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Wealth tax academic paper

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dealtn
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Re: Wealth tax academic paper

#366820

Postby dealtn » December 16th, 2020, 5:27 pm

NeilW wrote:
dealtn wrote:But your argument (I think) was that deficits were caused by the existence of (GIlts and) bank reserves.


The deficit does start at the beginning of the process, since that is when the net financial saving is created.


Good that's clear.

NeilW wrote:
If the UK government wanted to reduce the deficit or the debt, they need to target what is causing it.


What is causing it (the net financial saving) is, as you describe,

NeilW wrote:
If I (the Government) put £100 from the Consolidated Fund into your bank account ...


Which is net Government spending, ie spending more than it raises.

Everything else follows, regardless of which branch of economics you follow. So, if the Government wanted to reduce the deficit, or debt, by targeting the cause of it, it needs to stop spending more than it brings in.

Of course, if it wants to reduce the deficit, or debt, by another means, or wishes to do so for another reason it has alternatives, such as the proposed Wealth Tax, or encouraging a series of inter-related private sector economic transactions, each of which it can apply a tax too. But that is different to targeting what is causing it. That is keeping what is causing it, and finding another way of dealing with it.

firevlondon
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Re: Wealth tax academic paper

#366858

Postby firevlondon » December 16th, 2020, 8:19 pm

Lootman wrote:But firevlondon was trying to make the point that a £200K tax bill would feel no different from a £200K drop in valuation, and I cannot support that view. For me it would feel very different.

Of course if he was really just trying to say that he is so rich that he wouldn't miss or notice £200K then I suspect that is exactly what the members of the Wealth Tax Commission want to hear. :D


I was trying to make the first point, namely that a drop in valuation is equivalent whether the taxman has caused it or it proves to be an ephemeral unrealised fleeting thing. There is probably some truth to the second point too. And if for me, then presumably also for somebody worth £20m having £1m taken (in five equal instalments of £200k each, over five years) from them. The reality is that 5 years on, it is hard to see how much of the change in net worth came from tax, or from market movements, or from other ins/outs.

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Re: Wealth tax academic paper

#366951

Postby 88V8 » December 17th, 2020, 10:06 am

I think this is more of an emotional thing.
The govt deciding to steal a chunk of one's money.

Yes, of course, it happens all the time.
But this would just be so blatant.

V8

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Re: Wealth tax academic paper

#366959

Postby Nimrod103 » December 17th, 2020, 10:31 am

firevlondon wrote:
Lootman wrote:But firevlondon was trying to make the point that a £200K tax bill would feel no different from a £200K drop in valuation, and I cannot support that view. For me it would feel very different.

Of course if he was really just trying to say that he is so rich that he wouldn't miss or notice £200K then I suspect that is exactly what the members of the Wealth Tax Commission want to hear. :D


I was trying to make the first point, namely that a drop in valuation is equivalent whether the taxman has caused it or it proves to be an ephemeral unrealised fleeting thing. There is probably some truth to the second point too. And if for me, then presumably also for somebody worth £20m having £1m taken (in five equal instalments of £200k each, over five years) from them. The reality is that 5 years on, it is hard to see how much of the change in net worth came from tax, or from market movements, or from other ins/outs.


There is a big difference.
If you lose £200k taken in tax, that is it, you will never see it again, and probably never see the benefit of it either.
If you lose £200k in adverse market moves, there is every likelihood that within a few years at most, you will see your share portfolio regain that amount, and more.

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Re: Wealth tax academic paper

#367431

Postby thebarns » December 18th, 2020, 2:59 pm

Bit late to the thread.....

But I did skim read the report when it came out.

Two points that did strike me

1) Having myself been involved for 30 years in professionally valuing businesses, whether companies, partnerships or sole traders, I know the process is fraught and incredibly subjective capable of significant swings in valuations among different valuers - I am a chartered accountant. So it would be a tortuous process.

2) The proper market valuation of defined benefit pensions (whether public or private sector) will be an eye opener if done properly. For years, these types of pensions have got away with ridiculously beneficial low valuations when taken in the context of looking at the Lifetime Pension Allowance, at one point being valued at a ludicrous 16 times multiple and even now the multiple of 20 is probably around half of what it should be. Why ? Because those that write the rules, the civil servants, would be amongst those hit hardest.

