“This Wealth Tax Won’t Work”

Yves here. I have from time to time made myself unpopular with readers by not being on board with a wealth tax. Murphy makes many of the same points I have in his dissection of a proposal from the Tax Justice Network. A biggie is the difficulty of valuing illiquid assets, and rich people often have quite a lot: private companies, real estate with no ready comparables, art…

A second is that a wealth tax is much more costly to administer than an estate tax at much higher rates. But even there, when private assets are distributed to heirs or charities, the valuation of private assets again comes into play. The IRS has lost every case where it disputed a large estate valuation since 1991.

So given the givens, higher taxes on incomes and capital gains from selling financial assets would be, erm, less unrealistic. Another that would be operationally easy to assess is a transaction tax. This would have the added bennie of making high volume trading less attractive. Third would be an exit tax on Americans with incomes over a certain level who look to be giving up their citizenship to escape global taxation,

By Richard Murphy, Emeritus Professor of Accounting Practice at Sheffield University Management School and a director of Tax Research LLP. Originally published at Funding the Future

The Global Justice Report from the World Inequality Database promises a great deal: climate stability, global income security, and justice through global wealth taxation.

It suggests that the world could dramatically reduce inequality, raise living standards, and remain within environmental limits, all through a coordinated system of global taxes on wealth and income. That sounds attractive. It sounds ambitious. It sounds hopeful. But there is a major problem. The proposal assumes away the practical, political, legal and administrative obstacles that make its plan unworkable.

In this video, I explain why a global annual wealth tax is not a realistic route to tax justice. The report assumes unprecedented worldwide cooperation between governments that often cannot agree on far simpler issues. It ignores the continuing existence of tax havens, overlooks the realities of tax competition, and pays little attention to the political power that wealth already exercises over many governments and institutions.

The proposal also assumes that wealth can be easily identified, valued and taxed. In reality, wealth is often hidden behind trusts, companies and complex ownership structures that stretch across multiple jurisdictions. Even when wealth can be identified, establishing a fair value for it is frequently difficult, contentious and expensive. The report ignores these practical challenges.

Most importantly, it fails to deal with the most basic issue of all: wealth is not the same as cash. Owning an asset does not necessarily provide the income needed to pay a tax charge based upon that asset’s value. Homes, private businesses, works of art and many other forms of wealth may have significant paper values while generating little or no cash flow. That creates a fundamental problem that the report does not adequately address.

Tax justice matters. Wealth inequality matters. The power of the wealthy matters. But reform has to be deliverable. A tax that cannot be assessed, collected or paid is not a solution. It is make-believe economics.

In this video, I explain why the Global Justice Report misunderstands the realities of taxation, valuation and wealth ownership, why its proposed wealth tax would struggle to work in practice, and why there are more realistic ways to increase tax revenues from those with the greatest ability to pay.

If we want genuine tax justice, we need proposals that confront reality, not ones that assume inconvenient facts away.

This is the audio version:

The Debate Ammunition for this video is available here.

This is the transcript:

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There’s a new report out that is promising to solve the world’s problems. It comes from the World Inequality Database, and it is called the Global Justice Report. It promises that we can live within climate constraints and only warm the planet by 1.8 degrees by 2100. It says that everybody in the world can have an income of £5,000 a month, and it says all of this can be achieved by wealth taxation.

The report has been written by Thomas Piketty, Gabriel Zucman, and a pile of other colleagues of theirs, and there is just one problem with it. If it sounds fantastic, that’s because it is fantastic. What I literally mean, it is quite literally fantastic because it is based upon assumptions that bear little or no relationship to reality.

The report assumes away all the major obstacles to progress that are preventing these things happening. It ignores practical constraints. It ignores political realities. It doesn’t show any understanding of the true nature of tax, let alone money. And I need to explain all of this because a lot of people are going to think that this report is the answer to all their prayers. And I have to tell you, much as I’d like to say otherwise, it isn’t. This report is deeply misleading, and you need to know that now.

The first assumption that this report makes is that there can be a global wealth tax and there can be a global income tax. It assumes that we can create cooperation between every country on the planet to achieve these goals. These taxes would be imposed everywhere and on top of local taxes. And this is simply absurd.

We are not going to get that scale of cooperation across the world. No country is assumed to opt out, and that, of course, is wholly unrealistic. This is a quite remarkable assumption that is grossly naive. There are around 70 tax havens in the world already, and no country is going to give up a large part of its tax sovereignty to a world tax authority to achieve the outcomes we’re talking about here. I’m sorry, it’s just not going to happen.

You cannot ignore political economy when you’re writing a report on political economy.

