ratto
Recycles dryer sheets
- Joined
- Mar 11, 2011
- Messages
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In today's WSJ, there is an opinion article from Professor Ronald McKinnon at Standford University. Basically, he proposes a new tax levied on personal wealth assets in addition to income tax. The arbitrary baseline figure he suggests is 3 mils and above (domestic and foreign all together) because it "effectively excludes more than 95% of the population", at 3% tax rate. 3 mils might sound reasonable at this time, but no doubt it will be subject to change. Maybe 90% or lower population will be excluded by then.
So hypothetically if an ERer accumulated a lot of assets after decades of frugality, even if at a very low SWR, (s)he will still be potentially facing hefty tax based on this proposal. This just throws a monkey wrench at FIRE calculation. What could you do in this case if it does become true?
Here is the excerpt from the article:
The Occupy Wall Street protests have faded from the news, while the unemployment rate fell to 8.5% in December, the lowest level since February 2009. Still, unemployment and income inequality remain justifiable concerns for tens of millions of Americans and are two of the most pressing issues in the 2012 presidential election.
Reforming the income-tax system is commonly seen as the principal way to reduce inequality. But any attempt to impose higher marginal tax rates on even moderately high income earners as President Obama wants for families earning more than $200,000 per year can lead to losses in economic efficiency and even to losses in sorely needed government revenue if high earners work less or seek out more loopholes and tax shelters.
The basic problem is that defining "income" becomes progressively more difficult as income and wealth rise. Straight wage income is relatively easy to define and tax for middle-income earners through payroll taxes for Social Security or through the personal income tax. But wealthy people live much more off returns from their asset holdings. They receive capital gains, stock options, interest and dividends; and carried interest for owners of hedge funds that, to avoid double taxation, are taxed at lower rates than wage income. They may receive imputed rental income from multiple homes and major consumer durables such as automobiles, art collections or yachts, which the federal income tax misses altogether.
In order to have a fairer tax system, we should implement a new federal wealth tax in addition to the federal income tax. Unlike the current income tax, the wealth tax would not rely on how income is defined. Rather, it would require that households list all their domestic and foreign assets on, say, Dec. 31 in the relevant tax year. With a large exemption of $3 million that effectively excludes more than 95% of the population, a moderate flat tax say 3%, on wealth so defined could then be imposed.
If on Dec. 31 a household declares total net assets of $5 million, and the "standard" wealth tax exemption is $3 million, then its wealth tax is $60,000 ($2 million x 0.03). Because wealth will generally present a much larger tax base than income, tax rates can be kept low and still raise substantial revenue. The incentive for tax avoidance is minimal unlike the incentive created by a high marginal income-tax rate of 40% or more for earners paying both federal and state income taxes.
Another advantage of a modest wealth tax, in contrast to high marginal income-tax rates, is that it would hit old wealth along with new wealth. Wealthy people living off their inheritances who are not affected much by the income tax would be hit relatively harder by a wealth tax, whereas "strivers" with higher wage and salary income would be hit less hard. This is especially true if marginal income-tax rates could be reduced because of revenue generated from a new wealth tax.
The new wealth tax would be levied on both the domestic and foreign assets of Americans. Overseas real-estate holdings an Italian villa or a Parisian "pied-à-terre" as well as foreign bank accounts, many of which their holders try to keep secret, would all be taxable. In 2009, when the Union Bank of Switzerland was fined $780 million for hiding the bank accounts of wealthy Americans, bipartisan outrage set in motion the Foreign Account Tax Compliance Act, or Fatca, which passed in 2010. By 2013, foreign financial institutions will be responsible for reporting to the U.S. Treasury American assets held with them. So Facta would nicely complement collecting a new wealth tax as well as a flatter income tax.
Beyond mollifying Wall Street protesters, a modest flat wealth tax is the key to flattening the income tax to make it more revenue-efficient. Everyone agrees that the current U.S. income-tax system, with its many deductions, exemptions and special credits, is an inefficient mess. The GOP candidates want to simplify the tax code by flattening the rate structure and closing "loopholes."
