Applying an asset tax to property - how banks would contribute

In just over a week, I have written several posts about my suggestion of introducing a universal 1% annual tax on all assets - whatever their nature, and wherever they are located. When those assets are held by corporations, individuals or trusts in tax havens, the 1% would be paid to the United Nations to help fund the 17 Sustainable Development Goals that essentially everyone agrees with, but will need trillions every year in funding. If an individual, trust or corporation was already paying the 1% tax elsewhere (because the tax was already implemented locally), they would not be required to pay more. That effectively demolishes the current advantages that can be offered by tax havens.  Countries would be free to add an additional amount to the tax if they so desire (and it they thought that the risk of assets being shifted was not too high).

In today's blog I want to talk about how the tax would apply to people purchasing property. Essentially, if you take out a loan to purchase a house or apartment, you would only pay the tax on the percentage of the house value that belonged to you.


To illustrate the mechanism, I'm going to use a personal example, that has the additional interest that it illustrates how the way mortgages operate in different countries can be surprisingly different. As as Ex-pat Brit living in France for 38 years,  it's particularly surprising to see how the systems can be so different in the UK and France, despite the two countries being part of the European Union, until very recently.

In 2016, when I was already 60 years old, we decided to buy a four room apartment in the centre of Toulouse that I could use during the week to avoid commuting from our main house in the French countryside. I was able to borrow €235,000 with fixed monthly repayments over 20 years. The interest rate was fixed at 1.3%, and I know exactly how much the total cost of the interest will be over the 20 year period - it is €36,633.43. That's 15.58% of the total value of the loan, which I must admit seems remarkably low. When we purchased our first property in the Parisien suburbs in 1986, we were paying around 15% interest EVERY YEAR. How times have changed.

You may be asking yourself why on earth would a bank lend me €235,000 at age 60, with a loan that won't be repaid until I'm 80. Well, I guess that as a public sector researcher (I'm a Research Director with the CNRS who has reached the top of my career options) and a guaranteed state pension, I'm a pretty safe bet. But the loan was conditional on me getting comprehensive insurance so that, in the event of my dying, the insurance would pay off all the remaining loan. I had a fairly comprehensive health check, and was able to get insurance at an annual cost of 1.66% of the value of the remaining loan.

So, I have another document that says exactly how much the insurance will cost every year, with a maximum monthly payment of €298.95 a month at the start of the loan, decreasing to €52.07 a month when I reach 80. I know the total cost of the insurance over that 20 year period -it's €49,151.34. That means that the total cost over 20 years of borrowing the €235,000 needed to buy the apartment (interest payments and insurance) is still only 36.5% of the initial cost. Again, this seems pretty reasonable, especially when you realize that if I had dropped dead the day after taking possession of the property, the insurance would have paid off the entire €235,000, and my wife and sons would have a very nice apartment paid for by the insurance.

As I mentioned, the system in France is totally unlike that in the UK. In the UK, fixed term mortgages over 20 years don't even exist - not even for people in the 30s, and certainly not for those who are over 60. For many taking out a mortgage, the rates are only fixed for 2 or 5 years. After that, there is nothing to stop the banks from sending letters to all their customers to announce that "Sadly, economic conditions have forced them to double (or triple) the interest rate". I actually think that variable rate mortgages should be banned. Offering an attractive "teaser" rate for the first 2 years, in full knowledge that they can increase the rate to anything they can get away with later on, is extremely dubious, and can easily lead people to take on unmanageable levels of debt. Fellow Brits! Why do you put up with that? Indeed, for years I had thought that there was a very valid case for taking UK banks to court to force them to provide the same sorts of  20, 25 or even 30 year fixed rate mortgages available elsewhere in the EU. It should not be legal in the EU to discriminate between people simply  on the basis of their residence. But of course, now that people like Dominic Cummings managed to get people in the UK to leave the EU, that sort of protection is dead. It's tragic....