You can’t ignore the existence of tax havens.

You can’t ignore tax competition because it happens.

You can’t ignore the existence of tax advisors and all that they are doing to undermine the world’s tax systems, because they will keep on doing it.

You can’t ignore the fact that many states are being captured by the wealthy in their interests and operate for their advantage, and that does include all the world’s tax havens, but others besides, including the UK.

None of these things can simply be assumed away, but that is what this report does.

The second key assumption that the authors make is that they can create a global wealth fund funded by a global wealth tax. Now, I just don’t believe them. I have major reservations about wealth taxes, and the one that they propose is utterly implausible. They’re proposing an annual wealth tax. And the cost of administering an annual wealth tax would be so great and so impossible to do that it would never work. But let’s leave that little technical problem aside at the moment, and instead look at the rates that they propose.

They say that this wealth tax would not apply to anybody who has wealth of less than $1 million. Well, there’s a lot of people in the UK who are going to be paying a lot of tax on the value of their properties in that case. And that is not going to be popular on top of existing UK taxes. So let’s just put that into the scenario now.

They then say that for people between $1 million worth of wealth and $10 million worth of wealth, the tax rate would be 2%.

On top of that, they would then say, the people with wealth between $10 million and $100 million would be taxed at 3% a year on that wealth. Wealth above $100 million will be taxed at much higher rates, and wealth above $1 billion would face a 20% annual charge. Figures are on the screen, and that’s the proposal that is at the very core of this report on global justice.

Now, I’m not saying that wealth inequality isn’t a problem. Don’t get me wrong. I’m not saying that wealth is not a problem. Don’t get me wrong. The power that wealth gives rise to is a problem in our world. But there are major problems with the assumptions behind this supposed wealth tax.

The reports’ authors assume that the ownership of wealth is identifiable.

They assume that the location of wealth is identifiable.

They assume that the legal claims against wealth that would ensure that a tax could be paid are always enforceable.

And critically, they assume that the valuation of wealth is easy, and it just is not.

None of these assumptions is in any way credible.

What is more, the report misunderstands the ownership of wealth.

Much wealth sits behind multiple ownership layers, and it’s not at all clear how they’re going to unravel those and how they are going to impose their taxes. Wealthy people create trusts. Trusts own companies. Companies own other companies. We are already seeing that these will be split across many jurisdictions. And the consequence is that these tiers of ownership can be difficult to establish and then tax.

And where in the tier is tax charged, particularly if it’s unclear who has any benefit from any aspect of this wealth? And it’s entirely possible to create structures that do not appear to have owners. That is one of the major problems in world wealth. And the authors assume that problem away.

This means that there is no answer within their report as to how they’re actually going to collect the money that is owed or how they’re going to solve the problem of multiple taxation of one source of wealth. These practical details appear to me to not be addressed in these reports.

And at the same time, the report also seems to fundamentally misunderstand the valuation of wealth. The fact is, the valuation of wealth is deeply subjective. How much is a work of art worth? How much somebody will pay for it. If it hasn’t been put up for sale for over a century, how much do we know it’s worth? We don’t.

How much do we think the silver teaspoons in a very wealthy house might be worth? We don’t know. Are they worth just the value of the silver, or are they worth the design that’s inherent within them? Does that change the valuation? We don’t know.

All these questions would have to be solved year in and year out for the world’s wealthy. And the world’s wealthy will include almost everybody who owns a property in London. Let’s be clear, we are not talking about something which is merely incidental here. We are talking about very large numbers of people in the UK who do have wealth of this order. Maybe 15% of the UK population could be affected by this tax. And it’s not going to work because we don’t have the resources to manage the wealth and agree the valuation of wealth for 15% of the UK population year in, year out, even if much of it will be based upon the value of their homes, and you could say, we could do that via Zoopla or Rightmove or whatever else. That isn’t a sufficient basis for taxation.

These things are assumed, and valuation and taxation are, anyway, not independent. The moment you know you’ve got a property worth $2 million, according to this report, which would be, let’s call it roughly $1.5 million, which isn’t extraordinary in London right now, but you now know you’re going to pay 2% additional taxes as result on that property, do you think the property is now worth £1.5 million or might it be worth less?

The tax charge changes the value of the property that is going to be subject to tax when we come to wealth taxation, but the report assumes otherwise. In that respect, it’s very naive.

But the biggest and third problem that this report does not address is the fact that having wealth does not provide the capacity to pay tax. Tax justice depends on ability to pay. I know a lot about tax justice. I co-created the Tax Justice Network. I’m not in it now because, like most of the world tax justice movement, it’s driven by fantasists these days. People who do not understand tax, who do not understand how it works, who do not understand how money works and do not understand how wealth taxes work.

