verify for large assets (real estate, stock, bonds). Why not do it?

First off, If I am a retiree and spent my life working and accumulated wealth, which was subject to income tax already on that path and now you're going to clobber me again with an asset tax now that I'm done earning income?

Financial assets are pretty liquid and I'm sure they would be taken elsewhere around the world and that 200T in assets as claimed will shrink to 100T easily.

A 2% asset tax is hardly "clobbering" anyone.

Especially since you'd pay 0% income tax, and 0% sales tax. And 0% inheritance tax.

No capital gains tax either. No dividend tax.

Seriously, you could come out ahead, even in retirement.

SFace says

Financial assets are pretty liquid and I'm sure they would be taken elsewhere around the world and that 200T in assets as claimed will shrink to 100T easily.

Nope, not going to happen. First of all, most of those assets are not mobile (think land, factories, office buildings) and second of all, the US economy would probably boom with zero income taxes and zero sales taxes. And an incentive to spend.

Anyway, you'd owe the tax as a US citizen even if you moved assets abroad. Unless you give up citizenship and leave. Which is fine. You could do that now anyway.

so say someone makes 100k, doesn't own a car or a home, could end up paying no taxes?

If the total value of all US assets is about $200 trillion, and the total tax revenue in the US (federal, state, and local combined) is about $4 trillion per year, then if follows that a simple tax of 2% on all US assets would pay all taxes.

The problem with this math is that taxes are inversely proportional to valuations.

Slap a 2% federal LVT on land and land prices will fall immensely, and there goes your $200T total asset value.

Another problem with the math is that there's only $72T in asset value, according to the Fed:

http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf

You can throw in the $40T non-financial businesses hold, but that's double-counting.

Dunno what assets "financial" businesses hold, LOL.

SFace says

Financial assets are pretty liquid and I'm sure they would be taken elsewhere around the world

No SFace, you gotta stay with us! What would we do without your rent-seeking ways?

immigrant says

so say someone makes 100k, doesn't own a car or a home, could end up paying no taxes?

True, if they spend it all right away. Except that they have to live somewhere, and so part of their rent would go for the asset tax.

Bellingham Bill says

Slap a 2% federal LVT on land and land prices will fall immensely, and there goes your $200T total asset value.

According to the link at the top, tangible assets are a quarter of all assets. And land is probably only half of that quarter.

I'm not sure land values would actually fall though. With zero income taxes and zero sales taxes, business would be booming, so the economy would expand.

It's an attractive idea on the surface - but actual implementation would create massive, (let me repeat) MASSIVE change (probably catastrophic).

I am not talking about people "not liking it". That could probably be managed.

No, it is how we value assets that would be radically changed. I think the first effect would be that it would knock probably around 60% off the value of all assets within the first 2 years of the tax starting.

With the 2% flat asset tax their will only be ONE value test for 99% of assets (I am sure there will still be some asset classes or circumstances under which this will not be true, but I am confident of the 99% where it will) - and that is the test

Will it cover the tax and still be worth owning ?

For example - with the flat asset tax, the property bubble would have never ever ever happened.

Typical Scenario : $450,000 Residential House

Rental PA (maybe) : $20,000

Asset Tax : $9000

Leaving $11000 for debt maintenance, insurance, property care and all other costs.

How about traditionally high value assets that are slightly speculative but generate sporadic / little direct income ? (usually the domain of the upper middle, if not the genuinely rich).

A large block of land in a very nice rural area (that is becoming "the cool place") with a luxury lodge-ish building on it.

This is the kind of thing that has great asset value now (say 3-5 Mil) that can be held relatively low cost (if you have a bit of cash and borrowing for it is bundled in other operational borrowing). This is such a discretionary asset, where it is purchased with the thoughts of "well, I reckon the place is getting popular, unlikely I will loose on it, and I like the place, and I can hold it without it hurting".

