alternative tax system

EarthOS Scifi Economics
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Hello everybody.

I have been playing in my mind with a scenario. What if instead of all the taxes we have right now, capital gain tax, tax on revenue, value added tax, and so on, we had only one tax: a property tax?

Let us define a threshold T and a rate R.

If someone had P amount (which includes everything, cash, real estate, stocks, bonds, crypto, art, …) he must pay each year (P-T)*R.

A starting rate of R could be 2.6%, and T could be 10’000 euro. Of course the threashold and rate could be changed, but the general idea would be to have something very simple, that works, and that does not slow down the economy (like VAT) and does not push people into the black market.

I see a few problems with

  1. evaluating the value of real estate

  2. evaluating art

  3. corporate tax (which I have not considered so far)

Probably for real estate, it could be solved by analysing the market and comparing each house with similar ones. For art maybe a self declaration could be enough, if associated with the obligation to sell it if someone offers much more than the declared price (like twice the amount).

Not sure how to handle corporate tax.

Any thought or reason why it wouldn’t work?

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Ciao Pietro, great to hear from you. What you say is reminescent of stuff that was actually tried at the beginning of the patrimonial age, in the early 19th century. I read about it in Piketty’s Capital and ideology. Even if what you want to do is whack up a model, accounts of how the real-world instance behaved might inspire features of the model. Let me fish out the reference and get back to you.

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@pietro , I refreshed my Piketty and can now say a bit more about your idea.

  • A tax on real estate (contribution foncière) was introduced by the lawmakers of the French Revolution in 1791-1792.
  • At the time, it was thought that most wealth existed in the form of real estate, so this move was thought of as a tax on wealth.
  • The taxable base was designated to be the rental value of the property, whether the property was rented or not.
  • The tax rate was 3-4% of that value a year, which, in the real estate market of the time, amounted to about 0.2% of the value of the property itself.
  • The tax was proportional – no progressivity.
  • Upon inheritance, the inheritor paid an additional 1% of the value of the property.

Piketty sees this type of tax as a major enabler of the patrimonial age that lasted throughout the long 19th century (so, up to World War 1). For those not familiar with Piketty, a patrimonial society is one where, by and large, most people have no wealth at all. The top 10% will own 90% of the nation’s wealth; the top 1% will own something like 50%. These were the rough numbers in Europe at the end of the Belle Epoque.

The structure of your tax is similar to the contribution foncière’s – but your proposed rate is 100 times higher, a significant difference. In order to form an opinion about it, I need to ask: how (if) do you intend to make it progressive?

On the role of the contribution foncière itself, Piketty has this to say:

It is important to note that a tax on capital that is strictly proportional and assessed at such a low rate serves the owners of capital well. Indeed, during the French Revolution and throughout the period 1800–1914, capitalists saw this as the ideal tax system. By paying barely 0.2 percent a year on the value of capital and an additional 1 percent when “son succeeded father,” every capitalist obtained the right to enrich himself and accumulate ever more capital in peace, to derive the maximum profit from his property without having to declare the income or profits it generated, with the guarantee that any taxes due would not depend on the profits or rents actually realized. Because a low proportional tax on capital is not very intrusive and gives every advantage to the owners of capital, it has often been the preference of the wealthy. This was the case not only at the time of the French Revolution and throughout the nineteenth century but also throughout the twentieth century, and it continues to this day. In contrast, a tax on capital in the form of a truly progressive tax on wealth tends to frighten property owners, as we will see when we study the debates that erupted in the course of the twentieth century.

– Piketty, Thomas. Capital and Ideology (p. 146). Harvard University Press. Kindle Edition.)

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Thanks for the answer, @alberto . Interesting. As I am trying to keep as simple as possible, I would definitely not make it progressive, but strictly proportional. Which would have the added benefit to make it neutral respect to how many people share the asset. In other words it is not worth to hide ownership by splitting up among “prestanome”. I think if the tax is high enough it would not generate that kind of pareto division with few people owning everything. Beside even the tax system we have right now produces this kind of distribution. I suspect this distribution is a side effect of a deeper law, and not just an effect of the tax system. After all it mirrors a power law, which you know very well, is just a side effect of social systems and systems with positive feedback loops.

Instead the system should have some sort of threashold T (and a rate R), and people below it would not pay taxes, but would get money from the state. Proportionally to how little asset they have. If the threashold is 0, then the system will produce every year exactly R% of the total value of what exists (which includes the value of stocks which is not fixed).

I should run some models to see how much money would it be produced from the taxes depending on T, R and the Gini index.

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This is not just simplification, it is an important technical and political choice. As far as I know, academic macroeconomists would need a discussion explaining its welfare advantages, as it runs completely counter the practice of the last 100 years at least. In Italy, progressivity is a constitutional obligation.

The power law distribution of wealth is easy to explain with multiplicative growth (what Ola Peters calls “ergodicity economics” – there is a discussion of in on this forum). It is also considered a bad thing, and progressive taxation a mitigation mechanism.

