Nat O'Connor: The BBC reports that "A group of rich Germans has launched a petition calling for the government to make wealthy people pay higher taxes." German speakers can access the petition website here.
The idea is that if each of the 2.2 million Germans with €500,000 or more paid a 5 percent wealth tax for 2 years, the state would raise €100 billion "to fund ecological programmes, education and social projects".
The National Irish Bank wealth report claims that Irish households had an average wealth (net of debt) of €547,000 in early 2008 (including primary residences). The report is summarised here, and available as a PDF here.
Over 18 months later, in depressed Ireland, a lot of the NIB report's gloss is less an accurate estimate of remaining wealth and more like a monument to hubris (e.g. "There are now more Mercedes per capita in Ireland than in Germany where they are made").
Page 15 of the NIB wealth report suggests that 10 percent of Ireland's near €1 trillion in wealth was held in savings/deposits. The text says this is "€100 million", but unless I have missed something, 10 percent should be €100 billion. This in line with the €80 billion reported for 2005 in Bank of Ireland's 2007 Wealth of the Nation report. Of course, much larger sums were invested in shares and other financial assets, as well as a disproportionate amount in property. Much of which is likely to have fallen (if not collapsed) in value.
In order for a wealth tax to work here, it would probably have to include property, shares and other financial assets as well as savings/deposits. If not, people may simply move their savings into investments to avoid the tax.
Also, any wealth tax will not just include the helicopter-owning wine investors that the NIB report describes, but it will also include a lot of middle class households whose deposits/investments/property equate to their retirement savings. Many people who simply downsized their primary residence during the boom may have gained €500,000 plus in that single transaction, which may also represent their one-off 'cashing in' of assets to prepare for retirement. And many of these households - who are not professional wealth managers - may have invested in the 'safe options', like bank shares and property. In other words, the pool of 'wealth' is not an infinite resource that already makes enough profit that it will reproduce itself endlessly regardless of how much it is taxed.
Yet, the whole premise of progressive taxation is that 'money makes money'; that is, all things being equal, a careful investor with a pool of money can make a tidy profit on an ongoing basis. Our commercial legislation, regulation, taxation, tax expenditure, etc. is designed to encourage investment and to permit such wealth to grow. The basis for wealth tax then is that in exchange for the ways in which we encourage investment, the state's guarantee of bank deposits, etc. we can legitimately seek a fair share in the profits made by wealth. Not too big, to avoid discouraging investment here, but not too small, to avoid growing the gap between the 'haves' and 'have nots'.
(Note, I am now shifting away from the German idea of a one-off two-year tax. Here I'm examining the idea of more wealth tax on an ongoing basis).
If the state wanted to tax the remainder of Ireland's wealth - and let's say that €500 billion remains - it would need a range of property taxes, deposit taxes, share/financial asset taxes, etc. These would affect many ordinary households. However, a 0.1 percent wealth tax on €500 billion would result in €5 billion for the Exchequer every year.
€5 billion might be as much as we can expect from wealth tax. It won't close the structural deficit in the current budget, but it would make a major contribution - not only to repairing the state's finances, but also to reducing our unequal distribution of wealth.
In practice, the result of the various wealth taxes would look something like this:
- A household living in a house worth €500,000 would pay €500 a year in property tax.
- Someone with €200,000 deposited in the bank would pay €200 a year in deposit tax.
- A shareholder with €10,000,000 in assets would pay €10,000 a year in financial asset tax.
The fact that a general rule of 0.1 percent applies regardless of the form of wealth would negate incentives to shift the form of wealth - except of course, to move it out of the country; but those who can already do. The 0.1 percent could also be modified to make the tax progressive, rather than a single rate.
Of course, the tax would have administrative costs, and there'd have to be exempt categories, such as asset-rich, cash-poor older people living in houses they own. Hence, in this example, only €4 billion might actually be gained for current expenditure rather than €5 billion.
I may be making various simplifications or unreasonable assumptions. Is there a category of Ireland's wealth that will be impossible to tax? Is any of this wealth already taxed? Is there a constitutional barrier to taxing wealth (as opposed to gains)? Does 0.1 percent as a general rule for wealth/property tax seem reasonable (on the basis that assets will in general grow by more than this per annum, above inflation)?