“If you tax the rich, they’ll just leave!” – I’m sure you’ve heard that one, before. It’s often trotted out alongside the old, “If you change the tax system, the rich will just figure out new ways to cheat.” That made me wonder, is it possible to figure out cheat-proof systems?
What follows is not a real suggestion; I’m throwing it out so that it can be examined and someone can explain to me how wrong it is. It seems to me that the topic of taxes attracts proponents that don’t hesitate to exaggerate things a bit, which makes it extra hard to sort out; if you ask a rich person about taxes on wealth, they’ll immediately tell you all about how it kills jobs, etc. Of course it’s more complicated than that – are the jobs that are not being created entrepreneurial business opportunities, or are they crap jobs mowing lawns for mansion-dwellers in the Hamptons?
This is a proposal that consists of several pieces. Take any of them in isolation, and it does not work at all, and would probably be dramatically worse than doing nothing. I’ll outline it first then discuss the various pieces and their implications. I freely admit that I’m not an economist, a tax specialist (though I have some experience with setting up tax shelters) an offshore money expert (no offshore money, unfortunately) it’s quite possible that one of you will point out some horrible flaw that hasn’t occurred to me, in which case I’ll update the posting with a warning to stop taking any of it seriously. In fact, I will warn you with that, right now, because you shouldn’t take macroeconomic advice from a computer programmer, let alone an economist.
The problem is “how to tax the rich fairly and ubiquitously, in a way such that they cannot cheat or escape the tax?” That’s a serious problem because, in case you hadn’t noticed it, tax cheats are very willing to rob from their fellow citizens by not paying their fair share; oddly, it seems as though the richer you get, the less you’re willing to contribute. As Warren Buffett famously pointed out, he pays less taxes than his secretary – which was an odd thing to point out when he was perfectly capable of whipping out his check-book and fixing that problem with a $2bn donation to the treasury.
Like holy water and garlic to vampires is inflation to capitalists. Inflation, by itself, has a terrible effect on an economy – it encourages people to just spend their money before it becomes worthless, it makes it worthless, it stifles investment (once your money has become worthless you can’t invest in anything) and it makes market prices go haywire. Radical cases of “hyper inflation” have collapsed governments, or are useful as a weapon to collapse governments (the way US sanctions have caused hyper inflation in Venezuela) – it hurts everybody. Of course, it hurts everybody disproportionately; someone with more money has more buying power to lose than someone who’s got a pittance in savings.
When I first had this idea, years ago, it was because I was discussing hyper inflation in Weimar Germany with a friend; he mentioned that for some people it worked out OK; as the value of money decreased, some people who had cash reserves were able to pay off existing mortgages, easily. After all, if you have a $150,000 mortgage and suddenly the cost of a boiled egg is $2,500 because prices have been inflated hugely, you can sell a couple of eggs and pay off your mortgage. That’s one of the other insidious bits of economic damage inflation causes – it throws a lot of the prices for existing contracts out of whack. Banks’ reaction is to immediately stop writing loans, which makes the problem worse.
If you’re wealthy, and inflation suddenly obliterates half of the value of your savings, you’re going to be pretty unhappy. If you’re poor, you’re going to be pretty unhappy, too, because a boiled egg is $2,500 and your monthly rent is $1,250,000 and your crap job just got shut down because nobody wants to spend any money even if they have it – prices are making it worthless. When I was a kid in France they still talked about the devaluation that happened, when the old French franc was declared basically worthless, and the economy switched to new money; citizens were allowed to transfer a certain amount of wealth but the rest just … evaporated.
Inflation, economists tell us, is a behavioral phenomenon as well as a side-effect of lack of confidence in the government and its currency, most usually a result of a desperate government that lacks wealth simply turning on the printing presses. So, what happens if a government tries to manage the side-effect of lack of confidence and price-gouging and uses carefully tuned inflation – “taxflation”, let’s call it, to trim wealth from the top of the economy in order to move it to the bottom?
Let’s imagine we have a country where 75% of the country’s wealth is in the hands of 1% of its citizens. Obviously, they’d like to re-balance the economy, but the rich have made it clear that they will simply leave the country or cheat (more than they already do) if they are targeted with taxes. So, radical populists take over in a non-violent revolution election and announce that they are re-balancing the country’s wealth using taxflation. These are the steps:
- Immediately announce the taxflation-rate: “We are doubling the size of our currency, in order to taxflate the economy. Please pay close attention, since this will affect everyone – mostly for everyone’s benefit. Do not panic.”
- Announce: “During the taxflation cycle we expect all businesses to double what they charge for their goods and services. This is not mandatory but it is highly recommended.”
