Oh Mais No!

Some interesting thoughts/comments on a property-rights rationale for replacing the income tax with a net wealth tax.

Loftin Graham

---------------------

On Nov 6 2007, [utf-8] Loftin Graham wrote:

Dear Mr. Diamond and Mr. Mirrlees:

I am curious to know whether either of you is aware of any academic work that proposes the use of a wealth tax to finance general government expenditures. I recently received a communication from Michael Devereux in which he suggested that you were involved in a joint effort (along with a Mr. Banks? whose contact information I was unable to locate) that might involve some discussion of a wealth tax. He provided a paper that I have downloaded and am in the process of going through.

If either of you has a couple of minutes to skim what I've written below and give some direction or sources to go to, that would be great. If not, that's fine too.

Sincerely,

Loftin Graham

The reason that I ask about the wealth tax is that I have become convinced in thinking about it during the past year, that wealth is the most appropriate basis to use in order to pay for that portion of government expenditures that are not associated with specific programs or projects (i.e. that are, rather, associated with the general operations of government). The rationale I have for this involves the answer to the question: what is the underlying basis for the economic claims that governments have on their citizens? The answer to this question seems to me to be that ultimately all legitimate economic claims that governments have on their citizens originate in the provision on the part of governments of something of economic value to their citizens individually and as a group. This is not really a new notion; it is merely the economic analog of the statement that every government exists to benefit its people (or at least that it should do). From the reference point represented by this conclusion, one is led to consider what economic benefits accrue to a nation's citizens as the result of good government. I have become convinced at the conceptual level, that the primary and most general economic benefit that good government provides for its citizens is an environment within which their individual rights to have and productively use capital (of all sorts) are guaranteed. In other words, the primary - or at least most fundamental or basic - economic benefit that good government provides is the guarantee of property rights. Other economic benefits that the citizens of a nation might choose to dispense through government agencies and programs might include: different forms of insurance (e.g. Social security, Medicare, Medicaid, worker's comp, etc.), infrastructure (roads, sewers, etc.), and so on; but here I am talking about funding the GENERAL operations of government. Good government of course generally also provides other benefits, e.g. political, that are not primarily economic in nature; but, again, here I am talking about economic claims that the government might have on its citizens, and those should be tied, it seems, to economic benefits provided.

Now, since decoupling a benefit received from an associated and commensurate charge to the recipient is likely (if self-interest is deemed to be a persistent force in determining human behavior) to result in the equivalent of a sort of benefits-arbitrage, it seems that good tax policy would involve an assessment that is in some sense proportional to the benefit received; and in the case of the considerable amount of GENERAL expenses associated with providing an environment in which individuals are able to own and productively use capital, the benefit accruing to individuals is related to the property or wealth that each has at his disposal: the absolute value that is at stake for each individual in the loss of genuine property rights is proportional to their overall wealths. Consequently, the financing of this portion of government expenditure should be accomplished in a way that is proportional to individuals' wealths. Other categories of expenditures would be dealt with via taxes that are proportional to income or to some other relevant quantity (e.g. gasoline consumption in the case of financing highways and roads).

Are you aware of any discussion of this principled justification of wealth taxation - or of taxation in general? Most of the articles that I have come across posit the entitlement-based justification that is inherent in ability to pay arguments. I am uncomfortable with the ability to pay justification for much the same reason that I am uncomfortable with the notion of pure democracy (e.g. absent important guarantees for individual/civil rights). Using ability to pay as the basis for taxation seems to suggest that there need be no guarantee of the basic individual economic right that is expressed in the concept of individual property rights. Since from the perspective of behavioral considerations there may be long-run implications (distributional and in terms of overall welfare - via effects on productivity, for example) associated with entitlement-based frameworks versus those that emphasize or reward individual responsibility and initiative, it seems like it would make sense to find a justification of taxation that is consistent with the latter class of frameworks. While the modelling technology may not currently exist to adequately take into account this behavioral dimension, this doesn't mean that one can afford to ignore it altogether.

