12 Apr 2016

Death, taxes and the one percent

The Panama papers "scandal" has surprised people who thought that the rich and powerful declare their assets and pay their taxes like the rest of us.

For others, the scandal is not the existence of so many offshore "tax-efficient" entities but the lack of shame, reaction or explanation from those named (so far) in the leaks.

A few years ago, I read a chapter on "tax avoision" that Arthur Seldon wrote in 1979. In that chapter he merges (legal) tax avoidance and (illegal) tax evasion into one concept that captures the "grey area" where citizens are not exactly breaking the law but also not following it.[1]

Although death and taxes are often described as inevitable, it's much easier to change the amount of tax you pay than change the amount of death you incur, so people put a lot of time into tax avoision.

How much time depends on how much effort you need to go through to save a dollar (or million dollars). Thus, it's uncommon for people to do very much about avoiding sales taxes when buying clothes or groceries or try to avoid income taxes when they work for a tax-paying company. In the first instance, it's not worth the effort to buy milk on the black market. In the second, it's not easy when the company tells authorities about payments to you (business expense deductions to them).

The cost-benefit criteria change when there's a lot of money involved for people who are self-employed or who have lots of income generating assets, e.g., drug dealers and trustafarians real estate developers and investment bankers. For these people, it is easier to hide income and wealth, and one of the most common ways to do this is by transferring money among various offshore (and onshore!) tax "structures" like those mentioned in the Panama Papers.[2]

So now we have the weapon and the motivation. What remains is a trial by a jury of peers to determine whether the people named in the leaks are actually guilty. Although Tyler Cowen argues that these people may deserve "privacy" in the same way as we deserve privacy from the NSA and its various national cousins, I side with the leakers in thinking that few of those named would have been caught via normal means. Even worse, to me, are the chances that those named will be found guilty of anything. I predict that some will resign in shame while most will deny and stonewall until their friends in power (their peers) can safely drop the matter.[3]

That said, I have a small hope that these discussions may lead people to ask deeper questions about the efficiency of income taxation that discourages work, confuses normal people, and misses the rich and criminal. Wouldn't it be better, for example, to replace income taxes with taxes on real property?[4]

A few years ago, I wrote out my ideas on just such a proposal, but here are the quick highlights:
  • It's easy to assess and hard to dodge with a property register and auction-for-nonpayment, respectively
  • It's fair and accurate when it's based on some combination of purchase price and current market value (via sales of similar properties)
  • It's pro-privacy, since nobody cares who owns the property as long as taxes are paid
  • It's fair to renters who split tax costs (like other property expenses) with owners
  • It's progressive because it raises more money from rich people living, working and shopping in expensive locations
Bottom Line Property taxes are low in most countries because wealthy people want to shift tax burdens onto wage workers. If you want to tax the one percent (they own half the world's wealth), then tax property.

  1. The Dutch love Kings Day for many reasons. One is the entire lack of taxes on goods and services citizens sell that day. In California, I know that the state asks citizens to pay "use" taxes based on their (self-reported) purchases from outside California (including souvenirs brought in foreign countries!)
  2. Don't forget that the US and UK are world leaders in providing legal ways to hide one's wealth or that one man's change of address can destabilize a state's finances!
  3. Those that do not will be offered bribes and perhaps just eliminated if they carry on.
  4. California's property taxes are distorted by Prop 13, but they need only increase from (roughly) 1 to 3 percent of a property's value per year to provide enough revenue to replace corporate, income and sales taxes. The only losers I'd see from this change are tax lawyers and shopping center developers who play with loopholes and lobby for subsidies from property tax-starved cities, respectively. A rough estimate is that the property tax bill on a $500k house would go from $6,500 to $19,500/year. Yes, that's a lot of money, but not nearly as much as is spent, wasted and lost in the current system. (The Federal Tax code, btw, is over 70,000 pages long.) Even more, the burden on the middle class would drop if property taxes were levied on all property (including that of "non-profits" such as churches).