- Announce: “During the taxflation cycle we are fixing all prices for goods and services. You may not charge more than the double price in item #2 or you are guilty of gouging and will be disqualified for getting a payout in item #6 below. If you are guilty of extreme gouging, your assets are subject to being seized (“repatriated”) so don’t do anything you’ll regret later.”
- Announce: “All contractual debt is automatically doubled. If you have a $150,000 mortgage it is now a $300,000 mortgage. If you have $1,200 on your credit card, it is now $2,400.”
- Announce: “All businesses are to immediately double what they pay employees and contractors. Outstanding pending contract payments are automatically doubled – if you’re working on a project for which you expect to get paid $6,000, you are now expected to get paid $12,000.”
- Announce: “The additional money we created in this process – which is equal to the old currency ‘authorized and outstanding’ float – hundreds of billions of dollars – will be issued as government grants to all citizens equally. Within a month or so, you will get a check for a very large amount of money.”
- Announce: “Rich people like to tell you that you’re poor because you don’t know how to handle money. And, that may be true. Some of you may want to buy golf course memberships or other stupid things, but others of you may wish to invest it wisely. Your government has made arrangements with financial services organizations, and our own department of education, to offer quick day-long seminars in investing, how to start a business, how to pick good wines, and how to cook excellent healthy meals. Your government has also made arrangements with rental brokers who can help you find a nice new house or apartment. Spend your money wisely and you can dramatically change your life for the better. Or not, we really don’t care.”
- Announce: “Other governments of the world, we’ve just taxflated our currency. We suggest you adopt a new exchange rate wherein our dollars are worth half what they used to be, and you may want to charge a great big whopping surcharge on any of our oligarchs who want to convert our dollars into your currency. In the meantime our treasury will be supporting the value of our currency by buying your government’s bonds with it, so you’ll have a disincentive to devalue our currency. We will let our currency float against the market in a year, when the taxflation cycle has ended. It’s our pleasure doing business with you.”
See what we’ve done? The rich just lost half their wealth in the form of a tax, inescapably, invisibly, and it works whether they’ve got their money held in secret offshore bank accounts, or not. Of course they are positioned to try to immediately regain it – a person whose wealth was tied up in real estate still owns the real estate and it’s still worth the same amount, adjusted. And look at all the new buyers that are looking for a nice property to own!
As I said, I’m not an economist; I’m sure I’ve overlooked something huge. Other than the fact that the rich would immediately try to turn the military on the people and stop the whole process. But once it’s announced, it would be hard to roll everything back.
Here’s the part I am really unsure about: taxflation would result in injecting an incredible amount of money back into the economy, and that money – unlike the vast wealth the rich pile up and sit on – would be high-velocity money: a lot of it would get spent and would circulate rapidly. That would tend to drive prices up due to availability. That would be inflationary, and it would be the wrong kind of inflation. To rein it in, there are the normal tools: price-freezes, low interest rates (to encourage people to take their time and not pile up money) etc.
I think the whole idea’s nuts but I can’t see why. The reason I am inclined to believe I’m missing something huge is because it sounds fairly simple – and I’m extremely leery of economic recommendations that seem simple; like, you know, “give the rich more money because they will share it around.” At the very least I don’t think this idea is more absurd than trickle-down economics; perhaps this is “trickle up economics” – we acknowledge that the rich are going to stay rich and will get right back to their old tricks, but we sure showed them a thing or two.
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One more reason that something like this is completely impossible: governments are run by corporations, now. It’s not simply that corporations cheat on their taxes (e.g.: Amazon made $239bn last year and paid no corporate tax! [cbc]) they control the government to get the government to create ridiculous loopholes for them to drive through. Taxflation would actually affect companies that have been stockpiling money and cheating on their taxes. That would not be permitted.
This trick could only be played once, and it would have to be done as a surprise.
I feel like I need to re-emphasize: this is not a serious proposal. It’s never going to happen. It never should happen. The rich, and companies, should pay their taxes and it’d be no problem at all.
Unrelated but related: Why is there a statute of limitations on tax cheats? My accountant once told me a story of one of his friends’ clients who used to game the IRS’ account 3-year review limit, by filing a return then waiting 2 years and 9 months and filing an amended return that was substantially different. The amended return claimed that he owed vastly less tax and the IRS would dutifully issue a refund, which set a clock ticking for the remaining 2 months during which they could audit the return. Usually he made a point of being out of the country and unreachable during that time. Apparently this technique worked well enough that he pocketed “several million dollars” over the course of a few years, and never saw the inside of a prison cell unless he happened to be visiting one as a tourist.