Now the first thought will be "I need to stump up a hundred grand every year just to have it, before ANYTHING else". Keep it for a decade and I will have dropped a mil into the place before any improvements or maintenance. Watch how quickly that kind of asset stops being worth 5 mil.

I reckon the idea should be given a go just to see what happens :D

Curdmudgeon says

I reckon the idea should be given a go just to see what happens :D

what we could do is add-in depreciation credits for capital investment, and it would become a LVT : )

According to the link at the top, tangible assets are a quarter of all assets.

Ah, you're counting the $60T of debt that banks own. 2% tax on debt is a 2% rise in interest rates debtors pay right there (but that's not a bad idea).

But $200T / 130m households is $1.5M per household. Doesn't sound too far off I guess. Hell, after 400 years here we should have tons of wealth accumulated, no?

The bottom 90% owns 30% of the wealth in this country, and this 2% tax on assets will hit them hard since 60% of the total principal residence wealth is held by the bottom 90%, and a 2% tax on that would crush real estate values.

So under an asset tax, aren't homeowners going to have to pay a tax while renters don't have to pay? I don't like the idea of that. How are renters going to have skin in the game?

I like this idea.

It would cut down a lot on speculation.

Perhaps it would cut down on the dependency on appreciation of an asset as a passive revenue-generator. Why would you want to buy and hold some land in hopes you could flip it in a few years to developers?

Hmmm... yes.

Is there any history on such a system?

Wouldn't it be a wash? 47% now pay no Federal Income Tax, and approximately 47% are renters (give or take a couple of percentage points). Seems to me it would work quite well. I like the "2% Solution" much better than 9-9-9.

Today's book recommendation: A Bull in China, by Jim Rogers.

Why should renters be exempt from tax? Do renters not use public services?

It seems that a large group of individuals slip through the tax trap, one way or another. How about a flat 2% SALES TAX? That would catch those pesky renters AND those dead-beats who pay no federal income tax. Problem solved!

HousingWatcher says

How are renters going to have skin in the game?

Renters will pay the tax in two ways:

1. Via their rent. Sure, the bill goes to the landlord, but the tax money will come from the renter.
2. Via whatever assets renters do own.

Vicente says

Is there any history on such a system?

It was the standard early on in Islamic countries when they became rich. Actually, they had a 2.5% asset tax with an exemption of the first N dollars or dinars. I'm not a fan of Islam in general, because Mohammed robbed, raped, and murdered, but I think an asset tax a good idea, and it probably contributed to their early economic success. Some historians claim that Islam's rapid spread was due primarily to everyone deciding that their tax system was so superior.

Looks like some European countries have it too:

http://en.wikipedia.org/wiki/Asset_tax

Honest Abe says

Wouldn't it be a wash? 47% now pay no Federal Income Tax

No, those people who pay no federal income tax actually DO pay a lot of tax, it's just payroll taxes (soc sec and medicare) and sales tax and government fees. As a percent, they seem to pay about as much as rich people do. It's the middle class that gets taxed the most under our current system.

Honest Abe says

How about a flat 2% SALES TAX?

A single tax on sales is the worst possible tax IMHO. Rich people would accelerate their accumulation of all the capital, because the rich don't spend much. They have more money than they know what to do with. The poor would end up paying the highest percent of their incomes with a sales tax, because they must spend pretty much everything they earn.

Bellingham Bill says

The bottom 90% owns 30% of the wealth in this country, and this 2% tax on assets will hit them hard

2% wouldn't hit them all that hard. But OK, maybe there should be an exemption of the first $50,000 or whatever one year of median national household income is. Something like that.

BTW, I'm not thinking of taxing cars and trivial personal possessions, just the big-ticket assets: real estate, stocks, bonds, etc. Cash in sufficiently large amounts. Those big-ticket assets are fairly easy to track too, because there are good records of them.

Would you also eliminate property tax? A lot of states have very high property taxes.

Yes, property tax would be eliminated too, because the 2% asset tax is itself a property tax.

