Wealth Based Taxes
We have already discussed several kinds of unfairness in our current taxation system, and we have introduced wealth as a potential basis for taxation. This chapter concludes that discussion. We will outline why the current bases for taxation are wrong. We will specify why wealth is the right basis for taxation. We will, through generalized numeric examples, assess the extent of unfairness of our current taxation bases when compared to wealth as the basis for taxation. We will also outline all other reasons, besides fairness, that makes wealth the ideal basis for taxation.
An Overview
This section provides a comprehensive overview of wealth-based taxes. Only those aspects that require a longer explanation are separated out and presented in subsequent sections.
Taxes are for the common good.
As discussed in the "Clarifying Utopia" chapter, a significant portion of the wealth in a society is owned privately by its citizens. The wealth owned collectively by the society cannot be used to fund the expenses of the society; if they were, then the society will eventually exhaust all the collective wealth. A society still needs to do work for the common good; what a society does for the common good determines how good the society becomes. Doing the common good requires money, and that money needs to be collected from the citizens. This money collected for the purpose of doing the common good are the taxes.
Thus, taxes should be considered as the service charge for the smooth functioning of the society.
Tax needs to be collected only in the form of money.
Had we been living a few thousand years ago, then we could have asked people to do various things for the common good of the society, the tribe or the kingdom. We would have collected grain from farmers, fruit from orchard keepers, fish from fishermen, etc. We would have expected everyone to participate in the protection of one's land and possibly help in conquests of other lands. But, we do not live in those times, and hence, such ways of contributing to the common good are no longer applicable to our society or our country.
Government is an organization that renders services. To render services, it needs infrastructure and people. The government has to pay for various things. We have advanced our society to a stage where money is the medium of exchange of value. Hence, we would need to obtain money to pay for our government.
People can do whatever they wish to do to lead a good life. They may grow potatoes, write software, style other people's hair, cook food for others, tell news or jokes, sing songs, play music, etc. These are the kinds of things that people can do, however, we would not like to collect taxes in the form of whatever goods and services people provide other people. We need to collect taxes in the form of money and not anything else.
The desirable characteristics of any taxation system are:
- Simple to understand. Easy to comprehend. Ideally, the entire tax code should fit in a single page.
- Fair. No one should feel that the taxes they pay are unfair.
- Non-discriminatory. Why should some get to pay taxes at a lesser rate than others? After all, it is for the common good.
- Least number of loopholes. Ideally no loopholes. Every loophole is an instance of unfairness and discrimination.
- Requiring minimum effort from the taxpayer. Ideally it should be fully automated.
Tax needs to be charged on some basis.
If we need to levy some taxes, and if we need to collect these taxes in the form of money, we need to identify the "basis" on which to levy those taxes.
Currently, in our societies and our countries, taxes are charged on various bases like wages, income earned, dividends earned, capital appreciated, goods sold, services rendered, fuel purchased, goods transported, transaction completed, property owned, etc. All these bases and methods have evolved over time, primarily because of the ease of implementation using these bases and methods.
There are only three fundamental bases to choose from: income, sales, and wealth. Most of the taxes in present-day societies are based on income and sales. A very small percentage is based on wealth, in the form of property taxes.
We have already seen in the chapter "Reasons for the Rich Getting Richer" that income and sales based taxes will lead to increasing wealth inequality. If a society is interested in the well-being of all its citizens, then that society will not choose these two as the basis for taxation.
Moreover, the way the current taxation systems are set up, these bases are used in discriminatory ways. Different people pay at different rates. Different means of earnings are charged at different rates. Different levels of earnings are charged at different rates. Even sales-based taxes differ from one kind of product to another. Having all these differences in rates and qualifications leads to a tax code that runs into several hundreds of pages. Its implementation is complex, because it is complex. There are too many ways in which people can avoid paying taxes and still not violate any laws; we call these the "loopholes" in the taxation system.