This is an excellent idea for economic stimulus. Make the bills twice as big, and everyone will have to buy new wallets and purses to hold their cash.
Reginald Sekirk@#1:
Make the bills twice as big, and everyone will have to buy new wallets and purses to hold their cash.
On the $10,000 bills there’ll be a fold-out of the imperious leader and the paper will be treated so, if it rains, you can use it as an umbrella or a roof-patch.
Obviously, I used the wrong word. I’m not sure what’s the right one. “Float” comes to mind. If it was stock shares it’d be “authorized and outstanding shares.” In the US it appears to be “debt limit ceiling.”
This sounds like a very complicated way to solve the problem, with tons of potential loopholes.
Better (still stupid, but less complicated):
0) close the country to all transfers of goods, money, people, etc.
1) “Hey rich people, there’s too much inequality going around, you are clearly geniuses, so you get to choose the solution:
solution A:
– A1: Kill the 100 wealthiest individuals, let their stuff trickle down to their heirs, on average improving the inequality measure;
– A2: If the levels of inequality are now okay, DONE, otherwise GOTO A1;
solution B:
– tax the fuck out of all the stuff rich people do and have”
2) implement the chosen solution
3) Undo step 0.
Could take as little as a day with guns pointed at the right people.
Or on a more serious note: start looking at what the old-school economists (Smith et al) had to say about productive vs unproductive labor, and earned vs unearned wealth. Tl;dr: they wanted to tax the fuck out of unearned wealth, e.g. interest and rent, which right there cuts the legs off of the rich getting richer.
This will have negligible impact on any sane rich person, as cash will be a very tiny portion of their assets.
My understanding is that the effects of inflation are very complicated and I don’t understand them. But there is a very easy-to-understand problem with using inflation as a form of tax. If eggs are going to cost $2,500 dollars, then billionaires won’t invest in dollars, they’ll invest in eggs. I suppose you could get around this by making the taxflation a sudden surprise, but it would still only impact the wealth that billionaires have lying around in the form of money, and not the wealth they have in any other form.
I really like the title of this blog post. By the way, I loved that Jonathan Swift’s essay.
There is a way how a rich person could avoid your proposed inflation tax. Basically, you are taxing all the savings that are in US dollars. If a billionaire owns some real estate, luxury cars, shares, Swiss francs, or gold bars instead of US dollars, then this rich person isn’t loosing half of their savings. Simultaneously, if a poor person has a bit of retirement savings in US dollars, then this poor person looses half of what they have saved. Of course, you were also proposing to just give a chunk of cash to each poor citizen, so the poorest people wouldn’t suffer much by losing half of whatever little savings they have. Although I’m not sure how the math would play out for middle class people who often have some savings in US dollars.
I don’t think that a surprise is possible. How do you manage this whole thing? Some days before the announcement is made publicly, some people will already know in advance about what’s going to happen. It’s impossible for a president to singlehandedly plan and implement this whole thing. Thus there will be multiple people with insider knowledge, who will know in advance that they must exchange all their US dollar savings for something else (be it Swiss francs or euros or gold bars or anything else like real estate). I’m cynical, so I believe that this information would also leak to the rich. They wouldn’t be surprised on the big announcement day, they’d probably know in advance to get rid of their US dollars.
On top of that, like you already said, your proposal is something that could be implemented only once. After you inflate the currency once, for the next few years people will anticipate that this might happen again, they won’t trust US dollars to hold their value, and they will store their money savings in Swiss francs instead.
Or it makes people switch to using other currencies instead. Before the 2008 economic crisis, there was a two digit inflation in Latvia for several years in a row. At that time, my family solved the problem by exchanging all our money savings from Latvian lati into euros. There was no point in saving lati, so we kept our money in euros instead.
In 1993 my family lost all their savings, when Soviet rubles were replaced with Latvian lati. The exchange rate was such that the old money became literally worthless and there was no point exchanging it for lati at all. Then in 2000ties there was a high inflation, which reduced the value of any lati people had saved. The end result is that I’m very cynical when it comes to money, I don’t expect it to be worth anything 40 years from now. This is why I’m very reluctant to make any retirement savings at all. I’m 26 right now. Even if I didn’t fear the climate going to shit 40 years from now, I’d still be reluctant to save money for retirement. I just don’t trust money to keep its value.
I have a friend who for a while worked in overseas revenues for HM Customs and Excise, he was the popular kind of taxman because he gave people refunds when tax had been paid in two jurisdictions. At some point he had reason to see John Lennon’s will, which had a clause that clearly reflected on Lennon’s experience with lawyers, as it said something to the effect of “if you even think about trying to dispute this will you are thereby excluded from being a benificiary”. It seems to me that having something along those lines in any process would be necessary, and it ought to be something that is in all country’s tax laws now, sure it would make a lot of expensive tax lawyers and accountants redundant, but I don’t have a problem with that.