But tax justice does always depend upon the ability to pay tax, and wealth does not provide evidence of ability to pay tax. Having wealth is not the same as sitting on a pile of cash.

Many assets generate remarkably little current liquidity; houses are one obvious example of that. Just because you own your own home does not mean you get an income stream to pay tax based upon it. And let’s be clear, if we are talking about a property worth £1.5 million in London and we’re going to pay 2% tax on it, my very quick mental maths tells me you’ve got to find £30,000 a year to pay that tax bill. Where’s it going to come from?

Most especially when it is said by this report that global income tax rates will reach levels of 90%. How is this money going to be found? The authors do not answer that question.

Nor do they address the fact that the fantastic valuations of wealth that we see for billionaires are usually based upon something completely different. They are based upon the valuation of future profits based upon accounting that brings into the present point of time the valuation of those future profit streams in a way that gives them a current value, even though there is no cash generated at the present point in time as a result.

Elon Musk provides us with an obvious example of this. Right now, he’s floating the SpaceX company that he owns. He owns 95% of that company. 5% of the shares are going to be sold on a stock exchange. His wealth could easily exceed $1.5 trillion as a result of this valuation. On the basis of that, a 20% wealth tax could exceed £300 billion.

But first of all, SpaceX does not generate cash on that scale at present. It can’t, it has not got that level of revenue as yet. It could not provide him with the money to pay this tax. As a result, a tax at this rate is clearly unrealistic.

And secondly, that valuation of £1.5 trillion is based upon the valuation of 5% of the company. But Musk owns 95% of the company, and 95% of the company is always worth, in pro rata terms, vastly more than 5% of the company. It therefore follows that Musk’s valuation is not £1.5 trillion; it’s something bigger. But how much bigger? How long is a piece of string? That is the question that needs to be answered. And we don’t know. This would be entirely based upon negotiation, and the authors assume away all the costs of doing those negotiations all the time because this is an annual tax.

And let’s be clear, going back to this point about future expectations, all major companies are valued on the basis of the expectation of their future profits. This is why we apply to them something called a price-earnings ratio. The earnings of a company are the earnings or profits after tax, and we establish the value in proportion to their earnings after tax. And the ratios at present are commonly around 20, but some are as high as 100 and in the AI tech companies, they are astronomical.

The point is, these companies are being valued at vastly more than their current levels of profitability. In fact, the average company is valued at least 20 times its profit after tax. And yet we’re asking the owners of this company, if it’s privately owned or majority owned, to pay 20% of the company’s value. That is going to be, if the company is valued at 20 times annual profits, a figure which is at least 4 times the current profitability of the company. The company cannot make enough cash in any circumstance to settle this tax liability; it is a technical impossibility. And this is something that yet again, the authors dismiss.

And they say there are ways around paying tax in these situations. They say that the wealth could be sold, the shares in a company could be sold, but who’s going to buy it because they’re going to be subject to a wealth tax the moment they buy this company, if they genuinely own it outright as the vendor does. And the fact is that in that case, they are also not going to be paying anything like the current values because acquiring this company will open them to a tax liability of four times, at least, the level of its current earnings. That makes no sense at all.

Then the authors say that instead of paying the tax by selling the shares, they could instead use those shares as the collateral, as the asset used to secure borrowing, to ensure that they could pay the tax.

But again, this is a ridiculous claim. That’s true if you’re buying another income-generating asset. But of course, the borrowing here is to pay a tax bill; that is not income-generating. And at the same time, if the company cannot generate sufficient income to pay a tax bill of four times its current level of profit, or more, no lender is going to provide a loan on the basis of the security of the shares in that company to allow tax to be paid because they will know that it will be impossible for the company to service that debt. It just cannot work. And as a result, borrowing to pay this tax bill is an absolute technical impossibility.

The last option is that the payment could be deferred. And this is commonplace when wealth taxes are talked about with regard to, for example, domestic homes. They could work in that situation, but it’s a small and niche solution. And the reality is that each of these solutions creates its own new problems, not least of which is the fact that sometimes no cash will be paid at all, which somewhat undermines the value of this supposed global wealth fund and the tax revenues it’s apparently going to enjoy.

The reality is, and this is what the authors refuse to recognise, is that forced sales of assets will always undermine valuations. And annual sales would depress prices and valuations, and so tax liabilities would be reduced to reflect the fact that tax is being claimed. Valuations would, in that case, become unstable. This tax will become completely unworkable and even unverifiable as a result.