If tax is the service charge for the smooth functioning of the society, and if the monetary benefit of a smoothly functioning society is the accumulated wealth, then the service charge should be in proportion to the accrued benefit of this service. It is the only fair way to charge for this service that society provides all its citizens. Isn't it? For current societies, one should say that the biggest loophole in the current taxation system is that wealth is not a basis for taxation.
For an ideal society, that leaves wealth as the only possible basis on which to collect taxes.
What is a wealth-based tax?
Wealth-based tax is a single rate of tax, and it is expressed in percentage of wealth. So, a wealth-based tax rate of 2% means that 2% of wealth needs to be paid as taxes by everyone every year.
Wealth-based tax raises taxes from an individual in the same proportion to the monetary benefit that the society has already given to that individual. The monetary benefit is the total wealth accumulated by the individual. In dollar terms, the poor person derives very little benefit and the rich person derives a lot of benefit. In terms of the tax rate, the rich and the poor pay at the same rate; there is no discrimination.
Wealth-based taxes are fair because they are "in proportion to the monetary benefit derived" and they are "non-discriminatory". So, wealth is a fair basis for taxation.
There is one more reason that adds to the overall argument that "wealth is the right basis for levying taxes". It is detailed in the section "One More Reason for Wealth Based Taxes".
What would be the rate of wealth-based tax?
In short, here are the highlights:
- If we consider the entire spending of various societies, then it would be in the range of 5% to 10%.
- From the entire spending, if we remove the individualized services that societies provide and explicitly charge to the service seeker, then it will be about half of that.
So, a reasonable number for wealth-based taxes is somewhere in the 2.5% to 5% range.
The section "The Rate of Wealth-Based Tax" provides actual numbers from the year 2020 for various countries.
Do wealth-based taxes have all the desirable characteristics of a taxation system?
Yes. Here are the reasons in brief:
- It is simple. In fact, it can be expressed in much less than a single page.
- It is fair, because everyone pays taxes in proportion to their net monetary benefit derived from being a member of the society. The net monetary benefit is the wealth that they have already accumulated.
- It is non-discriminatory. Everyone pays at exactly the same rate of tax.
- It has the least number of loopholes.
- Being fully automated with an ability to configure, the effort required to pay taxes is almost nothing. In fact, since even babies will be paying taxes, the default configuration will be such that no one will have to undertake any effort so that every one of these newborn citizens can pay their fair share of taxes.
The section "Goodness of Wealth-Based Taxes" presents an expanded version of the above list, and it presents additional points.
How are wealth-based taxes implemented?
Recent decades have seen advances in computer, communication and networking technologies. Now we can hold in the palm of our hands what would have been considered a super-computer just 5 decades ago.
Wealth is the right basis for taxation, and we now have the technology to implement it. With the availability of these advances in technology, we no longer need to continue using any of the existing and flawed bases for taxation.
Fiscal Policy will estimate the percentage of wealth that needs to be collected for spending on the common good. This becomes the rate of wealth-based taxes.
Wealth-Based taxes are collected daily. This requires an infrastructure suitable for this purpose, and it is discussed in the "UFI Book". The infrastructure will automate the collection of taxes fully. The infrastructure will provide some level of configuration ability to citizens to specify exactly the kinds of assets to use to automatically pay the taxes.
So, daily, from every citizen and every self-owning entity, the tax collection infrastructure will collect 1 / 365 of TaxRate% of their privately owned wealth.
How unfair are wage-income based taxes?
If one is curious to know the magnitude of unfairness of the wage-income based taxes when they are compared with wealth-based taxes, then one will need to compare them with what they translate to as wealth-based taxes. Further, one will also need to compare them with dividend-based taxes, because a dividend-based tax represents paying taxes on just the income derived from one's wealth; and such income requires no work at all.
In short, if wealth based taxes are in the 2.5% to 5% range, and if the comparison criteria should compare the same level of income, either from dividend-based income or from wage-based income, then ...
- Dividend-based taxes when represented as wealth-based taxes are in the range 0.2% to 0.6%.
- Wage-income based taxes when represented as wealth-based taxes are in the vicinity of infinite percent for the totally poor.