First off, I was a bit thrown by, “Obviously, they’d like to re-balance the economy”, seemingly implying an incorruptible, social government being in place. And this is before the
electoral majority decides to change directioncommunist agitators execute a calculated propaganda campaign to overthrow the legitimate government of this most patriotic and wonderful nation of free… er, patriots. That felt a bit being asked to tackle a difficult physics question by assuming that gravity flows backwards and time pulls up.Why sell real estate in that economy, having just learned that those bloody socialists may be above taking bribes – smug gits! – but aren’t above vaporising your money with a decree? No thanks. I’ll rent everything out at the state-mandated doubled prices. Everyone has money now and while it’s a slog I’ll just have to squeeze it out of them to regain what I’ve lost. Another lesson: When you buy real estate, make it a hotel.
Mind you, I suspect all money-grabbing beyond one’s first million is a pointless grind, so were I in that situation I probably wouldn’t even notice or be all that upset. “Gosh, 20$bn gone. Well, there go the last six months.” (Suggested scientific study: Make me filthy rich and observe how I change my mind.)
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To be fair, my highly hypothetical, infeasible and unserious approach to the same problem would be thus: If your megacompany doesn’t pay taxes that’s fine: Just get out, but don’t bother packing.
1) Your business leaves a footprint and for me as the state, that will most likely cost me. All that extra infrastructure you need but don’t want to pay for. All those exploited employees I have to feed because you probably skimp on wages as just as much as you do on taxes.*
2) All the assets you leave behind are now mine, taken legally in payment for taxes owed. Whether it’s real estate, hardware or the last remnants of intellectual property you weren’t able to erase before being expatriated by my longcoats, I can monetise it. I could even keep it as it is and turn the whole thing into a state enterprise. But I’m sure the competition – let’s call it the Reasonable Company With Progressive Attitudes Towards Fair Taxes And Wages. (The ACRONYM Group**) – would be just as happy to fill the void.
3) Now instead of paying taxes you’ll be paying customs when trying to sell stuff to the people in my country. Steep customs, because I feel like being vindictive. All that paperwork when all you had to do was pay your effing taxes and workes. Sure, you can blacklist us or pass the cost on to your customers and it won’t make me very popular. But you won’t be popular either, not with customers nor with shareholders. (The ACRONYM Group would like to thank you, though)
4) What about your employees? Well, as per (1) I was already feeding them, so full support isn’t out of the question. Or maybe they can just keep working, either for my glorious new state venture or for the ACRONYM Group, who are contractually obliged to keep on employees when they buy your assets cheaply – from me. Of course they’ll have to pay better wages but to sweeten the deal they’ll have earned their tax break, quite aside from having one less local competitor. And since I won’t have to support anyone anymore I’m better off, too.
It’s not quite “eat the rich”, it’s “rip bits out and show them to them.” What can I say, I’m a gentle soul. Of course it also wouldn’t work. One objection is the black market, the other is that it’s simply a loosing battle. As bizarre as it seems now that I type it, ousting Amazon or Google doesn’t sound surivable for a country. If general global chaos wasn’t enough, that should be a sound indicator that this is the dystopian future one reads about in now dated sci-fi books. ‘Dated’ only by virtue of calender dates, if that.
*If I set a reasonable minimum wage, again you’ll probably threaten to leave. Well, fine … etc.
**Their marketing department, having tried for years to come up with a decent acronym, decided to publicly admit defeat, thereby turning it into a sort of victory. This is what happens when your marketing team is incapable of lies and exaggeration.
P.S.: How do three percent remain so remarkably constant in the face of that much growth? What are those taxes based on? Money kept in the CEO’s wallet? The unpaid intern’s income? I only ask because I worry I’ve been doing percentages wrong all my life.
My first question would be ‘how much of the money the richest people in America have is in dollars?’. You can only affect your own currency given the proposal.
Personally I was thinking about the same question recently, how to prevent businesses and wealthy individuals simply moving to whichever nation has the most favourable tax laws. The first and most obvious solution was international agreements on the top marginal tax rates. As the world becomes more globally connected and national borders become ever more meaningless this kind of international cooperation is going to become vital.
@8:
It’s been done:
http://amultiverse.com/comic/2011/10/24/eat-the-rich/
We are all rich, though, by the standards of the world’s vast majority. Your proposal would hurt all of us, I am guessing.