As for the Gini index, we can fall back on Piketty again (though he does not like Gini indices, and IMHO makes a convincing case for not using them). He would say everything depends on the sign of the inequality r - g, where r is the rate of return on capital and g is the rate of economic growth. When this sign is positive, inequality increases.

Interested in what you find out and how you find it.

At this point it’s worth noting that Piketty leads a large project to collect, clean up and standardize historical data on distribution of income and wealth the world over, starting as far back as possible – France has decent records starting at the end of the 1700s. I think they must be online somewhere, if that appeals.

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@pietro, nice to meet you, I joined SciFi Economics long after you.

I have some questions, a couple of suggestions . . .

First, what is your perception of property that has you link real estate, cash holdings, stocks, bonds and art? Could it be that the property you identify represents excess income expenditure, thus a measure of excess income? Are you therefore proposing a tax on excess income?

Because these things you’ve enumerated are not equivalent in practice, incentives or desirability.

Land is unique in both its essential nature, potential and finiteness. Like food, we all need land to live. It’s essentially invaluable.

Art itself is not finite, though a particular artist’s work is finite. People with excess income spend on art because of 1) signaling, and 2) expectation of appreciation due to scarcity. But art isn’t something that could be developed into something more than it is. For me, art speculation is like crypto, in that artworks could become a store of value, but this totally depends on cultural opinions, very different from land. Art also has the added dimension of relevant humanism, such that art that speaks to someone today may not speak to someone 30 years hence. So does a Picasso have value because it’s an artistic work that speaks something to an observer, or because it’s a rare object because he is dead? So time dependent!

Stocks and bonds are allegedly desirable because they provide capital for productive ventures. Evidence suggests though that only 15% of stock investment goes to potentially productive endeavors, the rest to the resale of stock assets and their derivatives that initially provided that impetus. Even so, these vehicles aren’t of the art and crypto nature of ‘its value is what other people think its value is’ because they come with dividends, supposedly.

I came to the following insight while pondering your post. The Georgists claim that the government may ‘own’ the land in that it may extract a tax (rent), but that doesn’t give it ownership of what is done with the land, the improvements. Therefore Georgists are adamant that we need a land value (LVT) rather than a property value tax (and it needs to be near 100%). This is corollary to the Scholastics’ (and previous others) understanding that a lender has claim to the initial capital lent, but not to what was produced by that capital, which was their way out of the usury conundrum. One did not own another’s need or effort. This symmetry makes me quite happy.

So, my suggestions . . .

  1. Think more about what might be included in a single tax, and how the incentives and natures might differ between the different taxable items, remembering that taxation implies ultimate ownership.
  2. Explore the world of land value tax. I recommend this: https://lawliberty.org/book-review/georgism-revisited/ as a starting point, as well as the r/georgism reddit for interesting and insightful debate.
  3. Assessing land value tax is tricky, but many smart and creative people are working on this, and we can connect with them.

Finally, an offer. I’m on board with taxing ‘excess’, whether rents or profit. The challenge is in quantitatively and consistently defining excess, because it’s dependent on location and culture (a la Sen). I’m currently leaning toward a significant LTV plus unspent corporate profit, and dropping income tax. @alberto, we’d be taxing the corps before their excess became dividends and return-based wealth per Pikkety.

Specifically, I would be interested in assisting with modeling an implementation of a Georgian type LVT.

Best!

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Ahem. Pietro, meet Joffa. Joffa, meet Pietro. :grinning:

I see a lot of challenges with “excess”, and not only conceptual, but political (reading Acemoglu now). But hey, this is a space for thinking wide and deep, so let’s go for it.

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Yes, indeed!! Thank you, @alberto.
I read Acemoglu way back when the neoliberal agenda he espoused was clear . . . you need capitalism for democracy, thus the neoclassicism promoted through the IMF and WB was justified. I believe his current perspective as gleaned from recent talks, esp with the Franciscans, is much more developed and nuanced. I’m working to overcome my initial prejudice ; ).
I’ll offer that there is a time dimension with respect to excess. Excess perceived in the moment may not be actual excess over time. But yes, all fuzzy. But if you’re building a super yacht for your exclusive use, yes you have excess. I’ve just finished our friend Jason Barr’s book Cities in the Sky and believe that if you can spent 17 mil US on a high rise flat you have excess. So it exists, but how to define it?
I’m intrigued by the approach which asks what things a state has taxable authority over? What does it make sense for a state to ‘own’, thus allowing taxing privilege?

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That’s pretty up front.

As always, the interesting stuff is in when these arguments come into contact with reality. For example, I was surprised by reading in Piketty how the revenue wealth tax in France (supposedly next to impossible to collect, as the rich have many ways to dodge taxes, move wealth abroad etc.) was growing faster than GDP when it was abolished. I imagine that tax policy needs to be especially well-designed to work as expected, and that most of that good design is finding the right proxies.