- Wage-income based taxes when represented as wealth-based taxes are in the range 25% to 800% of wealth for the poor.
- Wage-income based taxes when represented as wealth-based taxes are in the range 5% to 80% for people with less than moderate amounts of wealth.
- Wage-income based taxes when represented as wealth-based taxes are in the range 1.25% to 20% for people with moderate amounts of wealth.
The above number comparisons are for a few income ranges that account for the majority of the population. All these numbers are presented in the sections "Taxes on Dividends in Terms of Wealth" and "Taxes on Wage Income in Terms of Wealth".
Every citizen can make similar computations, using more realistic numbers from their society, and draw conclusions specific to their society.
One More Reason for Wealth Based Taxes
Now let us consider why wealth should be the basis for taxation.
Imagine that we collect taxes every day to pay for all the daily expenses of the society. Since we will plan the activities for the common good of the society, we will also have estimated the daily expenses, and hence we will know the total amount of taxes to be collected every day. The question is: "who pays how much?"
There are three cases to consider:
Case 1: Imagine that at the beginning of a day, we wave a magic wand and let everyone have exactly the same amount of wealth. In this case, what would be the right way to charge taxes? Equally, from everyone. Right?
Case 2: Imagine that at the beginning of a day, we wave a magic wand and let some randomly chosen citizen have all the private wealth that the nation has. While the rest may not like it, that is not the consideration of this imagination. In this case, what would be the right way to charge taxes? Clearly, all the taxes should be paid by that citizen who has all the wealth. Right?
Case 3: Imagine that at the beginning of a day, we wave a magic wand and let each citizen have some randomly chosen amount of the wealth at his or her disposal at the beginning of the day. In this case, what would be the right way to charge taxes? The right way would be to charge taxes proportional to the wealth that each citizen possesses.
In each of the three cases, the benefit of the magic wand to each citizen is in the wealth that each citizen gets at the beginning of each day. Some citizens derive more benefit and some derive less benefit. However, regardless of how much benefit they derive, in all three cases, they are charged taxes that are proportional to the benefit, which is the wealth that each citizen possesses.
The three cases are intended to illustrate that charging taxes that are proportional to the wealth of the citizen makes sense.
What benefit does an individual derive from society? At the beginning of each day, the wealth that each person possesses is the benefit. A rich person has derived a lot of benefit, and a poor person not so much. Our society, our country, does not wave a magic wand at the beginning of each day. However, at the beginning of each day, each citizen seems to have some random amount of wealth at his or her disposal. If we were to charge every citizen taxes that are proportional to the wealth that the citizen possesses, then it would be consistent with our three cases involving a magic wand.
One can say it is a benefit of being part of the society that each citizen can get to own some part of the wealth. Maybe it is because of the common good done by the society, or maybe by some random luck of each citizen, or maybe by the efforts taken by each citizen. It could even be due to a combination of the common good done by the society, random luck and by the efforts of the citizens.
When a person earns some money and spends most of it and saves some of it, this person manages to accumulate some wealth. Depending on how large or small the accumulation is, the society's wand may seem pleasingly magical or just a stick. Any money that is earned and not spent is really the monetary benefit that this person derives from being part of society. It is his or her monetary profit.
Money spent becomes some other person's earnings or some other business's revenue. Part of the earnings or revenue is spent in providing the service or producing the product, and the rest is the profit. This goes on and on. All the profits are essentially the accumulated wealth. It may seem that all the money that is not profit is somehow lost. That is not so. This is because money circulates in our society. Every dollar earned is an opportunity to accumulate a dollar. Every dollar spent is an opportunity for someone else to accumulate that dollar.
Those who have a large amount of money can invest it in profitable ventures. Larger the amount of money, larger the amount of profit. Since humans are more or less the same, the amount of money required for survival is nearly the same, regardless of how rich or poor the person is. So after having spent money on survival, comforts and pleasures, the rich still manage to accumulate far more wealth than the rest. The rich have wealth and can add more to their already accumulated wealth. The poor start with no wealth or close to no wealth, and have far fewer opportunities to accumulate wealth. For the rich, the society's magic wand is pleasingly biased in their favor.
