I thought that the asset tax we were discussing was on the value of the asset – not on the rate of return. The value of the asset will be determined by the rate of return that people think they can make from it – as a result if using the asset is costly won’t people put less effort into using it well (and pushing up the value of the asset which is based on the rate of return) if the value is taxed?

“I suspect an assets tax would reduce investment in assets by about as much as income tax reduces employment and GST reduces spending.”

This is a little bit “partial equilibrium”. It will increase the relative price of capital – so that firms will use more capital and less labour. But it will also have an “income effect” whereby people will produce less and make less of both.

Ultimately I am not saying that the tax is definitely wrong – just that it is not clear whether this is a more efficient tax than an income tax or a tax on goods.

Still, thanks for raising the idea – I will see if I can give it some more thought and maybe do a post. Then we can discuss it in there 🙂

I don’t follow, if I have a capital asset that yields a 5% return if poorly run and a 10% return if well run, and the asset is taxed at 2%, poorly run gives a net return of 3%, well run a net return of 8% (in reality not quite this big a difference in return as the well run asset will be worth more – but that just means the owners equity is greater)

“the only way to reduce the tax burden would be to actually reduce the amount of tax we raise.”

Yeah, I made the point earlier that as a “visible” tax it would be harder for politicians to get increased tax rates passed the voters (though admittedly this seems to be no obsticle to local government in their eternal efforts to increase rates).

I suspect an assets tax would reduce investment in assets by about as much as income tax reduces employment and GST reduces spending.

Agreed.

“As a tax on assets it would have little impact on the poorest people, and doing away with income tax means every job would be a “cash job”, making legal short term casual work practical again”

I’m not sure if this is how it will function overall. Taking income making assets only will reduce the value of these assets and so reduce investment. If we reduce investment then the product of labour will be lower and so the amount people get paid will also fall as a result of the tax – ultimately all forms of tax fall on income (well fundamentally consumption) in some way, the only way to reduce the tax burden would be to actually reduce the amount of tax we raise.

One thing I would like to see is (dreams are free) a reversal in the decades old trend of an ever increasing government tax take.
As this would be a highly visable tax I hope that voters would be less accepting of it being imposed at higher rates.

Government revenue and expenditure half of what we have now sounds about right to me. Could that be financed with just a ~2% assets tax?
It would be interesting to see the result of such a tax were appied to all government owned assets as well.

While I’m on the increasing size of government how does this theory sound to you:
The reason governments in the West have grown as a percentage of GDP as they have over the last century is because voters have been happy to see this happen. Voters have been happy to see this happen only because increasing wealth has made it affordable for them, so if we were all suddenly as poor as we were 100 years ago for society to support government, government would need to be far smaller.
I know that government is a producer of services, we do get something for our tax money, but a lot of money is spent by government redistributing rather than creating wealth.

As a tax on assets it would have little impact on the poorest people, and doing away with income tax means every job would be a “cash job”, making legal short term casual work practical again. I actually like the idea that people who wish to live simple unskilled itinerant lives should be able to do so, the income tax system (and admittidly other legislation) have made this lifestyle all but impossible in the modern world, so instead these people who, because of their nature don’t fit rigid working rules, live on benefits.

Matt, I appreciate you taking the time to discuss these ideas,
regards.

I’m not sure – if we want to rise enough tax revenue to fund government spending something will have to give. In the long-run I would expect a sharp decline in capital accumulation surely.

“Another point is that it would be an incentive for people to maximise the efficient use of the assets they employ”

I’m not sure about this – people already have to incentive to use their assets, taxing them reduces the benefit associated with putting more effort into getting your asset running.

“Another point is how much income in terms of capital gains escapes the tax man now? This applies to all property types, leading to them being way over valued in terms of their economic productivity.”

I agree with this in part. Ultimately though, as long as the income from the asset and the income from selling the asset are taxed surely incentives are fine. The only problem comes about when we tax different assets at different rates.

“Pricing assets would be done by the assets owner, we do this already for insurance for most assets. Under what I propose IRD should actually make a profit buying under-valued assets and on-selling them.”

Good point, that does deal with the administration costs.

I just don’t understand where the revenue comes from though – and if we do raise sufficient revenue it appears that we will make capital sufficiently less desirable.

I recognise that the over-use of labour to avoid taxation on capital is factor but given all the other costs of employing capital I don’t see it as having a major impact on decisions on employing capital.

Another point is that it would be an incentive for people to maximise the efficient use of the assets they employ, eg. there are a lot of farmers surviving on farms that could be doing 20% or even 50% more production than they do now (I know this, I’m a farmer).

Another point is how much income in terms of capital gains escapes the tax man now? This applies to all property types, leading to them being way over valued in terms of their economic productivity.

How much does the administration of the present tax system cost the country? For large organisations it might not be too much of a problem, but for small business compliance costs are significant.
Pricing assets would be done by the assets owner, we do this already for insurance for most assets. Under what I propose IRD should actually make a profit buying under-valued assets and on-selling them.

So is the tax only on income producing assets? If this is the case then it creates a wedge between two inputs – capital and labour. Firms will “over-use” labour relative to capital in order to avoid the tax leading to relatively inefficient production. Currently we have a tax on all income, which shares the burden between inputs types.

I’m not sure that I believe it is an improvement – and the required regulation (pricing the assets, setting up IRD as a asset buying body) would increase compliance costs wouldn’t it?

I’d be looking to avoid taxing shares, as the tax would apply to the assets that the shares represented, I’d also be excluding bank balances, both in credit and debt, so literal savings (if that’s an OK term) wouldn’t be included.

People might spend more on consumption – but any goods consumed needed to first be produced, the assets used for production would be taxed.

I see this as similar to residential tennants who don’t directly pay rates, but in practical terms do, it’s included in their rent payments.

The basis for the whole idea is to have as all inclusive a general tax as possible but with minimal compliance costs, both to the state and the taxpayer.

The way I see it is that to increase productivity in NZ we need to maximise the manpower we have in producing desired goods and services and minimise that which we have in producing goods and services that don’t create wealth, but actually consumer wealth providing “services” that people, given the option, wouldn’t buy.