Ken Rogoff Warns Wealth-Taxes Aren't Enough

Tyler Durden's picture

Over 2 years ago when we first discussed the fact that "muddle through" had failed, BCG noted that "there were only painful ways out of this mess." The most painful truth, they suggested, was that "the only way to resolve the massive debt load is through a global coordinated debt restructuring... which will have to be funded by the world's financial asset holders: the middle-and upper-class' who will have a ~30% one-time tax on all their assets to look forward to as the great mean reversion finally arrives and the world is set back on a viable path." However, given the delay (and worst progression), Ken Rogoff warns that temporary wealth taxes may well be a part of the answer for countries in fiscal trouble today, and the idea should be taken seriously; but they are no substitute for fundamental long-term reform to make tax systems simpler, fairer, and more efficient.

 

BCG's Original "Muddle Through has failed" discussion... which addresses the inevitable need for a wealth tax

BCG_Back_to_Mesopotamia_Sep_11[2]

 

And why that won't be enough...

On The Shortcomings Of A One-Time Wealth Tax,

Authored by Ken Rogoff, originally posted at Project Syndicate,

Should advanced countries implement wealth taxes as a means of stabilizing and reducing public debt over the medium term? The normally conservative International Monetary Fund has given the idea surprisingly emphatic support. The IMF calculates that a one-time 10% wealth levy, if introduced quickly and unexpectedly, could return many European countries to pre-crisis public debt/GDP ratios. It is an intriguing idea.

The moral case for a wealth tax is more compelling than usual today, with unemployment still at recession levels, and with deep economic inequality straining social norms. And, if it were really possible to ensure that the wealth levy would be temporary, such a tax would, in principle, be much less distortionary than imposing higher marginal tax rates on income. Unfortunately, while a wealth tax may be a sound way to help a country dig out of a deep fiscal pit, it is hardly a panacea.

For starters, the revenue gains from temporary wealth taxes can be very elusive. The economist Barry Eichengreen once explored the imposition of capital levies in the aftermath of World Wars I and II. He found that, owing to capital flight and political pressure for delay, the results were often disappointing.

Italy’s armada of Guardia di Finanza boats would hardly forestall a massive exodus of wealth if Italians see a sizable wealth tax coming. Over- and under-invoicing of trade, for example, is a time-tested way to spirit money out of a country. (For example, an exporter under-reports the price received for a foreign shipment, and keeps the extra cash hidden abroad.) And there would be a rush into jewelry and other hard-to-detect real assets.

The distortionary effects of a wealth levy would also be exacerbated by concerns that the “temporary” levy would not be a one-off tax. After all, most temporary taxes come for lunch and stay for dinner. Fears of future wealth taxes could discourage entrepreneurship and lower the saving rate.

In addition, the administrative difficulties of instituting a comprehensive wealth tax are formidable, raising questions about fairness. For example, it would be extremely difficult to place market values on the family-owned businesses that pervade Mediterranean countries.

Wealth taxes that target land and structures are arguably insulated from some of these concerns, and property taxes are relatively underused outside the Anglo-Saxon countries. In theory, taxing immobile assets is less distortionary, though taxes on structures obviously can discourage both maintenance and new construction.

So what else can eurozone governments do to raise revenue as their economies recover? Most economists favor finding ways to broaden the tax base – for example, by eliminating special deductions and privileges – in order to keep marginal tax rates low. Broadening the income-tax base is a central element of the highly regarded Simpson/Bowles proposals for tax reform in the United States.

In Europe, efficiency would be enhanced by a unified VAT rate, instead of creating distortions by charging different rates for different goods. In principle, low-income individuals and families could be compensated through lump-sum transfer programs.

Another idea is to try to raise more revenue from carbon permits or taxes. Raising funds by taxing negative externalities reduces distortions rather than creating them. Though such taxes are spectacularly unpopular – perhaps because individuals refuse to admit that the externalities they themselves create are significant – I regard them as an important direction for future policy (and I intend to suggest other ideas along these lines in future columns).

Unfortunately, advanced countries have implemented very little fundamental tax reform so far. Many governments are giving in to higher marginal tax rates rather than overhauling and simplifying the system.

In Europe, officials are also turning to stealth taxes, particularly financial repression, to resolve high public-debt overhangs. Through regulation and administrative directives, banks, insurance companies, and pension funds are being forced to hold much higher shares of government debt than they might voluntarily choose to do. But this approach is hardly progressive, as the final holders of pensions, insurance contracts, and bank deposits are typically the beleaguered middle class and the elderly.

There is also the unresolved question of how much the periphery countries really should be asked to pay on their debilitating debt burdens, whatever the tax instrument. Although the IMF seems particularly enthusiastic about using wealth taxes to resolve debt overhangs in Spain and Italy, some burden sharing with the north seems reasonable. As the economists Maurice Obstfeld and Galina Hale recently noted, German and French banks earned large profits intermediating flows between Asian savers and Europe’s periphery. Unfortunately, arguing over burden sharing creates more scope for delay, potentially undermining the efficacy of any wealth tax that might finally be instituted.