Any suggestions you might be able to provide regarding discussion of wealth-based tax or property-rights justifications would be sincerely appreciated. Sent via BlackBerry from T-Mobile

---------------------

-----Original Message-----

From: Professor Sir James Mirrlees

Date: 14 Nov 2007 07:56:49

To:loftin@tmo.blackberry.net


Cc:pdiamond@mit.edu


Subject: Re: Wealth taxation

Dear Mr Loftin,

I had been waiting until I got back to Hong Kong at the end of the week to remind myself how much the Meade Report discussed wealth taxation; but I

think you should do that yourself! The Netherlands and Sweden, at least, have wealth taxes, but I still don't know much about implementation or legislative details. Probably they exclude small-business and residential assets.No doubt you could find out more by suitable web searches.


At the theoretical, or optimal-tax level, it seems to me that an important issue is the source of an individual's wealth. Anyway, a convenient date at which to tax it is when it is received, and then one can work out the incentive issues relatively straightforwardly. But remember that the age when receiving it may be a relevant parameter.

I rather think it would be unwise to go far into this without someone local to supervise your research. It's too easy to make mistakes.

Yours,

Jim Mirrlees

---------------------

On Nov 15 2007, [utf-8] Loftin Graham wrote:

Mr. Mirrlees:




I hope this doesn't seem overbearing, but in reading back over your


response, I don't think you understood the main point of my idea. My idea is that individuals should face costs for government-provided services that are proportional to the benefits that they derive from them. Since wealthy individuals receive - in absolute dollar terms, for example -greater benefit from government in the form of a guarantee of their property rights, they should pay more (again, in absolute terms) than their less wealthy counterparts, and the amount of their tax liability should be proportional to their wealth. Since the benefit people receive in respect to the capital they own is received continuously in much the same way that insurance benefits are received continuously during periods of coverage (i.e. NOT just at the point in time that they first come to own the capital), the tax should not be on income but rather on wealth! Theoretically the correct way to assess such a tax would be either require continuous payment of a fixed proportion of wealth or to integrate the product of instantaneous wealth times the rate for the year - accumulating with some interest rate - and charge this amount at the end of the year. The idea though is that the general economic benefit received is the guarantee of property rights and that benefit has some similarities with insurance coverage. The corresponding tax liability should be dealt with accordingly. Hopefully that makes a little more sense to you. Obviously, in real life some simplification would be necessary; but I don't guess that that would be much of a problem to work out.

Regards,

Loftin Graham

By the way, part of the reason that I wrote you and Mr. Diamond is that I

don't have much "local support" as you called it. I have upset some of the powers that be here at Wharton by pointing out what everyone here already knows: that there is a group of secular Jews here that have gained influence over the school and who use that influence in ways that are inconsisent with good scientific practice. In particular I believe that they give precedence to race over merit whenever they think they can get away with it - I mean they promote their own people to positions of influence and frustrate those who have differing viewpoints or who are unwilling to put up with their bullying. So, it looks like I'll be working on this project mostly alone unless my situation changes significantly somehow.

Sent via BlackBerry from T-Mobile

---------------------

-----Original Message-----

From: Professor Sir James Mirrlees


Date: 16 Nov 2007 12:39:33


To:loftin@tmo.blackberry.net


Subject: Re: Wealth taxation

Sorry, I don't think taxes are or should be payments for services rendered,so I had no sympathy for your general idea. Note that enforcement of

contracts applies to labour as well as capital and land.

Yours,

James Mirrlees

---------------------

-------- Original Message --------


Subject: Re: Wealth taxation


Date: Fri, 16 Nov 2007 14:42:15 +0000


From: Loftin Graham


Reply-To: loftin@tmo.blackberry.net


To: James Mirrlees


CC: Peter Diamond

Mr. Mirrlees:

Thanks for the clarifying response. Yes, I suppose that labor is also subject to contracts, with he implication that one's human capital would theoretically be a part of one's wealth, broadly defined. But that should only strengthen (from your stated point of view) the position of the argument I've provided because it demonstrates that wealth, defined broadly enough, is equivalent to the holy grail of tax bases: the so-called "ability to pay". The beautiful thing about this idea involving property rights (and I mentioned this to the professor here in my dept that has some tax background, without him catching the beauty of it apparently) is that one basically reaches the same policy result (using wealth rather than income as the base for taxes that fund general government expenditures) as an argument coming from polar opposite sides of the political spectrum - Ed Wolf, for example has justified a wealth tax on the basis of ability to pay rather than on that of benefits received. So, people that favor ability to pay justifications of tax bases should be content with my property rights reasoning because the policy implications are the same - the two sides appear to converge. This kind of an outcome (when the same conclusion follows from two independent lines of reasoning) is the kind of thing that most scientists get excited about, me included! Anyways, Mr. Diamond rightly pointed out that such a scheme has some practical difficulties in terms of implementation that would have to be overcome, but the general idea appears to be sound to me. And technology improvements may render concerns about valuing small business and other assets less and less serious - consider what telecommunications improvements have done through eBay and other online auction sites, for example. In addition, shifting the activities of the tax-services industry from being unproductive (I mean here in the organic sense that funding tax shelters and loopholes is not value-producing from the aggregate perspective) to being productive (valuation is a financially productive activity because information has value) would seem to be welfare improving. Anyways, these are some things to consider, no?

