Thursday, July 31, 2014

Capital in the 21st Century: A Global Tax on Capital (Chapter 15)

Well, this is the meat and bones of the book. This is the chapter everyone is talking about, a tax on wealth. By this point it is not really surprising. Plus, the numbers he suggests are quite small. His numbers can be summed on up page 517, a tax of 0.1% on net wealth up to 200,000 euros, 0.5% between 200,000 and 1 million, 1% on wealth between 1 million and 5 million euros, 2% tax on wealth over 5 million euros, and finally a tax of maybe 5% or 10% on wealth over a billion. These are just numbers, but the idea is that for people who own very large sums, they would pay a larger percentage in tax.

Taxes like this have been implemented over time. In fact, the property tax is a form of wealth tax. Although it is a flat tax and only applies to land, which 200 years ago made up a far greater portion of wealth than exists in the world today. Countries have often tried taxes like this but provide copious exemptions or depend on self reporting of wealth. Cheating on taxes throughout much of Europe is far more common than in the United States. The key to a progressive tax on capital is not allowing exemptions, of any sort. If you have X amount of wealth, it gets taxed. If you are really poor, well you would have no wealth and not pay the tax. To put this in perspective, given the numbers above, I pay more every year in tax on gasoline alone commuting to work than I would pay in a wealth tax. Alternatively, I spend more in one trip to a restaurant than I would in a year of wealth tax. Hopefully that would change as I grow older, but the point is, for the vast majority of people it would be an almost insignificant tax.

A bigger idea than the wealth tax, an idea which I view as even more utopian than a wealth tax, is transparency in banking. Early in the book Piketty mentions that roughly 8% of the world’s wealth is owned by unknown sources, that is to say it exists in tax havens. I’m rewording his words by saying that, but the point is, a lot of money is hidden from various tax authorities. Piketty pleads for global transparency in the flow of money. Given how money is transferred through the Internet and banks are online, this is a trivial issue to implement, but it would result in hundreds of billions of dollars of wealth having to be revealed. At the least this could result in additional income taxes. As an example of how easy this is to implement, I use Mint.com, which tracks all of my transactions through my accounts. It does not track my cash spending, but it does track ATM withdraws, so in short it tracks the vast majority of where my money goes each month. To use some sort of service like this and make the data available to governments would allow a global tax on capital to be possible.

Going back to taxing wealth. We already have a tax on wealth called the estate tax, which I believe taxes wealth over $5.34 million passed on when a person dies and another person inherits it. If this affects any of you, feel free to take me out to dinner and complain about the high taxes you had to pay on that money over $5 million. The issue with a tax like this is trusts and corporations are set up by the wealthy so their money can be passed on in other legal ways to avoid tax. Frankly, I don’t understand the details of trusts. That’s the benefit of a annual progressive tax on wealth, it would ideally affect everyone with a positive wealth, affecting people who have more with a higher bill, and apply across the board whether a person owns 10,000 acres of farmland, 2% of Apple Computer, or a 1991 Toyota Previa van and a Feathered Friends down suit (yeah I can pay $1.35 a year to hold on to that thing). The point of the wealth tax is not to end the progressive income tax, but provide for services, or redistribution of services, that we feel are important in the 21st century, like universal healthcare, low cost university education, or an infrastructure that is not falling apart, like the highway 20 bridge between Dubuque and East Dubuque.

Part of the chapter is devoted to how this might be applied in Europe, how China already has capital movement controls, while Russian oligarchs roam the world, and discussing the business of oil, a trillion dollar industry.

This is probably the chapter that most people are giving press. It's a big deal. Every time there is a new tax, people go crazy. Then we get used to it. Then we grow to like the services the tax provides. I like paved roads. I went to public school. I live clean water out of every faucet. This radical idea now, may in the future become the norm. Probably unlikely, but there is hope.


As I reach the end of this book my outlook grows more negative. Transparency in international banking will not happen because people with lots of money and political influence do not want it to happen. A progressive tax on wealth will not happen, first of all because if 200 countries could even agree to do it, 10 would disagree and suddenly find money flowing in to their secure and discreet banks. Secondly, the people with the largest percentage of their wealth to lose are the ones with the most money, and it is worth their money to lobby against such a tax. In other words, say there exists a bill proposing 5% tax on wealth over $1 billion. For a person like Bill Gates with $50 billion that is nearly a $2.5 billion tax bill just on his wealth, not even his income. It is well worth him giving $1 million to the 535 US representatives and senators (or their super-pacs) and saving nearly $2 billion, every year, to lobby for no such tax. Add in a few hundred other billionaires who don’t want to pay hundreds of millions in taxes, and there is no way that a progressive wealth tax could pass in the current political climate in the USA. Plus, you don't have to donate to every representative and senator, you only have to donate to about 300.

No one ever told me the more educated and well read I became the more jaded I would become, but that seems to be happening. Maybe a more complete view of the world, can also instill in me more hope in things that are truly good and right. I do think that appreciation and search for the good is happening too, it's just much harding to find than learning about injustices and inequalities which abound.

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