There would be exactly ONE tax: the 2% tax on assets.

But what specifically is defined as an asset and who/what determines the wealth of such?

Many assets depreciate in value (cars for the most part)...

How big/small would this get. If I pay $100 for a textbook would it be an asset?

In Mass we have sales taxes but generally do not have them on food or clothing (up to $300). Is food an asset? That might sound stupid but if someone spends 5K or so on a wedding cake that might add up.

I've heard a interesting argument would be a 1% sales tax on all stock transactions. There's enough in volume and I cannot really see that many that would be against 1%..might complicate short sellers though.

Patrick - would this be every year on all assets?

Regarding tax on depreciating assets, Mass has (or at least used to have) an excise tax on vehicles. If I recall correctly, its paid on a semi regular basis (annually, or whenever you re-register the vehicle or something like that)

I remember that when my wife (then girlfriend) moved up she absolutely flipped the first time she got a tax bill on her 10+ year old car... and flipped even more when she got another bill a few years later.

mdovell says

But what specifically is defined as an asset and who/what determines the wealth of such?

If you could sell it for a lot of money, it's an asset. The value depends on what you could sell it for.

mdovell says

How big/small would this get. If I pay $100 for a textbook would it be an asset?

No, nothing like that. Not even cars. Just real estate, stocks, bonds, big bank accounts. The things that can produce income without requiring work.

Let's say there's a $50,000 exemption per household.

EastCoastBubbleBoy says

Patrick - would this be every year on all assets?

Yes, every year on all those large assets. That's what it would take to eliminate all other taxes.

This wouldn't work.

There is no accurate way to account for the majority of assets.

Houses, cars, stock, businesses, land, and other large investments? Sure. But that's less than half of the value of all assets.

Retailers could not remain in business if they were taxed on their assets rather than their profits.

How do you account for bank deposits?

I'm definitely in favor of shifting taxes to wealth rather than income, but a flat tax on "assets" wouldn't work.

We need government because of demand for goods and security of the system to provide the goods we buy. Taxes should be based on the demand, not the ownership.

Three words why your idea doesn't work:
As A Farmer.
How, exactly, do you justify a tax on assets to someone who is losing money with those assets already?
Tell someone who is working 72 hours out of 96 that they will be paying an additional 2% tax (they are already losing money, so not paying income tax for the most part) on the $500,000 corn harvester that they are already struggling to make payments for.

The madness is caused by consumption. Stop the madness with Sales taxes.

PS: Your suggestion is based on the accumulation of resources. Resources are valuable because they can be used to create more resources. Accumulation of resources ('wealth') is simply the denial of those resources from people who demand them, either for useful or consumptive purposes. When everyone is convinced that they must accumulate resources, then none of the resources are left to create more wealth: all are taken out of circulation.
Our system of systems is already failing because of this culture of consumption and accumulation (selfishness rather than generosity, competition instead of cooperation).
The solution to the debt problems is to not allow the competition to overcome needs, and to moderate consumption so that overconsumption becomes undesirable. Actions by everyone should be useful to the future, not destructive of it. Everything about our monetized decision-making is oriented toward increasing consumption and perpetual growth. Within that system, there has to be a price to pay for the damage we do to our own future...or we have to somehow eliminate money as the decision-maker.

Kevin says

Retailers could not remain in business if they were taxed on their assets rather than their profits.

The argument could be made that if the sales tax is eliminated, then retailers could raise their prices 6-7% to capture the deadweight loss...

That would be enough to pay the asset tax and then some, unless they are operating with a very low ROA, like under 5.3%...

