What if we taxed net worth instead of our current system?

[W_HAMILTON]

Let me first start by saying that I don't want to get eviscerated here. I am not proposing this. I post this because I am sure there are holes in it that I am not recognizing, which is why I post it for others to see.

What if, instead of a progressive tax rate on taxable transactions (earning income, dividends, interest, etc), we have a progressive tax on net worth instead? The reason why we have economic downturns is that our companies pull back, which cause our citizens to pull back, which causes our tax revenues to drop, which means services are cut. It results inevitable tax cuts that encourage private spending and investment.

But what if we removed the taxes from all transactions, and instead taxed "held" wealth? You would initially set the bar relatively high (1m? 2m? 3m?) so that you aren't taxing individual savings/retirement accounts, or exempt accounts like these completely (with a specific cap, of course). But beyond that, you impose a progressive tax on accumulated wealth.

What do you all think? And please don't jump down my throat, like I've seen happen when others propose something different. I'm not advocating this, it's just something I thought up, and was trying to figure out the potential downsides.

[sharesunited]

1. This would be a property tax on all real and personal property including cash and receivables.

This already exists in some ways, though it is an ad valorem tax and not a progressive one.

If you are not engaged in any transactions to augment your wealth, your net worth is whittled away over time just by your passively doing nothing.

[ParkieDem]

2. It's an idea that's been proposed before.

However, there are several problems. First, you'd have to exempt a chunk of specific items -- not only amounts, but homesteads, retirement accounts, certain personal property, etc. Second, you have a valuation problem. While publicly-traded securities and, to a lesser extent, real estate are somewhat easy to value, other property is not. The compliance/collection costs would be relatively high.

The biggest problem I see is that you'd be basically taxing "paper money." Let's say you tax a guy who's net worth is $2 million. He takes a hit in the stock market the next year, and his net worth is $750,000. Is it fair that the government got taxes on the exact same assets that were worth $2 million rather than $750,000 (note: this already happens with property taxes).

Another problem is that you'd be creating an incentive to minimize "net worth," and people would start hiding assets like crazy. Because a great deal of bank lending is collateralized or based on net worth numbers, this could potentially gum up the system.

The biggest problem, though, is that people would perceive it as the government being able to "whittle you down" with taxes. Let's say you had an estate worth $3 million, but due to a conservative investment strategy, it did not grow but stayed steady in value. It would end up being less and less, all due to taxation.

[phantom power]

3. I, for one, have proposed it myself...

I think the biggest "hole" is logistical: If you happen to have a large net worth that is not liquid, what do you liquidate to pay taxes?

In the big picture, I don't think it's that terrible a problem. We already do this with property taxes. I think if you made it a progressive net-worth tax, and put the floor at something like $5 million, then anybody wealthy enough to worry about it could make it work.

[FarCenter]

4. We already have this, the govt prints more money, and we have inflation

Besides, you want to encourage people to save and invest for children's education, retirement, etc, so it would have to be low for small amounts of assets and get progressively higher as assets grow. Except that you may also want to have an age factor, where assets are taxed less as you get older and have more saved for retirement.