So if, as the Wealth Commission appears to suggest, these pensions are to be fairly valued, any person (whether public or private) retiring in their mid to late 50s will find their pensions being valued at a multiple of around 40-50 times the yearly income stream, depending on the exact nature of their guaranteed pension income stream.

As has been pointed out that will cause all sorts of issues for those with such pensions and rightly so, if those with defined contribution pensions are to be assessed based on the monetary value of their pension pots at a particular time which is very easy to establish.

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Re: Wealth tax academic paper

#367438

Postby scrumpyjack » December 18th, 2020, 3:14 pm

These are some of the reasons why a wealth tax has always been ruled out as completely impractical when it has been studied carefully by the Treasury for left wing Labour governments. The practical objections become even more overwhelming when the kerfuffle of setting all this up is purely for a one off tax. The thing that surprised me is that they had managed to get Gus O'Donnell involved in this. It is laughably tendentious and pompous for this lot of self appointed academics to call themselves the 'Wealth Tax Commission'.

Perhaps next Fox News could set up a 'Fair Tax Commission' stuffed with right wing economists arguing for a flat tax system? Rather reminds me of the Rory Bremner skit where a panel was reviewing some moral topic of the day. He said 'We have a carefully chosen representative studio audience to vote on the arguments'. The camera then panned to the audience - 100 Nuns!

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Re: Wealth tax academic paper

#367446

Postby Adamski » December 18th, 2020, 3:43 pm

Nice to see firevlondon on here, I enjoy his blog too.

I do think a WT would be politically difficult, and difficult to implement. However I think Labour if they get in would do it nonetheless, as they are ideologically wedded to taxing the rich, i.e. rich in income and in assets, to pay for more public services.

Keir Starmer is the acceptable face, the front man, but the mps and membership are the same corbynites as they were before.

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Re: Wealth tax academic paper

#367606

Postby NeilW » December 19th, 2020, 6:39 am

dealtn wrote: So, if the Government wanted to reduce the deficit, or debt, by targeting the cause of it, it needs to stop spending more than it brings in.


The would be to deny the depressive effects of net saving and would collapse the economy. Saving denies others an income and the power to spend. Carry on insisting that government runs a balanced budget and those people being denied an income will elect somebody who will put in place taxes to remove the savings from those hoarding them.

So you will bring about the wealth tax - since there are only two alternatives: you use government to accommodate the drain to savings, or you use government to confiscate the savings and move them around the economy. I find it very strange that anybody on the Conservative side of the fence would prefer the latter. But perhaps we need to go down the confiscation route before people accept which way round the dynamics are.
Last edited by NeilW on December 19th, 2020, 6:52 am, edited 2 times in total.

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Re: Wealth tax academic paper

#367607

Postby NeilW » December 19th, 2020, 6:48 am

Lootman wrote: A wealth tax is really an inducement to remove your wealth from the financial system and either offload it to related persons or hold it in some other (more anonymous and private) form. Maybe that is why Bitcoin and gold (although nor diamonds, oddly) have been doing so well, apart from a distrust of fiat currencies of course.


That's not removing it, since you need to have somebody on the other side of the transaction coming in the opposite direction. If you purchase Bitcoin assets, then somebody had to sell them to you in exchange. There is no conversion or removal. Therefore at that point they are in the same position you were. In aggregate little has changed.

At the point that people are saving in Sterling or deciding to buy Gilts they have already done all the portfolio swaps they want to do and have rejected other alternatives.

QE works like this. It induces portfolio swaps which just drives up the price of other assets, and reduces their yield. That generates a little taxation which reduces the deficit, may induce additional spending on non-asset items. The end result is still the same though - the person left holding the Sterling has to decide whether to spend it or save it.

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Re: Wealth tax academic paper

#367613

Postby dealtn » December 19th, 2020, 8:21 am

NeilW wrote:
dealtn wrote: So, if the Government wanted to reduce the deficit, or debt, by targeting the cause of it, it needs to stop spending more than it brings in.


The would be to deny the depressive effects of net saving and would collapse the economy. Saving denies others an income and the power to spend. Carry on insisting that government runs a balanced budget and those people being denied an income will elect somebody who will put in place taxes to remove the savings from those hoarding them.