Take care,

Loftin Graham

By the way, viewing tax liabilities as inherently connected to benefits received does NOT mean (i.e. it is NOT necessitated by logic) that those paying greater taxes are justified in believing that they have greater claim on any SPECIFIC government service. Nor does it mean that they have any just basis for claiming greater political influence (though practically speaking this is nearly impossible to avoid, regardless of tax-system considerations). All it means is that wealthier individuals benefit (economically) more in absolute terms from the underlying framework that good government provides than do their less wealthy counterparts, so they should be willing to pay more. In particular, they should be willing to pay the same annual proportion of their wealth.

Sent via BlackBerry from T-Mobile

Some interesting thoughts/comments on a property-rights rationale for replacing the income tax with a net wealth tax.

Loftin Graham

---------------------

On Nov 6 2007, [utf-8] Loftin Graham wrote:

Dear Mr. Diamond and Mr. Mirrlees:

I am curious to know whether either of you is aware of any academic work that proposes the use of a wealth tax to finance general government expenditures. I recently received a communication from Michael Devereux in which he suggested that you were involved in a joint effort (along with a Mr. Banks? whose contact information I was unable to locate) that might involve some discussion of a wealth tax. He provided a paper that I have downloaded and am in the process of going through.

If either of you has a couple of minutes to skim what I've written below and give some direction or sources to go to, that would be great. If not, that's fine too.

Sincerely,

Loftin Graham

The reason that I ask about the wealth tax is that I have become convinced in thinking about it during the past year, that wealth is the most appropriate basis to use in order to pay for that portion of government expenditures that are not associated with specific programs or projects (i.e. that are, rather, associated with the general operations of government). The rationale I have for this involves the answer to the question: what is the underlying basis for the economic claims that governments have on their citizens? The answer to this question seems to me to be that ultimately all legitimate economic claims that governments have on their citizens originate in the provision on the part of governments of something of economic value to their citizens individually and as a group. This is not really a new notion; it is merely the economic analog of the statement that every government exists to benefit its people (or at least that it should do). From the reference point represented by this conclusion, one is led to consider what economic benefits accrue to a nation's citizens as the result of good government. I have become convinced at the conceptual level, that the primary and most general economic benefit that good government provides for its citizens is an environment within which their individual rights to have and productively use capital (of all sorts) are guaranteed. In other words, the primary - or at least most fundamental or basic - economic benefit that good government provides is the guarantee of property rights. Other economic benefits that the citizens of a nation might choose to dispense through government agencies and programs might include: different forms of insurance (e.g. Social security, Medicare, Medicaid, worker's comp, etc.), infrastructure (roads, sewers, etc.), and so on; but here I am talking about funding the GENERAL operations of government. Good government of course generally also provides other benefits, e.g. political, that are not primarily economic in nature; but, again, here I am talking about economic claims that the government might have on its citizens, and those should be tied, it seems, to economic benefits provided.

Now, since decoupling a benefit received from an associated and commensurate charge to the recipient is likely (if self-interest is deemed to be a persistent force in determining human behavior) to result in the equivalent of a sort of benefits-arbitrage, it seems that good tax policy would involve an assessment that is in some sense proportional to the benefit received; and in the case of the considerable amount of GENERAL expenses associated with providing an environment in which individuals are able to own and productively use capital, the benefit accruing to individuals is related to the property or wealth that each has at his disposal: the absolute value that is at stake for each individual in the loss of genuine property rights is proportional to their overall wealths. Consequently, the financing of this portion of government expenditure should be accomplished in a way that is proportional to individuals' wealths. Other categories of expenditures would be dealt with via taxes that are proportional to income or to some other relevant quantity (e.g. gasoline consumption in the case of financing highways and roads).