Still, the IMF is right – on grounds of both fairness and efficiency – to raise the idea of temporary wealth taxes in advanced countries to relieve fiscal distress. However, the revenues will almost certainly be lower, and the costs higher, than calculations used to promote them would imply. Temporary wealth taxes may well be a part of the answer for countries in fiscal trouble today, and the idea should be taken seriously. But they are no substitute for fundamental long-term reform to make tax systems simpler, fairer, and more efficient.

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gibbs's picture

I'll give you three guesses where you can put your wealth tax idea(s)......

Newfie's picture

first two guesses don't count

unununium's picture

Only inflation can impose a tax that broad based.  All holders of fiat-denominated instruments will suffer.

CH1's picture

The thieving comes first, the justifications second.

RafterManFMJ's picture

All Fiat devalues against gold, by agreement, over a long weekend... GOT GOLD, BITCHEZ?!

Fredo Corleone's picture

In which Cayman Islands financial institution does Rogoff have his millions secreted ?

LetThemEatRand's picture

Exactly.  If they did a one time 30% tax on the world's billionaires -- most of whom are responsible for this mess --  it would not affect their lifestyles one bit, and it would have the same effect as taking a substantial chunk from the "middle and upper-middle" classes which would affect them substantially.  Tax the King of Saudi Arabia and the Kings and Queens all over the world.  And the Rothschilds etc.  But of course that would be wrong.   They get to keep theirs while they tell us we must part with ours to save their system.

kaiserhoff's picture

Temporary tax is both a damned lie,

  and an oxymoron.

LetThemEatRand's picture

I'd go along with a permanent tax on the Kings, Queens and oligarchs who inherited their wealth from their ancestors who stole it.  

Manthong's picture

WTF.

I thought his time it would be different..

.but I guess it’s just the same old sh*t.

Honey Badger's picture

The problem with a wealth tax is the wealthy will find a way to not pay it.

stacking12321's picture

i support the wealthy, as well as the poor, not paying any taxes.

the last thing i need is for the psychopaths in washington to get more money to start more wars, to spy more on our citizens, to harass and intimidate journalists and whistleblowers, etc.

 

seek's picture

And of course the 30% one time tax on anyone does zero to fix the problem. It may make the books balance now, but without spending = revenue, the problem persists. And as long as the problem persists, no one with wealth will trust a government again in their lifetime.

The only people the one-time tax helps is those that are holding debt that would otherwise default. And guess who that might be?

Let the fuckers keep their system, and let us move on to something new.

LetThemEatRand's picture

There will be no new system for the rest of us unless we take the fuckers' money back that they stole.  They are the system and the system will remain so long as they control our money.

And if the fuckers weren't skimming from the top (Fed, MIC, etc), we would have a functioning society and no account deficits.

bobert727's picture

30% wealth tax on billionaires will do nothing to help the debt in the US.
There are approx. 412 billionaires in the US. Lets say that instead of a 30% tax we just take everything they have. Take Gates, Buffet, Ellison, Waltons, and the other 400+ billionaires down to a net worth of ZERO.

Guess how much you would end up with?

About $1.3 trillion or about what the US Federal Government will OVERSPEND this year.

That still leaves the $17+ trillion debt load alive and growing

LetThemEatRand's picture

I'm not talking about those guys.  I'm talking about the Rothschilds and the Kings and Queens and princesses all throughout the world.  How much do they have?  You don't know, do you.  And they aren't on the Forbes list for a reason.  And they sure as hell didn't earn it, nor did their great, great grandparents.  They stole it.

EARLPEARL's picture

if you took all the money from all the billionaires it would not make  a dent.....do the math....takes one thousand billion to make a trillion...all the billionaires together would barely make 1 trillion...

Poor Grogman's picture

Taxes are one of the best control mechanisms that the fiat system has.

Even by simply talking about more taxes the PTB can cause panic among the sheeple and change society's behaviour, in significant ways.

It will never occur to most, that taxes themselves are not really even needed. Your friendly central Bankers could conjure all the tax money needed, into existence with a couple of mouse clicks.

Why don't they do this, you ask?

They don't do it because people may just choose to stop using the currency thus created. The government forces you, by threat of penalty, to pay tax. Therefore you must get your hands on some FRNs or face jail. This means that even if you don't need FRNs to pay back borrowed debt, you are still forced to acquire them by trading your labor in order to pay your taxes.

If there were no taxes and you had no debt, you may conceivably (using human ingenuity) be able to live outside the monetary system using a combination of barter networks and non fiat money (NFM).