2% asset tax divided by current corporate tax rate (35%) is 5.71% ROA = paying the same taxes with income vs. asset taxes. Since he can now capture the deadweight loss by increasing prices, his ROA under the current tax system needs to be under 5.71/1.07 = 5.3% in order for him to pay more taxes under a 2% asset tax system. FYI...Mcdonalds has an ROA of about 23%...

after 10 years, your assets are worth 81% of original value.
after 20 years, your assets are worth 67% of original value.
after 30 years, your assets are worth 54% of original value.
after 40 years, your assets are worth 44% of original value.
after 50 years, your assets are worth 36% of original value.
after 60 years, your assets are worth 30% of original value.
after 70 years, your assets are worth 24% of original value.

i would just invest outside the US and hide all my assets from this ridiculous taxation or just move out of the country.

i never thought of housing in this perspective, but after 30 years of owning, its value has decreased to 74% of original value at a 1% tax rate (excluding all other factors like inflation, appreciation, etc). 84% @ 1% after 15 years

A 2% tax on all assets is simple and fair, and pretty easy to verify for large assets (real estate, stock, bonds). Why not do it?

A very interesting idea. Like most ideas , it would probably have unintended consequences.

Possible scenario: the top 0.1% would likely sell their assets (to avoid the tax) and use the cash to buy politicians. Remember, the U.S. has the best government money can buy. Wealth would then be measured by what % of congress an individual (or corporation) owns. The Forbes 500 might have to change how they define the worlds' wealthiest individuals.

Would politicians (in the back pocket of certain individuals) be considered assets and taxed as such? How would those "assets" be valued? The bribery market is fairly non-transparent.

The United States is not the best place to live. You have to work hard to live here. That you have to grow your own food here. It just does not grow out in the open. Maybe a few berries and some fruit. Land you can get plenty of here. You just go and stake it out. Thing is you have to plant and grow. It's a real pain and takes up most of your time.

Now South America Brazil its the same thing. Land is free. Many, Many Americans have moved there. No one says it of course. Food grows in many places without having to plant or harvest. It has much game. All you have to do is put together shelter. Why the hell anyone would be in a city out on the streets is way beyond me. No one bothers you and its really not like Africa with lions and tigers and that kind of animal. The Amazon basin is really, really fertile. Why people sit around and bitch about a land that is filled with nothing but brambles and fields which this is a country of fields is beyond me. There is nothing much of food here unless you put a lot of work into it.

Insanity.

Not the idea, the comments.

This already exists. It's a combination of property tax and something like Florida's Intangible Tax: http://www.kulzick.com/fintti.htm

I should say former tax. http://dor.myflorida.com/dor/tips/tip07c02-01.html.

Terrible idea: I am not sure where you get the $200 T figure but that figure is extremely volatile since our economy runs on funny money, fractional reserve lending, federal government subsidized speculation, and other factors. When the entire housing market gets hit by 30% that is going to have an affect on the the tax receipts.

It is also has terrible incentives built into it that would encourage people to spend a larger percentage of their income on consumption immediately. Why put $10,000 per year away for retirement if the govt. is going to steal 2% of that every year until you retire. Instead, you should spend the $10,000 on a luxury vacation, and let the govt. take care of you when you get to retirement. After all, it is already being floated that people who manage to put enough money away for retirement in addition to the mandatory money they pay into SS should get docked SS benefits.

Also, can you imagine the epic corruption that would be built into the assessment role? I live in Cook County (where you grew up), and the assessment procedure is anything but fair.

A much better idea is a flat tax on consumption (sales or VAT). It is NOT regressive. A rich person can save as much money as he want without paying tax but he will never be able to enjoy his money without being taxed. Money is nothing but paper until it is spent. In order for rich people (or their heirs) to ever enjoy the mountains of cash they sit on, they will need to spend it, at which time they will be taxed. Although rich people can spend less of their income than you or I, every dollar they refrain from spending is a dollar's worth of goods and services that they do not deplete and thus remain available to rest of society.

I mean why work for someone else. When you can walk outside your door and get food that is already there. Solar power. Fish and hunting. Everything is there.