Thus, the functioning of the society, in terms of how much money one has at the beginning of a day, is indeed similar to the third case, with the qualification that it is biased in favor of the wealthy from the prior day.
If society was exactly similar to the third case, then taxes should be charged in proportion to the wealth possessed by the individual.
Given the fact that society is similar to the third case with a bias towards the already wealthy, does not alter the conclusion that taxes should be charged in proportion to the wealth possessed by the individual.
Hence, wealth is the right basis for taxation.
The Rate of Wealth-Based Tax
When we charge taxes in proportion to the wealth owned by citizens, what would be the tax rate? Let us look at data for some countries to get an estimate.
For any country we could think about the "total wealth" of the country, "government expenditure" of that country and the "government expenditure expressed as a percentage of total wealth".
Here is a table that shows these numbers for various countries at the beginning of 2020. These numbers are freely available on Wikipedia. Because they are obtained from a non-authoritative source, one should not trust them to be fully accurate. But we can consider them to be approximate and use them as an aid to help us quantify the relative magnitudes of the various quantities. In the table, Total Wealth (shown as Wealth) and Government Expenditure (shown as Expenditure) amounts are in trillions.
| Country | Wealth | Expenditure | Expenditure as % of Wealth |
|---|---|---|---|
| USA | 105.99 | 6.8 | 6.4 |
| China | 63.82 | 3.8 | 5.9 |
| Japan | 24.99 | 1.88 | 7.5 |
| Germany | 14.66 | 1.57 | 10.7 |
| UK | 14.63 | 1.12 | 7.6 |
| France | 13.72 | 1.41 | 10.2 |
| India | 12.61 | 0.72 | 5.7 |
| Italy | 11.35 | 0.92 | 8.1 |
| Canada | 8.57 | 0.65 | 7.5 |
| Spain | 7.77 | 0.53 | 6.8 |
| South Korea | 7.30 | 0.33 | 4.5 |
| Australia | 7.20 | 0.48 | 6.6 |
| Switzerland | 3.87 | 0.22 | 5.6 |
| Netherlands | 3.71 | 0.34 | 9.1 |
| Brazil | 3.53 | 0.77 | 21.8 |
| Russia | 3.05 | 0.28 | 9.1 |
| Mexico | 2.70 | 0.31 | 8.7 |
When we decide to charge taxes on the basis of wealth, government expenditure expressed as a percentage of total wealth in the above table would be the "tax rate for that country".
The information in the table was obtained from the page List of countries by total wealth and the page List of countries by government budget at the beginning of 2020.
For accurate amounts for any specific country, please consult the publications of the governments of those countries, as they alone are the authoritative and reliable source of such information. The expenditure amount should include expenditure at all levels of government.
From these numbers, it seems that the rate of wealth-based taxes will be in the range of 5% to 10%. This range is not an accurate measure of expenditures for the common good.
Most countries have revenues and expenditures. Countries collect some kinds of taxes to deliver specific services like social security, health insurance, unemployment insurance, etc. When such countries expend some amount for their obligations for these promised services, they are merely spending that money from the revenues collected to deliver those services. These services are never "free-of-charge" like the core common good services of defense, policing, judiciary, fire fighting, etc. So, to get a more accurate understanding of the percentage at which wealth-based taxes need to be charged, the cost of these paid-for services needs to be deducted from the above-mentioned total expenditure as a percentage of wealth.
Further, most countries spend some money in paying interest on their borrowings. In the next chapter, we will see that governments do not need to borrow at all. Hence, this expenditure is also not required, and hence needs to be removed from the current government expenditures to better assess the rate of wealth-based taxes.
Further, because wealth-based taxes are greatly simplified, it will reduce the overall effort to implement it. This reduction in effort translates to lower cost.
When all these "non-expenditures" are considered and removed from current total government expenditures, then we will obtain the expenditures for the common good. Considering that, the rate of wealth-based taxes to support the common good will be about half of what countries currently seem to be spending. This rate will be in the range 2.5% to 5% of the total wealth of these countries.