If a group were able to do this successfully, then state controlled fiat money might be toast.

Wouldn't it be good!

Oh I forgot to mention. Tax the Fed ....its for the children!

Escapeclaws's picture

There's probably at least $20 trillion sitting in offshore tax havens. That and real tangible assets is where "they" stash their "earnings". For instance, Ted Turner owns a big chunk of Tierra del Fuego.

Better than a wealth tax, which only hits people alreadiy drowning in tax and is manifestly unfair--consider that you could very well be forced to pay on the present value of any retirement funds you have, you call this anything other than confiscation?

Better than TPTB fiinding "solutions" for us (they always have our best interests at heart), consider that a 1% WALL ST FINANCIAL TRANSACTIONS TAX could easily raise the triions called for without putting us useless eaters in harms way. "Communism for the little guy" seems to be the Rogoff/TPTB mantra.

Here's a little secret I will let you in on: Randy Credico, the hidden-by-the-media candidate is on the New York ballot for mayor. Bring your magnifying glass and you will see his name near the bottom of the list, probably scrunched in between two candidates with Thai last names. Credico is running on a TAX WALL ST platform.

www.credico2013.org/

Invite Wall Street to the party!

StandardDeviant's picture

"There's probably..."?  Right, that's some good, useful data right there.  Thank you for your contribution.

Also, before trotting out the stupid Tobin tax idea again, why not read up a bit on how well that's worked in the past?  (You could start with Sweden.)  If you think markets are broken now, just bring in one of these, and watch your liquidity flee.

Escapeclaws's picture

I've seen the 20 trillion mentioned several times, including a documentary by the BBC on the city of London where this figure was given, but I can't locate the documentary at present. This establishes that I did not, in any case, pull the number put of a hat.

Regarding the one percent transaction tax, that was proposed by Webster Tarpley at www.tarpley.net. The idea is to exempt accounts having less than a million dollars in capital. I think this is a good idea because it would kill HFT and really put a hole in the profits of GS and JPM, as well as The hedge fund hyenas (Tarpley's expression). Currently, Wall St pays virtually nothing in tax.

I don't expect the least thing to be done to put the brakes on our parasitic financial system. Gradually, the rest of the world will decide they've had enough and that will bring down Wall St.

booboo's picture

The NSA is all about tracking money crossing wires, these well to do Manhattanites and wine and cheese crowds poo pooing the "conspiracy nuts" and "their rantings" about fascism are going to get it full bore when they find out there is a target on their backs from the same guy that was wooing their dollars during the election. Usefull fucking idiots, the lot of them.

nmewn's picture

It never ceases to amaze me C.

Governments run up insurmountable debt with their cronies, when everyone with half a brain is screaming at the top of their lungs to stop, then turn and say we need ANOTHER TAX to fix this whole mess they created.

No...fuck you Lagarde, you leather-faced bitch, YOU drop 30% of YOUR assets into the meat grinder of the statism you built to show us how its really done...FIRST. Then we'll move on to every elitist prick, monarch, prime minister, staffer, meter maid & senator who entered your miracle of central planning from the middle class and is now a millionaire or "well to do".

Do this...and then we'll have a serious discussion about all your salaries & pensions and why you have them in the first place for bringing it to this stage and then...AND ONLY THEN...will we entertain "helping" you.

Otherwise, molon labe.

lewy14's picture

Fears of future wealth taxes could discourage entrepreneurship and lower the saving rate.

For the ruling class, these are features, not bugs.

StandardDeviant's picture

That line was the biggest understatement of all in the article.

If anything will instantly breed an "us vs. them" mentality on the part of the embattled middle classes, it'll be a government that announces suddenly (and it must be suddenly, as the IMF report explains) that it will steal a significant portion of whatever little they've been able to save after already confiscatory taxation -- only to continue borrowing and spending as before.

Far from simply discouraging entrepreneurship and lowering the (already vanishingly small) saving rate, it will lead to capital flight, tax evasion, an underground economy, demand for hard and portable assets, barter, etc., all on a massive scale.  Cyprus is only the most recent example.

It's also astonishing that there is absolutely nothing in the Rogoff article about reducing government expenditures.  Granted, that's not the main topic; but surely it's relevant enough to warrant at least a line or two.

(Not sure what you mean about features vs. bugs, though.  How is reduced entrepreneurship and saving in the interests of your "ruling class", however you define it?  If you're holding some cartoonish vision of feudal serfs and barons, that's certainly not in the interests of the wealthy any more than it is of the middle class or the poor.)

lewy14's picture

Fair question.

Discourage entrepreneurship -> acquire the best people at reduced prices. Fewer people taking the bait and starting their own venture. Less disruption of existing rent seeking structures. In a confiscatory tax environment, big connected corporations will be able to provide in-kind enticements that entrepreneurship will not. (Consider that this is how employer provided health insurance got started in the wake of crazy tax rates post WWII).