So you will bring about the wealth tax - since there are only two alternatives: you use government to accommodate the drain to savings, or you use government to confiscate the savings and move them around the economy. I find it very strange that anybody on the Conservative side of the fence would prefer the latter. But perhaps we need to go down the confiscation route before people accept which way round the dynamics are.


Neil, you were the one that made the suggestion.

NeilW wrote:
If the UK government wanted to reduce the deficit or the debt, they need to target what is causing it



Those are your words, not mine.

If you read my post (the parts you didn't quote) I suggested they might want to do it, but not by targeting what is causing it.

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Re: Wealth tax academic paper

#367617

Postby scrumpyjack » December 19th, 2020, 8:35 am

NeilW wrote:
Lootman wrote: A wealth tax is really an inducement to remove your wealth from the financial system and either offload it to related persons or hold it in some other (more anonymous and private) form. Maybe that is why Bitcoin and gold (although nor diamonds, oddly) have been doing so well, apart from a distrust of fiat currencies of course.


That's not removing it, since you need to have somebody on the other side of the transaction coming in the opposite direction. If you purchase Bitcoin assets, then somebody had to sell them to you in exchange. There is no conversion or removal. Therefore at that point they are in the same position you were. In aggregate little has changed.

At the point that people are saving in Sterling or deciding to buy Gilts they have already done all the portfolio swaps they want to do and have rejected other alternatives.

QE works like this. It induces portfolio swaps which just drives up the price of other assets, and reduces their yield. That generates a little taxation which reduces the deficit, may induce additional spending on non-asset items. The end result is still the same though - the person left holding the Sterling has to decide whether to spend it or save it.


That assumes that the UK is a closed system. It isn't. It is a tiny cog in the world's financial system and wealth would flow out of the UK and go elsewhere which would seriously damage the UK.

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Re: Wealth tax academic paper

#367703

Postby Steveam » December 19th, 2020, 12:57 pm

Very interesting contributions. I think it is sensible to consider wealth taxes and the original paper makes a useful contribution to the discussion. It is not entirely clear to me that the government need to take (drastic) action to reduce the debt but if action is to be taken it will be a matter of degree ... some options, at some levels, are distinctly worse than others. And some options put the extra burden on broader shoulders but may be more damaging than others.

So, the authors make clear that they see a one off wealth tax as better than a long term wealth tax. I think their reasoning is sound. They also make clear that their proposed tax must be broad based and inescapable. Again, I think their reasoning is sound.

When we consider the repair of government finances (if necessary) the options are reduce expenditure or raise income. I would prefer that we don’t go through another period of austerity (cuts to the NHS, social care, education, law and order, etc lead to a society which I find unattractive). If we need to increase government income then the biggies are income taxes, corporation taxes, VAT and transaction taxes, and the current wealth taxes. Changes to each of these will impact different groups of people but none will seriously impact me yet I’m among those with the broadest shoulders ...

[I’ve maxed out ISA and SIPP, have an overly large and valuable house, have considerable sums in NS indexed linked certs, have a large unprotected equities portfolio (and use the CGT allowance fully), and am not a vast consumer]

As one of the posters above has commented, a one off wealth tax as discussed would fall within the (large) movements that happen, albeit with no chance of recovery.

While I think this sort of tax is unlikely to be implemented (reasons given by other posters include the value and illiquidity of housing, valuation of assets, public sector pensions) I would prefer it to either austerity or twiddling which encourages tax avoidance (and, perhaps, evasion) or damaging the economy in the long term by underinvestment.

Best wishes,

Steve

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Re: Wealth tax academic paper

#367705

Postby johnhemming » December 19th, 2020, 1:07 pm

What the government will need to do is to adjust spending and taxation so that they are to some extent aligned with an arguable case that over time the government will pay down debt. The big problem with working out how to do that is that we don't know how big the GDP is going to be.

Given that a lot of the debt is held by the Bank of England and the interest on that goes back to the treasury there is no rush to pay this down, but the government has to have that as an arguable even if long term strategy.