Are you aware of any discussion of this principled justification of wealth taxation - or of taxation in general? Most of the articles that I have come across posit the entitlement-based justification that is inherent in ability to pay arguments. I am uncomfortable with the ability to pay justification for much the same reason that I am uncomfortable with the notion of pure democracy (e.g. absent important guarantees for individual/civil rights). Using ability to pay as the basis for taxation seems to suggest that there need be no guarantee of the basic individual economic right that is expressed in the concept of individual property rights. Since from the perspective of behavioral considerations there may be long-run implications (distributional and in terms of overall welfare - via effects on productivity, for example) associated with entitlement-based frameworks versus those that emphasize or reward individual responsibility and initiative, it seems like it would make sense to find a justification of taxation that is consistent with the latter class of frameworks. While the modelling technology may not currently exist to adequately take into account this behavioral dimension, this doesn't mean that one can afford to ignore it altogether.

Any suggestions you might be able to provide regarding discussion of wealth-based tax or property-rights justifications would be sincerely appreciated. Sent via BlackBerry from T-Mobile

---------------------

-----Original Message-----

From: Professor Sir James Mirrlees

Date: 14 Nov 2007 07:56:49

To:loftin@tmo.blackberry.net


Cc:pdiamond@mit.edu


Subject: Re: Wealth taxation

Dear Mr Loftin,

I had been waiting until I got back to Hong Kong at the end of the week to remind myself how much the Meade Report discussed wealth taxation; but I

think you should do that yourself! The Netherlands and Sweden, at least, have wealth taxes, but I still don't know much about implementation or legislative details. Probably they exclude small-business and residential assets.No doubt you could find out more by suitable web searches.


At the theoretical, or optimal-tax level, it seems to me that an important issue is the source of an individual's wealth. Anyway, a convenient date at which to tax it is when it is received, and then one can work out the incentive issues relatively straightforwardly. But remember that the age when receiving it may be a relevant parameter.

I rather think it would be unwise to go far into this without someone local to supervise your research. It's too easy to make mistakes.

Yours,

Jim Mirrlees

---------------------

On Nov 15 2007, [utf-8] Loftin Graham wrote:

Mr. Mirrlees:




I hope this doesn't seem overbearing, but in reading back over your


response, I don't think you understood the main point of my idea. My idea is that individuals should face costs for government-provided services that are proportional to the benefits that they derive from them. Since wealthy individuals receive - in absolute dollar terms, for example -greater benefit from government in the form of a guarantee of their property rights, they should pay more (again, in absolute terms) than their less wealthy counterparts, and the amount of their tax liability should be proportional to their wealth. Since the benefit people receive in respect to the capital they own is received continuously in much the same way that insurance benefits are received continuously during periods of coverage (i.e. NOT just at the point in time that they first come to own the capital), the tax should not be on income but rather on wealth! Theoretically the correct way to assess such a tax would be either require continuous payment of a fixed proportion of wealth or to integrate the product of instantaneous wealth times the rate for the year - accumulating with some interest rate - and charge this amount at the end of the year. The idea though is that the general economic benefit received is the guarantee of property rights and that benefit has some similarities with insurance coverage. The corresponding tax liability should be dealt with accordingly. Hopefully that makes a little more sense to you. Obviously, in real life some simplification would be necessary; but I don't guess that that would be much of a problem to work out.

Regards,

Loftin Graham

By the way, part of the reason that I wrote you and Mr. Diamond is that I

don't have much "local support" as you called it. I have upset some of the powers that be here at Wharton by pointing out what everyone here already knows: that there is a group of secular Jews here that have gained influence over the school and who use that influence in ways that are inconsisent with good scientific practice. In particular I believe that they give precedence to race over merit whenever they think they can get away with it - I mean they promote their own people to positions of influence and frustrate those who have differing viewpoints or who are unwilling to put up with their bullying. So, it looks like I'll be working on this project mostly alone unless my situation changes significantly somehow.

Sent via BlackBerry from T-Mobile

---------------------

-----Original Message-----

From: Professor Sir James Mirrlees


Date: 16 Nov 2007 12:39:33


To:loftin@tmo.blackberry.net


Subject: Re: Wealth taxation

Sorry, I don't think taxes are or should be payments for services rendered,so I had no sympathy for your general idea. Note that enforcement of

contracts applies to labour as well as capital and land.