Reduced savings: Read Izabella Kaminska at the FT. The new ruling class holds that savings are an immoral hoarding of claims against future production; your duty is to consume in the present. The state vacuums up all excess earnings and spends more into existence. No need for savers; savers are in fact the cause of the instability and crisis. 

Financial rentiers are to be euthanized. The rent extracted by producers of actual stuff will be protected and enhanced. Wealth as a portable set of claims against future production will disappear. Don't need it due to "radical abundance" provided by technology.

This is all freedom-destroying ideological lunacy of the first order and the worst kind to be sure, but my read of what the "smart set" is saying these days indicates to me that this is what they're thinking.

Feudal, yes, cartoonish, no. Recall feudalism started in the wake of Diocletian's monetary "reforms" which essentially destroyed money and freedom in the Roman empire. The middle ages started well before Rome fell for good. The destruction of wealth is essential for the destruction of freedom.

"Freedom" for this new ruling class is a terrible thing, it allows terrible people to exhibit all sorts of terrible, selfish behaviors. No wealth - no freedom - problem solved. In their view, Keynes's "economic problem" is about to be solved for good, so "capital" (wealth) is redundant and toxic.

 

LetThemEatRand's picture

Don't let them fool you.  When they talk about a tax on the middle and upper-middle class, it does not include the ruling class.  The ruling class have all the money.  Take it back and let the people who earned it keep theirs.  They love it when people talk about how taxation of inherited wealth is evil.  They -- the Rothschilds, the King of Saudi Arabia, etc -- have all the wealth.   

nmewn's picture

"Still, the IMF is right..."

Go do something anatomically impossible to yourself.

fonzannoon's picture

for those guys it's actually possible

NoDebt's picture

What?  Pulling their heads out of their asses?  No, that's quite impossible for them, I assure you.  They've been up there for so long their spine has fused in that position.

 

TheFourthStooge-ing's picture

.

for those guys it's actually possible

Hmmmm... alrighty then. Ken Rogoff, go fuck your face in the ass.

nmewn's picture

Fonzi, I'll supply the lube my brutha ;-)

Carl Popper's picture

I dont think anyone would believe it to be a one time thing if they were suddenly surprised by a "wealth tax overnight and woke up to 10 % liens on real property and ten percent taken from all their savings and investments.

It would lead to revolution, such a naked brazen disregard for law.

If they debated it openly and then passed a law giving everyone plenty of warning I cannot imagine the havoc that would create too.

Might be fun to watch though, provided it happened somewhere else.

RafterManFMJ's picture

If a 10% lien puts your even close to underwater, stop paying.

If you get tossed out, return some dark and moonless night, and BURN IT TO THE MOTHERFUCKINGMOTHERFUCKING GROUND.

At some point, even a retard will actively oppose this fascist BS. Your boiling point is a function of your IQ and experience.

GeezerGeek's picture

I can see quite a few willing to give the bastards 100% of all the lead they've acquired. Well, that would be one way to ensure that no incumbents got reelected to office.

Which is worse - bankers or terrorists's picture

"It would lead to revolution, such a naked brazen disregard for law."

 

It's much easier in the context of a war or major market shock. Like the confiscation of gold in 1934, for example. 

Not that any government would undertake any kind of false flag action like that. 

johnQpublic's picture

why is the answer never to stop spending so much?

reading this made me want to punch my monitor in the face

NOTaREALmerican's picture

Re: why is the answer never to stop spending so much?

Because, 60+ years of spending too much brought un-imagined bling to Western nations.

Who doesn't love bling?    You can't expect people who lived through bling utopia bought with borrowed money wouldn't expect it to keep working.   Hell, it still IS working for the top 10%.  

CH1's picture

why is the answer never to stop spending so much?

Because they want the money, and because the suckers always pay what they ask.

GeezerGeek's picture

Why stop spending when all you have to do is borrow more? http://cnsnews.com/news/article/terence-p-jeffrey/federal-debt-jumped-409-billion-october-3567-household

Besides, you can't buy votes with austerity.

0b1knob's picture

"In Soviet Union, state starves you!"    Jackoff Smirnoff

centerline's picture

Fun to see more idiots promoting the deflationary implosion of the global economy.  Got to hunt down that evil capital huh?

 

 

Carl Popper's picture

When there are no good solutions and no escape governments get desperate and do crazy things.

0b1knob's picture

Wealth taxes aren't enough.    Only lifetime slavery can support the state.  Pack your bags for the FEMA camps.

centerline's picture

Only if you promise we can name the camps, facilities, etc. after bank CEOs, politicians and other members of the elite social class.

Got to feel patriotic about all of this ya know!

trader1's picture

only the climate change deniers, universal health care haters, and some other wackos will be sent there.  no worries if you're not in that demographic.