9-9-9 or any flat tax is a step in the right direction because they create more efficiency in collecting taxes which is one of the problems we have now. Tax codes only get more complicated to create more IRS and tax preparing jobs which really don't produce anything. Everyone consumes: the rich, the poor the criminal etc. Once we tax assets the incentive will be to devalue assets which will ruin capital which will lead to collapsing the economy. But then remember, Patrick doesn't have a clue as to how a free market works.

immigrant says

so say someone makes 100k, doesn't own a car or a home, could end up paying no taxes?

I really don't like this part. It only encourages people to spend like drunken sailors and punishes responsible people who are mostly just trying to save for their retirement.

Hysteresis says

after 10 years, your assets are worth 81% of original value.
after 20 years, your assets are worth 67% of original value.
after 30 years, your assets are worth 54% of original value.

Only if you're just sitting on them without investing, denying the use of them to others. If you invest them and get anything over 2%, you're gaining. Remember that all income would be tax-free.

Kevin says

There is no accurate way to account for the majority of assets.

The stock market assigns a value to stocks every minute of every day. Bond market not much different. Real estate also not terribly hard. What would it sell for? Everyone knows, pretty much. Hell, they're obsessed with it: zestimates, etc.

Large cash bank accounts are especially easy to value.

Auntiegrav says

How, exactly, do you justify a tax on assets to someone who is losing money with those assets already?

Uh, perhaps it's not the best use of capital if they're losing money.

wthrfrk80 says

Would politicians (in the back pocket of certain individuals) be considered assets and taxed as such?

They should be! Not quite sure how to value them.

uvafitz says

Why put $10,000 per year away for retirement if the govt. is going to steal 2% of that every year until you retire.

Because the first $50K is completely free of both the asset tax and income tax. And because investing is much easier without any income tax. You just need to find something that pays more than 2%, like 10 year bonds, stocks that pay dividends over 2%...

Free the Markets says

9-9-9 or any flat tax is a step in the right direction

Nope, 9-9-9 is a big step in the wrong direction, toward giving the ultra-rich an even larger share of everything, until they own ALL of it and we're all their permanent slaves.

zzyzzx says

. It only encourages people to spend like drunken sailors and punishes responsible people who are mostly just trying to save for their retirement.

You forget that the income tax would be zero percent. Zero! Instead of losing 20% or 30% to income taxes off the top every year before saving anything, you lose nothing and so can save much more quickly, especially since the first $50K of assets would not have the asset tax either.

It's a strong incentive to save at first, but then a relatively small tax on idle wealth, to encourage it to be invested at better than 2%, or spent. Which is the right thing to do.

Hysteresis says

after 10 years, your assets are worth 81% of original value.
after 20 years, your assets are worth 67% of original value.
after 30 years, your assets are worth 54% of original value.

Only if you're just sitting on them without investing, denying the use of them to others. If you invest them and get anything over 2%, you're gaining. Remember that all income would be tax-free.

90%+ of people are terrible investors. look at the terrible returns of the average 401k.

we really don't need more incentive for amateurs (mis)investing their hard earned money.

instead of taxing, we should just cut government programs. spend less, tax less. simple. i'm all for self sufficiency because i'm getting screwed supporting all the morons that can't support (let alone invest properly for) themselves.

It's a strong incentive to save at first, but then a relatively small tax on idle wealth, to encourage it to be invested at better than 2%, or spent. Which is the right thing to do.

Break even (same amount of taxes as current) is an ROA of 2%/current tax rate. At current tax rates of 25% federal and 7% state, 6.25% ROA. That is, a 100,000 investment that you make 6.25% return on currently, or $6250, pays $2000 in taxes on that return. The exact same tax you would pay on a 2% asset tax.

Asset values are nothing more than the present value of the future expected cash flows (or the dollar value of its utility) from it.

The asset tax discourages leverage (and debt taking). It remains to be seen if this disincentive to debt taking (and loss of consumption through debt) would be overcome by the increased consumption and capture of the deadweight loss that would arise from the elimination of consumption and income taxes.