Yours,

James Mirrlees

---------------------

-------- Original Message --------


Subject: Re: Wealth taxation


Date: Fri, 16 Nov 2007 14:42:15 +0000


From: Loftin Graham


Reply-To: loftin@tmo.blackberry.net


To: James Mirrlees


CC: Peter Diamond

Mr. Mirrlees:

Thanks for the clarifying response. Yes, I suppose that labor is also subject to contracts, with he implication that one's human capital would theoretically be a part of one's wealth, broadly defined. But that should only strengthen (from your stated point of view) the position of the argument I've provided because it demonstrates that wealth, defined broadly enough, is equivalent to the holy grail of tax bases: the so-called "ability to pay". The beautiful thing about this idea involving property rights (and I mentioned this to the professor here in my dept that has some tax background, without him catching the beauty of it apparently) is that one basically reaches the same policy result (using wealth rather than income as the base for taxes that fund general government expenditures) as an argument coming from polar opposite sides of the political spectrum - Ed Wolf, for example has justified a wealth tax on the basis of ability to pay rather than on that of benefits received. So, people that favor ability to pay justifications of tax bases should be content with my property rights reasoning because the policy implications are the same - the two sides appear to converge. This kind of an outcome (when the same conclusion follows from two independent lines of reasoning) is the kind of thing that most scientists get excited about, me included! Anyways, Mr. Diamond rightly pointed out that such a scheme has some practical difficulties in terms of implementation that would have to be overcome, but the general idea appears to be sound to me. And technology improvements may render concerns about valuing small business and other assets less and less serious - consider what telecommunications improvements have done through eBay and other online auction sites, for example. In addition, shifting the activities of the tax-services industry from being unproductive (I mean here in the organic sense that funding tax shelters and loopholes is not value-producing from the aggregate perspective) to being productive (valuation is a financially productive activity because information has value) would seem to be welfare improving. Anyways, these are some things to consider, no?

Take care,

Loftin Graham

By the way, viewing tax liabilities as inherently connected to benefits received does NOT mean (i.e. it is NOT necessitated by logic) that those paying greater taxes are justified in believing that they have greater claim on any SPECIFIC government service. Nor does it mean that they have any just basis for claiming greater political influence (though practically speaking this is nearly impossible to avoid, regardless of tax-system considerations). All it means is that wealthier individuals benefit (economically) more in absolute terms from the underlying framework that good government provides than do their less wealthy counterparts, so they should be willing to pay more. In particular, they should be willing to pay the same annual proportion of their wealth.

Sent via BlackBerry from T-Mobile

I would not be surprised if a number of socialist thinkers in France are now considering whether millionaires should be prohibitted from emigrating. I've read socialist works arguing such ideas.

The socialist answer: the entire world should have the same high taxes on the wealthy. The UN would be their ideal vehicle.

Until that utopian moment they will contend that the nations that tax less are at fault.

France GDP Per Capita, $29,900, unemployment 10%, GDP Real Growth 1.4%

US o A GDP Per Capita, $41,800, unemployment _5%, GDP Real Growth 3.5%

Yep. When the socialists came to power, one of the first thing they did was pass that tax law.

Within a few months, my father relocated us from Paris to Brussels, Belgium.

That ridiculous tax completely ruined my teenage years.

He should have stuck to philosophy....

"According to this gentleman, raising tax rates even to stratospheric levels does not affect taxpayers' behavior."

Did this clown ever work for a living?

My boss has just been hit by ISF (Impôt de Solidarité sur la Fortune). Some Fortune !! It kicks in for those worth more than €750,000 (750.000 * 1.25 = $937,000).

When we saw a tax advisor, he said that the big fortunes have already cleared out and it is now the second-liners that are getting hit....those whose "Fortune" starts at less than $1 million.


It is only in ultra-liberal Anglo-saxon countries (and above all the USA) where one whinges at such magnificent solidarity betwixt rich and poor. Vive la France !!

I asked one of my professors once if taxing people to support a welfare state slows the economic growth needed to keep the welfare state going. Her response: "Economists say that, but it's not really true."

How could you not quote this one as well?:

France's opposition Socialist Party leader Francois Hollande said recently that his party's -- and his country's -- opposition to proposals to lower high-income taxes has nothing to do with disdain for the wealthy. "I don't have anything against rich people, as such," Hollande said in a recent political debate. "They have the right to be rich. But I can't accept that the richest can have their taxes lowered."