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Wealth tax academic paper

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Adamski
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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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Re: Wealth tax academic paper

#367894

Postby NeilW » December 20th, 2020, 6:50 am

Lootman wrote:There is always a counterparty for the sale of any currency.


(i) How is there if there is no market maker of last resort?
(ii) Since the counterparty is replacing you what do they know that you don't?
(iii) Since you have left and somebody else has turned up, in aggregate nothing has changed. You have moved your wealth out. Somebody else has moved theirs in. That's just a difference of opinion or a "market" as it is known.

No "wealth" has been moved out of the UK. The UK is completely indifferent to your view since you can't do anything that can affect the amount of money in circulation.

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Re: Wealth tax academic paper

#367896

Postby NeilW » December 20th, 2020, 6:59 am

johnhemming wrote:
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.


*All* the interest goes back to the Treasury. Either it goes back directly - via the Bank of England dividend (less interest on reserves). Or it goes back indirectly via the spending cycle - since interest is paid to be spent and when it is spent that creates additional taxation flows since tax is a percentage.

They don't use Sterling anywhere else.

Therefore there is no need to be concerned and no need for any change in tax rates. Increases in activity will generate increased tax flows. And the amount of interest the UK pays is entirely a policy variable - there largely to prop up pension funds.

The Bank of England pays interest on reserves to banks from Gilts it holds as assets on its books, and returns the rest to HM Treasury. The Bank of England owning Gilts is no different from the Bank of England owning an overdraft from HM Treasury. The net effect of both is that they are charged at the Bank Rate.

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Re: Wealth tax academic paper

#367914

Postby Gengulphus » December 20th, 2020, 8:22 am

NeilW wrote:
Lootman wrote:There is always a counterparty for the sale of any currency.

(i) How is there if there is no market maker of last resort?

Either the would-be seller finds someone else to sell to, in which case that someone is the counterparty, or they don't, in which case there is no sale. So it cannot happen that there is a sale but no counterparty, and that remains true regardless of whether there is a market maker of last resort.

You may be reading Lootman's statement as "There is always a counterparty for the attempted sale of any currency.", which obviously needn't be true in cases where there is no market maker of last resort. But the alternative reading that "There is always a counterparty for the successful sale of any currency." is equally obviously true. And when faced with two readings of someone else's statement, one obviously false and the other obviously true, assuming the former does not assist useful discussion...

Gengulphus

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Re: Wealth tax academic paper

#367920

Postby dealtn » December 20th, 2020, 8:50 am

NeilW wrote:
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.


Neil you said what "causes it in the first place". Then conceded that cause was the saving, and that was because the Government spent more than it took. Creating a "savings" that sits either in reserves or Gilts. I agreed with you. If you don't want a deficit the Government either doesn't create this in the first place, or the private sector gets rid of the savings. From an accounting perspective that is right. Neither route is particularly likely or practical at least on a meaningfully short time frame.

I am not sure why you are disagreeing with me when I have shown much agreement to how your theory works. All I did was to point out your inconsistency when you say the government should stop what creates it in the first place, said it was the government that was behind this "in the first place", and then place the "cause" on the "saving".

Accounting identities create the problem of "cause". You can't argue it is the "savers" causing it, and not the "Government" I'm afraid. Either both are at fault, an interesting position to take, or the initiator, which as you concede is the Government spending more than it takes. Of course there are ways to reduce or eliminate the debt/deficit - which may not prove popular with either the Government, or the electorate - but if you want it done by stopping what is driving it in the first place then it is the Government spending more than it takes that has to be addressed. Anything else is stopping it by some other means, not stopping the initial creation.

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Re: Wealth tax academic paper

#367928

Postby NeilW » December 20th, 2020, 9:16 am

dealtn wrote:
Accounting identities create the problem of "cause". You can't argue it is the "savers" causing it, and not the "Government" I'm afraid.


I can because the alternative is the economy is collapsed to eliminate the savings - and solid capital is destroyed in the process. For the non-government sector to earn more than it spends, the government sector has to spend more than it earns. Because it all has to sum to zero.

Therefore by saying the government must cut its spending you are still saving the excess savings of the private sector must be eliminated - it's the yang to the ying.

If government stops spending the economy collapses and the savings are forced to be deployed as people end up out of work. Or you can tax the savings to encourage them to be deployed - which is the wealth tax we are discussing. Or you can simply accommodate the savings by running a functionally balanced system (full employment and price stability) rather than getting unnecessarily excited about irrelevant fiscal balances and ratios - and which would be the sensible option.

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Re: Wealth tax academic paper

#368026

Postby Lootman » December 20th, 2020, 2:01 pm

NeilW wrote:
Lootman wrote:There is always a counterparty for the sale of any currency.

(i) How is there if there is no market maker of last resort?
(ii) Since the counterparty is replacing you what do they know that you don't?
(iii) Since you have left and somebody else has turned up, in aggregate nothing has changed. You have moved your wealth out. Somebody else has moved theirs in. That's just a difference of opinion or a "market" as it is known.

No "wealth" has been moved out of the UK. The UK is completely indifferent to your view since you can't do anything that can affect the amount of money in circulation.

(1) The FX market is the most liquid financial market there is. In practice there will always be a counterparty, at least for the major currencies. The price will move to ensure that.

(2) What do I know that my counterparty doesn't know? Depending on their situation and mine, we might both benefit from such a trade. And they might not be liable for a UK wealth tax.

(3) For the purpose of a discussion about a UK wealth tax, wealth is not constant. It can be moved, hidden or destroyed. You are thinking academically, in the aggregate, only about cash and only about sterling. But I can hold wealth in many forms and in many locations. And it absolutely can move out of the UK: in the simplest case suppose I have ten million in diamonds, and I move them and myself to the Cayman Islands. The UK loses the wealth tax it would have levied on that wealth which, from a UK point of view, has vanished. Same with FX, paintings, shares, gold bars, bearer bonds and so on. In fact the only forms of wealth I cannot move are property and pensions, which makes them bad assets to hold purely from a UK tax perspective. They are sitting ducks. The rest is mobile.


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