Goodness of Wealth-Based Taxes
Let us see if charging taxes proportional to wealth has all the goodness criteria that we considered earlier.
Wealth as the basis for taxation is simple. There is just one rule. Taxes are proportional to wealth.
Wealth as the basis for taxation is fair. If a person has something left over after all his needs, then this person is in a position to pay something for the common good. For someone who is just managing to earn some money and use all the money thus earned to survive, then this person in effect is giving every penny earned to others and hence helping them to earn their living and maybe also helping some to accumulate wealth. Once this person has helped others, do we really need to take away some of this person's earnings via income tax or sales tax? Those who have immense amounts of wealth may be tempted to say "yes", since these income taxes and sales taxes reduce their tax burden. But is it fair to reduce the tax burden of the wealthy, still provide them with the protection and infrastructure that the country provides them and instead charge those poor people for that, especially when they have nothing left?
Wealth as the basis for taxation is non-discriminatory. Every citizen gets charged as per the wealth he or she possesses, regardless of any other criteria. There is no discrimination. Everyone pays taxes in proportion to the wealth they possess. Even a newborn child pays the taxes.
Wealth as the basis for taxation cannot have loopholes. People tend to find loopholes if they stand to benefit by using the loopholes.
- If a person has wealth, then the person pays taxes.
- If a person does not have wealth, then the person does not pay taxes.
- If a person has some wealth, then that person pays taxes in proportion to that wealth.
The only way a person does not pay taxes is if that person does not have any wealth. Hence, if a person's goal is to not pay taxes, the only way it can be accomplished is by not possessing any wealth. There is no reason to avoid taxes if one does not have any wealth. If a person has wealth, then the cost of avoiding taxes is the entire wealth. In wealth-based taxes, there is no benefit derived by creating a situation in which one does not have to pay taxes.
Wealth as the basis for taxation has minimal work. We can account for the wealth of all citizens easily. We can automate it since it is so simple.
All the above considerations are sufficient to say that taxes should be charged in proportion to the wealth of an individual.
Here are some of the consequences of charging taxes on the basis of wealth and in proportion to wealth.
There are no taxes on activities. Income is not taxed. There are no taxes on sales. There are no taxes for producing something in one part of a country and selling it in another part. There is no octroi.
There are no taxes on gifts received and wealth transferred, since these are just activities. The wealth is still owned by somebody, and that someone will pay taxes on the wealth owned. There are no inheritance taxes since it is a transfer of wealth.
There are no taxes on making a profit. Engaging in activities that are profitable, are still activities, hence, there are no taxes on the profit. Hence, for any organization that is directly or indirectly owned by people, there are no taxes, as the wealth in possession of this organization is accounted for in the wealth of its owners. Dividends paid by organizations are not taxed since it is just wealth transfer.
Any entity that can own wealth has to pay taxes on the wealth that it owns. There are some kinds of organizations that are not owned by anyone. Some examples are trust funds, charities, endowments, and foundations. These are the self-owning entities. These organizations have wealth at their disposal, and they have their own policies about using that wealth. Since it is privately held wealth, this wealth is subject to taxes in proportion to wealth.
We will have to change something in our laws so that we only allow two kinds of organizations to exist: The first kind of organization is the one that is owned by others. The second kind of organization owns itself; that is, a self-owning organization. This enables accounting for the wealth of these organizations, assigning the ownership of such wealth so that all owners of the wealth can be uniformly charged taxes based on wealth.
The taxation system becomes greatly simplified. The enormous amount of work that people currently do to deal with taxes is eliminated.
When compared to the current tax rules, most people will pay less in taxes. The rich will pay more taxes. Those who own nothing will pay zero taxes.
No one can complain that someone is not paying their fair share of taxes, since everyone pays taxes at the exact same rate.
Taxes on Dividends in Terms of Wealth
Let us consider some hypothetical scenarios in present times, in which some person earns only dividend income and pays taxes according to existing tax rates on dividends.