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Re: Wealth tax academic paper

#367742

Postby Lootman » December 19th, 2020, 4:13 pm

scrumpyjack wrote:
NeilW wrote:
Lootman wrote: A wealth tax is really an inducement to remove your wealth from the financial system and either offload it to related persons or hold it in some other (more anonymous and private) form. Maybe that is why Bitcoin and gold (although nor diamonds, oddly) have been doing so well, apart from a distrust of fiat currencies of course.

That's not removing it, since you need to have somebody on the other side of the transaction coming in the opposite direction. If you purchase Bitcoin assets, then somebody had to sell them to you in exchange. There is no conversion or removal. Therefore at that point they are in the same position you were. In aggregate little has changed.

At the point that people are saving in Sterling or deciding to buy Gilts they have already done all the portfolio swaps they want to do and have rejected other alternatives.

QE works like this. It induces portfolio swaps which just drives up the price of other assets, and reduces their yield. That generates a little taxation which reduces the deficit, may induce additional spending on non-asset items. The end result is still the same though - the person left holding the Sterling has to decide whether to spend it or save it.

That assumes that the UK is a closed system. It isn't. It is a tiny cog in the world's financial system and wealth would flow out of the UK and go elsewhere which would seriously damage the UK.

Exactly, Neil is assuming that the wealthy and their wealth are somehow trapped in the UK. Neither is true.

When Labour was planning a tax raid, had they won the GE a year ago, they had discussions about implementing exchange controls to prevent capital leaving our shores. But of course the problem with that is the same as the problem with a wealth tax - as soon as word gets out that these things may happen, the wealth goes walkabout. If Labour had looked remotely like winning a year ago, hundreds of billions of pounds would have instantly done the thing Neil says cannot happen - it vanishes.

This is a big part of the Laffer effect - raise taxes beyond a reasonable level and the effect is counter-productive. Neil seems to want to punish those who save, which is an odd position to take given that the government generally encourages people to save via tax breaks for pensions, ISAs etc.

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Re: Wealth tax academic paper

#367767

Postby NeilW » December 19th, 2020, 5:16 pm

scrumpyjack wrote:That assumes that the UK is a closed system. It isn't. It is a tiny cog in the world's financial system and wealth would flow out of the UK and go elsewhere which would seriously damage the UK.


Sterling is a closed system. It's a floating rate currency. You cannot get rid of it in aggregate. All you can do is exchange it with somebody else - which puts them then in the same position you were. Nothing in the aggregate changes.

If there isn't anybody coming in the opposite direction, you are stuck with it - because there is no market maker of last resort. And that means somebody has to hold it somewhere.

It's a basic feature of our age. Convertibility ended in 1971.

There is no less money in the UK and the stuff in the UK is at the same price relative to that money. And relative to other money stuff has got cheaper and delivers more income, which will lead to a flow correction in the opposite direction.
Last edited by NeilW on December 19th, 2020, 5:23 pm, edited 2 times in total.

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Re: Wealth tax academic paper

#367769

Postby NeilW » December 19th, 2020, 5:19 pm

Lootman wrote:Exactly, Neil is assuming that the wealthy and their wealth are somehow trapped in the UK. Neither is true.


Ok. How do you get rid of your Sterling if there is nobody coming in the opposite direction? You need a counterparty, or you are stuck with it.

And if you need a counterparty coming in the opposite direction, what do they know that you don't?

Convertibility ended in 1971. And what an individual can do does not apply to the aggregate. There is no less Sterling in the system and it buys just as much in the UK as it ever did.

Neil seems to want to punish those who save, which is an odd position to take given that the government generally encourages people to save via tax breaks for pensions, ISAs etc.


God knows where you got that from.

I have exactly the opposite view - that there is no need for wealth taxes or anything of the kind because we can just accommodate the savings. The wealth tax idea comes from those people who are obsessed with fiscal balance rather than concentrating on functional balance and letting the fiscal numbers float where they need to to achieve that.

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Re: Wealth tax academic paper

#367773

Postby NeilW » December 19th, 2020, 5:26 pm

dealtn wrote:
Those are your words, not mine.


To reduce the deficit you have to reduce the level of financial saving, since that is what causes it as a matter of accounting. They are two sides of the ledger. You cannot have a deficit without somebody holding money on the other side. For there to be a Gilt liability there has to be a Gilt holder.

