8 Oct 2023

A simple 1% tax on net wealth could replace conventional taxes

The more I think about it, the more I am convinced that we could solve a lot of our problems by replacing manycurrent taxes by a simple annual tax on net wealth. 

Calculating net wealth for individuals is really not complicated. Just add up the value of all your assets, and subtract the value of everything you owe (your liabilities). If you possess more assets than debts, then you have a positive net wealth. If you owe more than you possess, you are negative. 

There are loads of apps you can download to help you do it. Here are some of them:

We have figures for the total amount of net wealth for the most of the population on the planet, thanks to the Credit Suisse Global Wealth Report that analyses net wealth for 5.4 billion people. The latest 2023 edition is available here. It shows that Global household wealth in 2022 was $454.5 trillion, which works out at $84,718 per adult. 

Suppose that everyone paid 1% of their net wealth per year to an international agency. For example, the United Nations.  Obviously, this would generate $4.5 trillion a year - enough to tackle many of the challenges we currently face. For example, it has been claimed that we need to find $3 trillion a year to fight climate change every year from now to 2050.  With a 1% net wealth tax, this would be paid for immediately. 

Alternatively, you could use the money to give every adult on the planet $847 a year - about $70 a month. That sort of global basic income would prevent millions of people starving to death, as well as helping safeguard biodiversity. It might also mean that the thousands of people trying to cross the Mediterranean to get to Europe might decide that actually it would be better to stay at home. 

Now the critical question would be to work out who would end up paying the 1% net wealth tax. 

Here again, the Credit Suisse Wealth Report is very useful. Clearly, mean wealth values will vary a lot between countries.  This figure shows the mean wealth for 20 of the richest countries. 

This means that the average Swiss adult would pay $685 a year. In the USA, it would be $551. In France, it would average out at €312, and in the UK it would be €302.

But of course, the amount paid would vary a lot even within a country, depending on a number of factors. 

In the USA, the bottom 50% of the population only accounts for 3% of the wealth. Whereas, the top 1% account for 18.5% of the total net wealth.

Indeed, the percentage of people with no net wealth at all (and who would never be called on to pay a net wealth tax)  can be very significant. According to an OECD report, in 2019, 10.4% of US households had negative net worth

And of course, the people with negative net worth are not randomly distributed amongst the population. People in their 20s and 30s are often very heavily indebted, with student loans and mortgages to pay off. In contrast, many people reaching retirement age may have paid off their mortgages and managed to save quite a bit of money.  This is particularly obvious in this graph for the UK from the Institute for Fiscal Studies.

It is clear that, if a 1% annual tax on net wealth were introduced in the UK, the average amount of tax paid would increase almost linearly with age, from around £300 a year at age 30, to £3000 a year at 50, and £5500 a year at 65. Would this be unreasonable? I don't think so. Don't forget that someone who was 65 and living on just their pension in rented accommodation with no savings would pay nothing. It really would be a tax that only affects people who are in a position to pay.

One other very attractive possibility that would follow from a switch to taxing net wealth is that you could scrap inheritance taxes. Since it doesn't matter whether the wealth is held by elderly grandparents, or whether it gets shifted to the next generation(s), there would still be the 1% to pay. 

I've been reading up on some of the discussion about the pros and cons of taxing Net Wealth. The OECD conducted an analysis of such taxes in 2018. They noted that while there were 12 OECD countries with net wealth taxes in 2012, the number had dropped to just four in 2017 (France, Norway, Spain and Switzerland), and Emmanuel Macron scrapped the one of remaining French wealth taxes in 2018. 

Why is this? Well, one problem is that the existing wealth taxes only generate a relatively small amount of government revenue, as shown in the following figure, where you can see that only 0.48% of total taxation in France came from the wealth taxes.



But the reason for this lies in the fact that these wealth taxes almost always have thresholds and only apply to people with very large net wealth. This also makes it very tempting for rich people to find ways of moving wealth to tax havens to avoid having to pay.  But my proposition is that the 1% tax should be paid by anyone with net wealth. Indeed, if the net wealth tax was to be applied at a global level, there would no longer be any incentive to move wealth elsewhere. 

In my opinion, a simple annual net wealth tax could easily replace many of the existing complicated taxes on income. 

But, even more significantly, I see no reason why the 1% net wealth tax should only be paid by individuals. If we were to apply the tax not only to the $454.5 trillion of wealth held by individuals, but also to the huge amounts of assets held by corporations, then we really would be able to get rid of many of the current tax mechanisms. In my recent posts, I mentioned that the companies in the Forbes Global 2000 list have over €231 trillion in assets, $170 trillion of which are held by banks and other financial institutions. 

So far, I have been unable to find any way to determine the net wealth of all the other companies that didn't make it onto the Forbes list.  According to Statistica, there were around 333 million companies in the world in 2021. I suppose I could try downloading all their company statements, but I can't be bothered! Nevertheless, my understanding is that wherever those companies are located, they are legally obliged to report their assets every year. So why not simply require them to pay 1% of the net asset value in tax every year? 

That way, you could almost certainly scrap taxes on company profits, which are notoriously susceptible to "tax optimisation" by extremely sophisticated accountants. Hiding assets would probably be much harder, and frankly not worth the bother.

And in the same way that I think it makes sense to require young people with student loans and mortgages to pay much less tax than elderly people who have accumulated lots of wealth, I think that it would make sense to tax companies that have amassed lots of assets rather than start-ups. Even a start-up that is making a good level of profit should not be the target of heavy taxation. That start-up will probably want to use those profits to invest and hire new staff. Why prevent them doing that by taxing away all their resources? No, taxation should target those companies that have amassed large amounts of assets.

Here's one final reason why taxing net wealth makes much more sense than taxing income. If you are rich and have lots of assets - properties, shares etc - the current system is designed so that you only pay tax if you sell off those assets. At that point, you get taxed on the capital gains if you made a profit. If you just sit still, you will see the value of your assets increasing by around 8% a year, as demonstrated by another fascinating graph from the Credit Suisse Wealth Report. 

You can see that, except the financial crash in 2008, global net wealth has been increasing by around 8% every year since 2001. This immediately tells you that getting the asset holders to pay 1% in tax per year is hardly going to make them suffer. They will still get to keep the other 7%!

But the other critical point is that if you only tax assets that get sold, this is a strong incentive for asset holders to remain very passive and not to try and actively use their assets to promote useful activities. Why would you sell off your property and shares to invest in a new venture if you knew that you would have to pay 30% tax on the increased value of those assets? If you paid 1% of the value of your assets every year in tax, you would be much more likely to try and swap your assets for ones that produced an even better return. 

Well, I think that's enough for today. But the bottom line is that I find it decidedly odd that so few people seem to have been thinking about the advantages of a universal flat rate net wealth tax.

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