But I digress. Let me get back to the original point of this blog piece. How much would I pay this year if there was a 1% asset tax on the property that I purchased in 2016? My proposal would be that I should pay 1% of value of the part of the property that was already paid for. After 4 years, you might have thought that I would have already paid off around 20% of the loan. But that's not how my loan has been set up. My monthly repayments over the entire period are totally fixed, and that means that at the start of the loan period, nearly all the money is used to pay interest, and the amount of capital being paid off drops quite slowly. In fact, after 10 years, I will only have paid back about €89,000 (about 38% of the initial loan). It is that amount that would decide how much I should pay. With the asset tax set at 1%, this would mean me paying €890 a year, even after 10 years. The amount due would only reach 1% of €235,000 (i.e. €2350) after the entire repayment period is completed.

Actually, I think that the amount should not depend on the value of the property at the start of the loan, but actually the value at current market prices. There are various ways this might be done. One would be to take the increase in the French House Price Index which, according to EuroStat, has increased by about 10.6% since the apartment was purchased in 2016 (Check out the numbers on a Google Sheet I have set up here). Or it could use a more local figure  since prices in Toulouse have tended to increase more than the national average. But whatever method is used, it needs to track the actual value of the property. Otherwise, the 1% asset tax paid on a property purchased 50 years would be negligible.

But the other big question concerns what happens to the Bank who lent me the €235,000 back in 2016. For me, it is clear. If the bank is using the piece of paper that I signed saying that I owe them €235,000 as an asset, they should pay the 1% asset tax on the remaining sum that I owe them - €235,000 at the beginning of the loan - €0 at the end.

Yes, of course, the banks are going to scream that it's not fair. And it's true that since the world's 50 largest banks hold $68 trillion in assets, my proposal is going to cost them around €680 billion  a year. But this is a logical reflection of the way that money is created in the current system, and yes, it really is perfectly fair.

The fact is that the way in which my Bank managed to find the €235,000 that they lent me is critical. They might like people to believe that they are simply re-lending the money that savers have entrusted in them. According to that idea, my €235,000 came from an army of people who have put their savings in the bank and are hoping to get some money back from them. If that was true, the €235,000 they lent me would be compensated for by the banks liabilities to the savers that provided the money. In that case, it would be the savers who would be paying the 1% a year - not the bank.

But hopefully you won't have to think for too long to realize that this is pure myth. Firstly, since the bank is only charging me 1.3% interest, this would be a catastrophic misuse of their savers money. It's not even covering inflation. Admittedly, the rates banks currently provide to savers are terrible, but you don't hear banks justifying the crappy returns for savers by saying - ah, sorry, we can't provide you with better rates because we need to be able to lend people like Simon Thorpe (who is over 60) a fixed rate 1.3% loan over 20 years.

No, the simple truth is that the bank that lent me the money just created it out of thin air. That's what commercial banks can do. The fact that are only asking me for interest at 1.3% and this is extremely unlikely to beat inflation over the the 20 year period is not a problem. They know that, since they have a piece of paper saying that I will pay them €36,633.43 to thank them for creating the money, and that they have another piece of paper saying that if I die, the insurance company will pay off the loan, they are happy. Since creating the money costs them essentially nothing, they are able to get me to pay them €36,633.43 over 20 years, it's a no-brainer for them. The only slight drawback is that they have to add €235,000 to the list of their assets - and that's why French banks end up with astronomic amounts of assets. For example

• BNP Paribas SA $2,427,625 billion
• Crédit Agricole SA $1,982,329 billion
• Société Générale $1,521,031 billion

If those banks were indeed forced to pay the 1% tax on the value of their assets, like everyone else on the planet, it might indeed force them to charge more for their loans. Yes, I wouldn't be able to borrow over 20 years at 1.3%. It would be 2.3% instead. Is that unreasonable, given that the European  Central Bank is supposed to have a target inflation rate of 2%? Not for me. Especially if European house prices have been increasing by over 4% a year for several years in a row.

No, the current system, where banks are allowed to inflate their asset sheets virtually with no constraints is one reason why our governments, businesses and households are now €255 trillion in debt. When commercial banks have a license to create money out of thin air, it's hardly surprising that people like me can get large amounts of "money" to buy property at remarkably little cost. Forcing those banks to depend on savers money to make loans by putting a 1% asset tax on their trillions of assets would be doubly effective. First, it would provide hundreds of billions of vital money for funding the really important things for our planet. And it would shine a light on the very dubious system that we have for creating the world's money supply as interest paying debt.