This proposal actually undermines its own tax base in that case, but perhaps that’s deliberate. Perhaps that’s what these proponents want. They don’t want a viable tax; they want the value of world wealth to collapse, and that’s fine. But in that case, the people who’ve written this report should be saying so.

That’s my problem with what they’re doing. They aren’t being explicit about the fact that what they are actually asking for is the effective expropriation of assets, because cash payments in very many cases of wealth tax of this order will simply be impossible.

So talk about the fact that you are talking about effective nationalisation. Say that is what this is about. Say that tax will be paid by transferring ownership of shares, properties, and other assets into this wealth fund. Be explicit if you wish, but don’t pretend that tax is the mechanism to do that, because it isn’t, and this is not tax justice. This is about wealth reorganisation, and tax is not the suitable mechanism to supply it.

And in any case, this report also contains a major contradiction. Its authors do not understand the role of tax in the world economy. It’s as if they’ve never heard of modern monetary theory. They think that tax funds spending and that assumption is fundamentally wrong. And it’s completely absurd in the context of the report that they have written because they actually suggest the creation of a new currency for the Sovereign Wealth Fund that they are creating.

If they believe they can create new currencies, they must understand that governments can spend without taxation. But there is no implication of that running through this report at all. Everything is dependent upon tax being paid, and as I’ve just shown, tax is not going to be paid on the basis that they are suggesting because it is technically impossible for that to happen, because their tax literally destroys itself. And in that case, we have a report that is technically flawed at the conceptual level as well.

So let me stand back for a moment. I’ve criticised everything that this report is doing, and that’s because I don’t believe it will work. And I don’t like ideas that won’t work. And I don’t like people being misled by ideas that I don’t think will work.

I have written ways to raise the amount of tax that we can raise from people with significant income and wealth. I wrote the Taxing Wealth Report precisely to look at what we can really do, and I suggested, using the UK as an example, that I could raise significantly more revenue in this country by changing the existing tax system than I ever could by taxing wealth.

We could raise income taxes. We could raise capital gains taxes. We could increase and reform inheritance taxes. We could make National Insurance fair. We could charge companies more tax, and we could collect the tax that they actually owe, when vast quantities goes missing at present. We could tax banks more.

All of these approaches are possible. They would have to be used judiciously. You might not want to do them all at once, because that might create problems. But the point is, all of these could, in some combination, and without using them all, raise substantially more revenue than a wealth tax could in the UK. And they do represent tax justice because every one of these measures recognises the capacity of a person to pay.

What is more, they will be much easier to administer than the proposals made in this wealth report because all the information to charge them does exist already in existing tax returns. That means that these are politically deliverable. What this wealth report, this Global Justice Report, claims is not based upon anything that is currently available.

So, I think this report is very wrong. Wrong in its assumptions. Wrong in its economics about tax and its role in society. And wrong about the administration of tax. And that’s because whilst the authors are skilled theoretical economists, and I’m not disputing that for a moment, and they are very good at constructing large data sets, and they use them very effectively, that is not the skill base required to design a tax system. And most of these people appear to have never worked in tax.

I have. I’ve done company valuations, I’ve done the sort of work I’m talking about. Their expertise does not match the task they’ve set themselves, and that’s apparent in what they’ve produced. What they produced is an undeliverable proposal because the authors appear to miss crucial, practical realities.

They do not understand tax cooperation well enough.

They do not understand company valuation or the accounting behind it, of which there is no clue in the report.

They do not understand tax administration well enough.

And they ignore the problems of double taxation, particularly in complicated ownership chains.

They simply assume away these difficulties. They prove themselves to be economists. When they see a problem, they assume it doesn’t exist. That’s what theoretical economists do. But I live in the real world. We do have a serious problem that needs solving in the real world. We have a serious problem with inequality, with corporate power, and with the capture of our political economies by those with wealth. But those problems cannot be solved by assuming them away.

Real reform comes from confronting reality. A better world cannot be built on make-believe economics. We need to understand how the current world works. We need to understand how the transition from this current world to the one that we would prefer can happen. And hard realities of that process of transition have to be confronted directly.

This report does none of that hard work. That is why, unfortunately, I think it has remarkably little value. And please, I beg you, do not be misled by it. This is not a solution to any known problem, and do not trust any politician who says it is.

That’s what I think. What do you think? There’s a poll down below. Please let us have your comments. Please do like this video if you do, and I know some people won’t. And please share it because this discussion is important. And at the same time, if you want to support us to produce more videos like this, please do buy us a coffee. There’s a link down below.