One of the reasons a large concentration of wealth at the top is bad for our economy is that people who tend to accumulate wealth tend to save more as well. Ever see a Porche or Land Rover parked outside of a Wal-Mart? Ever hear the saying, "The rich don't get richer by spending money". This means there is less cash flowing through the economy and through the hands of others; for example: the wealthy buy a car, manufacturer pays wages and earns a profit, hires more people, those people have more income and are able to consume more; repeat cycle.
Increasing the top marginal tax rate (aka tax the rich) almost seems impossible these days. I mean, our government can't even agree on taxing private jets! Unless I'm missing something, I don't understand why this isn't/hasn't been happening. So, whats another way we could tax the rich in a "fair" way?
Let me introduce the idea of a Savings Tax. This would deter the wealthy from sitting on hordes of cash and give them incentive to spend, spend, spend. This tax may not be appropriate for all economic conditions, but in a time when there is a lack of demand to jump start the economy, it could get our wealthy friends off the couch and into the shopping malls.
The message would sound like this, "The economy lacks demand, we need those who are in sound financial positions to help the economy out by spending some of your wealth. If you decide not to, we will spend your money for you." Obviously, the tax would have to take into account current individual liabilities to decide who has the excess wealth to spend. Also, there would have to be exemptions for things like retirement and college funds (because that just makes sense). I realize there would be "record keeping" challenges but I refuse to believe, that in this day and age with all the technology we have, that these challenges could not be over come.
One more note on the Savings Tax; we also hear about how corporations are setting record profits and are sitting on piles of cash. We have public records of the financial well being of businesses, so perhaps the Savings Tax would be better suited as a business taxes. As a matter of fact, the Savings Tax could help to cure our unemployment problem. Maybe I'm on to something...
I'd love to hear some of your thoughts on this.
Yak, wouldn't a savings tax just encourage people to invest their money in real estate, stocks, and other areas, which they already do? I doubt very much that the problem at hand is that the top 1% are all keeping Scrooge McDuck rooms of gold coins to dive into when they're feeling sad.
ReplyDeleteWe have a universal savings tax, it's called inflation.
ReplyDeleteTaxing savings would also cause massive distortion between taxable and non-taxable assets. It could cause a stock and bond crash and property boom, and capital flight overseas. With the wealthy less willing to save, the government would have to pay higher interest rates to sell bonds.
Casey:
ReplyDeleteThat is kind of the point. People are still skiddish about the markets for numerous reasons.
The real estate market is swamped right now, we need to absorb the excess supply.
Companies obtain capital from stocks, which they need to invest in things like machinery, plants, and workers.
Promethean_spark:
You are right about inflation, however; inflation is not doing much right now, so savings are safe from inflation. That is where the problem occurs, too much capital sitting idle when we have an economy that needs it.
I would almost agree with you about the "distortion between taxable and non taxable assets" but I cannot simply because the only non-taxable assets I can think of are government issued bonds...they could use some extra cash these days too (they'll use it to lower taxes, boost public services, etc.). If you were referring to items, then I would say you still don't have to worry about distortion because non-taxable items are basically food and medical expenses like drugs.
As for property, stock, and bonds; I would stress that this would only be a temporary tax to help inject capital into the markets, when the excess supply of property has evaporated, companies start investing (machines, workers), and bonds return to a steady state of profitability, then the market will be back up and running and you can sunset the tax.
Capital flight could be a concern, but wouldn't the government notice capital flying out of bank accounts to off shore destinations? In any case, it would probably depend on the Savings Tax rate imposed.
Government would only need to pay higher interest rates if there was a lack of demand for their bonds, they would essentially be competing with other assets on the market that are yielding a higher return.
By the way, I've been thinking about this most the day and I think that a Savings Tax would be more appropriate to apply as a business tax. It would without a doubt help lower unemployment and it would very difficult for business capital to take flight.
One last note on the temporary tax point; we are dealing with a extraordinary crisis which requires an extraordinary response. You wouldn't carry on with a tax implemented during an extraordinary time, so its important that it sunset when things return to normal or yes, we will have more problems.
This luxury tax is really going to hurt my hotels on Boardwalk, Yak.
ReplyDeleteInteresting proposal.
ReplyDeleteHowever, it would be important to start taxing savings at the right level. Savings should be encouraged; if the current euro crisis and sub prime mortgage saga has taught us anything, it is that spending beyond one's means is disastrous.
Savings allow many people to accumulate their wealth in order to make big-ticket purchases such as cars and houses. If we deter savings for the middle-class, we will inevitably be squeezing the them: they would still desire big-ticket items such as cars and houses but would find it difficult to fund such dreams.
In a sense, the interest rates set by the fed is a form of a tax on savings - especially when you consider inflation as well: low rates discourage savings and encourage consumption (at least in theory). As I alluded to earlier, this very much contributed to the sub prime mortgage crisis.
But your last point, focusing the savings tax on firms, is very interesting, hopefully pressing businesses into employing more people than simple putting their cash under a mattress somewhere.
Overall, however, I don't believe a saving tax could be implemented. Your goal is to encourage investment in the real economy through capital spending on new technology, employing more workers or increasing researching and development funding.
But then we arrive at the difficulty of actually getting firms to do that. How would we define savings - just money in a bank? For there are many different ways to save: in gold and other metals, in financial investments or simply directing the firms' cash sums to foreign banks.
Another perspective on the savings tax is to draw parallels with the euro crisis and confidence in a currency. As Europe finds itself deeper in the quagmire, the value of firms' euros depreciate - a kind of tax in a sense. Some commentators are suggesting that as the euro crisis worsens (i.e. the tax on savings increases), big firms may convert their cash into gold and other instruments. This would very much trigger the credit squeeze and subsequent contraction which European policy makers must avoid.
This, in my opinion, would be the eventual outcome of a savings tax on companies.
Shane, remember, the savings tax would be an alternative to a millionaire tax.
ReplyDeleteThe trade-off, millionaires get to choose what they want to do with their money instead of the government taking the money and spending it themselves. It is also no secret that the government is not the best at spending money efficiently so let the private sector do what they are suppose to do and invest. The government does need to step in and spend when the private sector is not, that is why a savings tax would give investors incentive to spend or else the government will do the spending for you.
Referring to interest rates, the rates are at historic lows and people are not spending, this is because most of the population's wealth was wiped away when they lost their homes, jobs, and retirements (stock market crash). So again, the savings tax would force private investors to pick up the slack.
Implementing the tax would be tricky and probably costly, but I do believe that the tax would be implementable as a business tax. Companies who are traded public, which are the large companies that have money, have public records, so it would be easier to tax what is on their balance sheets. But again, what do you tax? Since the goal is to create jobs, I would say capital that is not creating jobs should be taxed.
The Savings Tax would be an alternative to the millionaire tax, I think millionaires would prefer the savings tax over the millionaires tax because it gives them the option of what to do with their money. Again, the "business as usual" approach that we have in this country is not working, we need creative, new, and fair ways of getting things done.