The purpose of these hypothetical scenarios is for us to estimate, "what is the wealth tax rate for those people who live on income earned through dividends and currently pay taxes on such dividend based income?" We will use current methods of computing tax amounts and express that tax amount as a percentage of their wealth.
We will assume that this person earns only a 2% dividend. Further, we will assume that the tax rate increases as the dividend amounts earned by an individual increase. We would like to see the dividend income and tax amount on this income. We will also express these taxes as a percentage of their wealth.
| Wealth | Dividend Amt | Tax % | Tax Amt | Tax as % of Wealth |
|---|---|---|---|---|
| quarter million | 5000 | 10 | 500 | 0.2 |
| half million | 10000 | 10 | 1000 | 0.2 |
| 1 million | 20000 | 10 | 2000 | 0.2 |
| 2 million | 40000 | 20 | 8000 | 0.4 |
| 4 million | 80000 | 30 | 24000 | 0.6 |
| 8 million | 160000 | 40 | 64000 | 0.8 |
| 16 million | 320000 | 50 | 160000 | 1.0 |
Starting at what amount of wealth can one live only on dividend income? When living on dividend income, the entire wealth remains intact, and it provides dividend income the next year and hence such individuals will never have to work to earn a living.
Taxes on Wage Income in Terms of Wealth
What is the equivalent wealth-based tax rate for those people who live on income earned through wages and pay taxes based on existing tax rates on such wage-based income?
To answer the above question, we will use an approximation of current methods of computing tax amount and express that tax amount as a percentage of wealth. We will assume that the tax rate increases as income earned by an individual increases. We would like to see the income and tax amount on this income. We will also express these taxes as a percentage of their wealth.
First, the table below shows that people who have no wealth literally pay an infinite percentage of their wealth as taxes.
| Wealth | Income | Tax % | Tax Amt | Tax as % of Wealth |
|---|---|---|---|---|
| 0 | 20000 | 10 | 2000 | infinite |
| 0 | 40000 | 15 | 6000 | infinite |
| 0 | 80000 | 20 | 16000 | infinite |
Next, the table below shows that people with very little wealth pay taxes that are a very large percentage of their wealth, sometimes exceeding their wealth.
| Wealth | Income | Tax % | Tax Amt | Tax as % of Wealth |
|---|---|---|---|---|
| 2000 | 20000 | 10 | 2000 | 100 |
| 2000 | 40000 | 15 | 6000 | 300 |
| 2000 | 80000 | 20 | 16000 | 800 |
| 8000 | 20000 | 10 | 2000 | 25 |
| 8000 | 40000 | 15 | 6000 | 75 |
| 8000 | 80000 | 20 | 16000 | 200 |
Next, the table below shows that people with less than moderate amounts of wealth still pay taxes that are a large percentage of their wealth.
| Wealth | Income | Tax % | Tax Amt | Tax as % of Wealth |
|---|---|---|---|---|
| 20000 | 20000 | 10 | 2000 | 10 |
| 20000 | 40000 | 15 | 6000 | 30 |
| 20000 | 80000 | 20 | 16000 | 80 |
| 40000 | 20000 | 10 | 2000 | 5 |
| 40000 | 40000 | 15 | 6000 | 15 |
| 40000 | 80000 | 20 | 16000 | 40 |
Finally, the table below shows that people with moderate amounts of wealth pay taxes around the norms of government spending, expressed as a percentage of total wealth. For some, it is still large and for some it is small.
| Wealth | Income | Tax % | Tax Amt | Tax as % of Wealth |
|---|---|---|---|---|
| 80000 | 20000 | 10 | 2000 | 2.5 |
| 80000 | 40000 | 15 | 6000 | 7.5 |
| 80000 | 80000 | 20 | 16000 | 20 |
| 160000 | 20000 | 10 | 2000 | 1.25 |
| 160000 | 40000 | 15 | 6000 | 3.75 |
| 160000 | 80000 | 20 | 16000 | 10 |