But they all want to keep the two biggest loopholes: (1) to allow charitable or philanthropic contributions to be deducted, and (2) not to tax the imputed rental value of owner-occupied homes while allowing full deductions for mortgage interest rates. Owners of mansions and possibly multiple other properties are the biggest beneficiaries. Both (1) and (2) disproportionately benefit the very wealthy aka "the top 1%."
So hypothetically if an ERer accumulated a lot of assets after decades of frugality, even if at a very low SWR, (s)he will still be potentially facing hefty tax based on this proposal. This just throws a monkey wrench at FIRE calculation. What could you do in this case if it does become true?
Here is the excerpt from the article:
The Occupy Wall Street protests have faded from the news, while the unemployment rate fell to 8.5% in December, the lowest level since February 2009. Still, unemployment and income inequality remain justifiable concerns for tens of millions of Americans and are two of the most pressing issues in the 2012 presidential election.
Reforming the income-tax system is commonly seen as the principal way to reduce inequality. But any attempt to impose higher marginal tax rates on even moderately high income earners as President Obama wants for families earning more than $200,000 per year can lead to losses in economic efficiency and even to losses in sorely needed government revenue if high earners work less or seek out more loopholes and tax shelters.
The basic problem is that defining "income" becomes progressively more difficult as income and wealth rise. Straight wage income is relatively easy to define and tax for middle-income earners through payroll taxes for Social Security or through the personal income tax. But wealthy people live much more off returns from their asset holdings. They receive capital gains, stock options, interest and dividends; and carried interest for owners of hedge funds that, to avoid double taxation, are taxed at lower rates than wage income. They may receive imputed rental income from multiple homes and major consumer durables such as automobiles, art collections or yachts, which the federal income tax misses altogether.
In order to have a fairer tax system, we should implement a new federal wealth tax in addition to the federal income tax. Unlike the current income tax, the wealth tax would not rely on how income is defined. Rather, it would require that households list all their domestic and foreign assets on, say, Dec. 31 in the relevant tax year. With a large exemption of $3 million that effectively excludes more than 95% of the population, a moderate flat tax say 3%, on wealth so defined could then be imposed.
If on Dec. 31 a household declares total net assets of $5 million, and the "standard" wealth tax exemption is $3 million, then its wealth tax is $60,000 ($2 million x 0.03). Because wealth will generally present a much larger tax base than income, tax rates can be kept low and still raise substantial revenue. The incentive for tax avoidance is minimal unlike the incentive created by a high marginal income-tax rate of 40% or more for earners paying both federal and state income taxes.
Another advantage of a modest wealth tax, in contrast to high marginal income-tax rates, is that it would hit old wealth along with new wealth. Wealthy people living off their inheritances who are not affected much by the income tax would be hit relatively harder by a wealth tax, whereas "strivers" with higher wage and salary income would be hit less hard. This is especially true if marginal income-tax rates could be reduced because of revenue generated from a new wealth tax.
The new wealth tax would be levied on both the domestic and foreign assets of Americans. Overseas real-estate holdings an Italian villa or a Parisian "pied-à-terre" as well as foreign bank accounts, many of which their holders try to keep secret, would all be taxable. In 2009, when the Union Bank of Switzerland was fined $780 million for hiding the bank accounts of wealthy Americans, bipartisan outrage set in motion the Foreign Account Tax Compliance Act, or Fatca, which passed in 2010. By 2013, foreign financial institutions will be responsible for reporting to the U.S. Treasury American assets held with them. So Facta would nicely complement collecting a new wealth tax as well as a flatter income tax.
Beyond mollifying Wall Street protesters, a modest flat wealth tax is the key to flattening the income tax to make it more revenue-efficient. Everyone agrees that the current U.S. income-tax system, with its many deductions, exemptions and special credits, is an inefficient mess. The GOP candidates want to simplify the tax code by flattening the rate structure and closing "loopholes."
But they all want to keep the two biggest loopholes: (1) to allow charitable or philanthropic contributions to be deducted, and (2) not to tax the imputed rental value of owner-occupied homes while allowing full deductions for mortgage interest rates. Owners of mansions and possibly multiple other properties are the biggest beneficiaries. Both (1) and (2) disproportionately benefit the very wealthy aka "the top 1%."
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