The stupidity of our current tax systems

My recent obsession with the idea that we should consider imposing a flat rate universal 1% annual tax on all assets has led me to look at the way taxes are currently implemented by our governments. And my conclusions are extremely clear. The way we tax now is frankly stupid. Essentially all the current systems are designed to make the tax burden on the poor as high as possible, while protecting the individuals and corporations who hold the wealth.

If you don't believe me, take a look at the figures compiled by the OECD. They provide a very clear annual report on the tax systems in 36 different countries, using a standardized scheme that allows different tax regimes to be compared.

Their Table 3.4 divides tax revenue for each country into 6 main categories

1. Taxes on incomes and profits 
2. Social security
3. Payroll
4. Property
5. Goods and Services
6. Other

Further tables break down the first group into taxes on personal income and taxes on corporate income.  I've compiled all the key information into a Google Sheet, and put the figures in the following table.

The really important numbers, for the current argument, are the bottom line which give OECD averages for the different forms of taxation.

Of all the tax revenue raised by the 36 governments, on average

• 32.4% comes from taxes on goods and services (with 20.2% due to VAT, which seems to exist everywhere except in the USA)
• 26.0% comes from social security payments
• 23.0% comes from taxes on personal income
• 1.1% comes from payroll taxes

That's a total of 82.5% that are effectively paid by ordinary people, irrespective of how wealthy they are. When you pay 20% VAT for repairing your car, for example, nobody is interested in whether you are struggling to feed your children, pay the rent and so forth. Likewise, your social security payments are not a function of whether you are wealthy or not. You start paying social security from day one when you start work. It doesn't depend on how much you have accumulated. Note that, in countries such as France, a lot of the social security payments are described as being by the employer. But, in the end, it means less money is available to pay the employee.

While it's true that income tax will depend on how much you earn, it does not depend on how much you already have.

9.3% comes from taxes on corporate profits. But even they don't depend on how wealthy the corporation is. A small company with very few assets will typically pay the same rate as a mega-corporation. In fact, it is often the mega-corporation that has access to sophisticated tax optimisation schemes that allow them to get a selective advantage.

Essentially, the only type of tax that really depends on wealth is the average 5.8% of government revenue that depends on property taxes. Interestingly, there are a few countries where the proportion of tax revenue from property taxes goes into double digits  - the USA (16%), the UK (12.5%), Canada (12%), Korea (11.7%), Australia (10.3%). But these tend to be countries where the tax take as a percentage of GDP tends to be relatively modest (27-33%). And there are countries that apparently are hardly interested at all in taxing wealthy people with property. Austria, the Czech Republic, Estonia, Lithuania, the Slovak Republic, Slovenia and Mexico all get less that 2% of their tax revenue from property taxes. Surprisingly, even Sweden, with its generous welfare system, only gets 2.2% of its tax from property.

Is this split really the best way to raise taxes?

For me, this looks like a system that is designed to protect those with wealth from paying their share, and ensuring that the bulk of tax is paid by those at the bottom of the ladder. I thus think that there is a very strong case for moving towards tax schemes that depend on directly on wealth.

Many young people starting out in life are effectively crippled by the massive tax bills that they have, even when they have no real assets.  Many people now accept that our entire system is now too biased in favour of older, retired people, who are effectively not earning income anymore, but living off their accumulated assets.

My proposed 1% flat rate tax on all assets would provide a real alternative. If we take France as an example,  I have recently provided figures showing that the assets owned by households amount to nearly €14 trillion. This includes both property and financial assets. With an simple asset tax set at 1% per annum, this would generate 11.5% of all the current tax revenue (despite it being a very high percentage of GDP in France - 46.1%, which is higher than any other OECD country!).

But then we should also include the assets held by corporations and companies. My analysis based on the Forbes Global 2000 list shows that just the first 57 French companies possess assets worth over $10 trillion. I am not yet able to report asset figures for the 457  French companies listed on the stock exchange in 2018, but it is bound to be substantially more.

I could also note that my other proposal for tax reform would also radically shift tax from ordinary citizens to those with the wealth. Taxing all financial transactions at a very modest rate of 0.1% or less would also allow essentially all the current taxation mechanisms to be replaced. It's an idea I have been pushing for over 10 years, starting with a paper in 2010, but also with a TEDx talk in 2014.

The net result of replacing the current systems used by essentially all countries with two simple mechanisms - a 1% annual tax on all assets, and a 0.1% tax on all financial transactions would be radical. Instead of impoverishing people who hardly have anything to start with, taxation would target those entities (individuals, corporations, trusts) that currently are able to protect themselves from taxation.

It is important to realize that it is not because all 35 OECD countries (and very probably most other countries) have ended up with similar taxation systems, that this means that those systems are well designed. I suppose that it could be that our governments have all converged on the same ideas because they have actually thought this through, and made some sort of rational decision. But I think that a highly plausible explanation is that the shape of our tax systems has been set up by the wealthy to protect their interests.

And if that is the case, surely it is time for the other 99% of the population to wake up, and say that we want the system changed.