My suggestion is that we don't do that and there is no need for wealth taxes or anything like that at all, because the deficit is not something anybody needs to concern themselves with. It's just people holding Gilts - probably in pensions.

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Re: Wealth tax academic paper

#367775

Postby Lootman » December 19th, 2020, 5:33 pm

NeilW wrote:
Lootman wrote:Exactly, Neil is assuming that the wealthy and their wealth are somehow trapped in the UK. Neither is true.

Ok. How do you get rid of your Sterling if there is nobody coming in the opposite direction? You need a counterparty, or you are stuck with it.

There is always a counterparty for the sale of any currency. The effect of a lot of people selling sterling is that sterling declines in value relative to other currencies, something that has been going on since there were 4 US dollars to the pound.

Some countries try and prevent its residents from holding foreign currency. Even the United States does not allow bank accounts in any currency other than USD. But you and I are free to hold our wealth in any currency.

Where I do agree with you is that negative interest rates have a similar effect to a wealth tax, in that they both punish people for holding cash. Swiss banks have long paid negative rates on bank accounts but people use their banks anyway. My response to either is to invest in non-sterling assets, and they could be held overseas if needed. Policies that encourage people to do that on a large scale cannot be good for the country, which is why countries have been getting rid of their wealth taxes, as the article acknowledges even whilst recommending one!

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Re: Wealth tax academic paper

#367776

Postby scrumpyjack » December 19th, 2020, 5:40 pm

I remember my great uncle saying he used to get 23 swiss francs to the pound (might have been before the first world war) and I can remember when it was about 10 on my early skiing holidays

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Re: Wealth tax academic paper

#367784

Postby Gengulphus » December 19th, 2020, 6:04 pm

Steveam wrote:Very interesting contributions. I think it is sensible to consider wealth taxes and the original paper makes a useful contribution to the discussion. It is not entirely clear to me that the government need to take (drastic) action to reduce the debt but if action is to be taken it will be a matter of degree ... some options, at some levels, are distinctly worse than others. And some options put the extra burden on broader shoulders but may be more damaging than others.

So, the authors make clear that they see a one off wealth tax as better than a long term wealth tax. I think their reasoning is sound. They also make clear that their proposed tax must be broad based and inescapable. Again, I think their reasoning is sound.

As regards being one-off and inescapable, I agree that their reasoning is sound - as far as it goes. But their reasoning doesn't go far enough - it doesn't go as far as practical politics. In particular, as I and others have pointed out, their wish for it to be made inescapable simply isn't feasible - word of any plans being formed for such a tax is bound to leak, especially to those likely to face the largest wealth tax bills. And as others have pointed out, it's hard to see how such a wealth tax can be made genuinely one-off - if it happens, it will be a precedent for any occasions a government wants to raise a lot of tax in the future, and there will be such future occasions. About the only way I can see for it to happen and remain one-off is for a government to somehow get it through but become hugely unpopular in the process, and I cannot see that happening without it being much more broad-based than it is. (As an example of how a tax can remain one-off, the poll tax in the 1990s did actually happen and made a big contribution to the Conservative government of the day becoming deeply unpopular - but it was basically aimed at taxing every adult in the country.)

As for being broad-based, using their definition ("By ‘broad-based’, we mean a tax on most (or all) types of asset, not only a specific type such as housing." on page 17 of their report), I agree that their reasoning is sound. But I strongly disagree with that definition, because I don't think a tax that can be expected to affect only about 7% of taxpayers (which is the figure on page 74 for the percentage of taxpayers who are above a wealth threshold of £500k) can reasonably be described as "broad-based"... I.e. their definition basically strikes me as spin, trying to imply to those who would be affected by their proposed wealth tax that a large proportion of the population would be affected. To avoid that spin, they need a more precise term, such as "all-asset-based" - though they probably don't want to avoid it... And again, their reasoning doesn't seem to have gone as far as practical politics: they say "Difficult as it may be, it is essential that the government resists any calls to exempt specific assets from the tax base of a one-off wealth tax." (page 49), but the chances of a government successfully resisting such calls are IMHO negligible, especially for types of asset that MPs and ministers are likely to own...

Gengulphus


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