You Are Wrong. Wealth Taxes Don’t Work

Do taxes change how people behave? The theorists like to talk about taxes as having no effect, neutral, while here in the real world we find they do change how people behave. And not always in a way you would expect.

An example

I have a client who pays himself a bonus from his business each year. Money the business does not need. In one year it was $3,000,000 and I happened to be there when he was writing the check for tax on it. The income tax was about $1.5 million as you might expect. I asked if that bothered him. “Not really. Taxes are the price of living in a civilized society. I do what I can to minimize them, but after that it is just what the formula spits out.”

Ontario has a tax of 1.95% on payroll for medicare. In this case $58,500. That number raised his blood pressure to dangerous levels. Not the amount so much as the idea of it. “How can we fix that he said?” Not hard, but you need to check with your accountants before implementing.

The next year his tax bill was unchanged, but the health tax cost dropped by about half. Not happy, but livable blood pressure.

The fact many overlook. Taxes change behaviour.

Who should pay the most tax?

The argument is simple. If income taxes are not good enough for the purpose, whatever that is, then a wealth tax must be needed.

If you are thinking about it, you will find this story from Nick Maggiulli useful.

Are Wealth Taxes a Good Idea

The idea of a wealth tax arises from the belief that the wealthy pay less tax than their fair share.

Has anyone decided what fair might be? Not while I have been watching. When it comes to fair, the idea is simple – wealthy people should pay more. Justified? That seems to depend on your personal idea of fair and has nothing to do with factual information.

If we accept the article’s data at face value, there are unexpected observations in Nick’s article.

  1. For the first 4 quintiles of income, your share of the total tax paid is less than or equal to your share of the total income. As you would expect, in the 5th quintile, people pay a share of tax greater than their share of the national income.
  2. Basing tax rate on adjusted gross income yields a surprise. In the income group $40,000 to $50,000 net tax is negative as it is in all groups lower. In the group $50,000 to $75,000 it is 2.4%
  3. The ratio of tax paid to income doubles for income over $1,000,000 compared to income between $200,000 and $500,000.

Quantitatively, the wealthy pay almost all the income taxes. Bloomberg reported on this recently. The top 1% paid more income tax than the total of the bottom 90%.

How about a wealth tax?

There are some who think that might work. I have met no one resident in the real world who thinks it would. It is one of those things that works in theory but not in practice.

In Nick’s article we find some information.

1. In 1990 twelve European countries had a wealth tax. Today three.

2. From NPR:
According to reports by the OECD and others, there were some clear themes with wealth tax policy:

  • it was expensive to administer,
  • it was hard on people with lots of assets but little cash,
  • it distorted saving and investment decisions,
  • it pushed the rich and their money out of the taxing countries—and, worst of all,
  • it didn’t raise much revenue.

3. In Athens in 2010, there was a tax on swiming pools. 324 of 16,974 paid it.

Wealth tax is one of those things that prove the rule, “Everyone has a good idea that won’t work.”

The takeaway

Don’t be so gullible as to believe a politician, or for that matter, anyone else with a self-serving agenda.

I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. 705-927-4770

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