Archive for August, 2018

Death and Taxes

Sunday, August 12th, 2018

Taxes For the Common Good?

For as long as humans have lived as pack animals with a dominance hierarchy, taxes have always been a part of human life. Those who are seen as the leaders of the pack, tribe, nation, or empire have always had a social mandate (albeit often a grudging one) to eat first from a shared kill and to take food and other rights from others. For most of human history, taxes have been seized from the poor by the rich without any justification other than the occasional claim that this plunder was justified in order to pay for protection from even greater plunder by even nastier thieves.

One thing that has made this scam so easy to implement is another aspect of human pack structure, namely the tendency to cooperate in competing groups of larger than family size. This competition between groups has favoured an inherited tendency towards suppression of the individual will and acceptance of socially-mandated authority based on a sense of group loyalty.  And to facilitate that we have also inherited a tendency to identify friends and foes on the basis of features such as bodily decoration (ranging from war paint to fashion styles and military uniforms) and behaviours (such as chanting, dancing, and expressing unfounded beliefs).

The human tendency to group-identify, though, has had an interesting secondary consequence. Namely various groups of those not at the top of the dominance hierarchy can come to see themselves as a separate team, tribe, or “class”, and consequently engage in attack and overthrow of the current leadership. In any “nation”  one of the main goals is therefore to build allegiance to a larger whole in which members of various interest groups may accept a “state” authority. In the case of a “democracy” this allegiance to the state is bought from the people by offer of at least the appearance of a role in determining both who wields the state authority and what it is empowered to do; and in even the most primitive groupings, the position of a leader is often dependent on giving some appearance of operating to advance the welfare of all.

Similarly, the power of taxation is often justified and maintained via a claim that property seized by the state will be used for the common good. This is a claim that I am happy to live with so long as the state is making a net positive contribution to what I consider the common good.

So What Is This Common Good?

There are many things that I accept as positive contributions by government to the common good – indeed enough in our present society that I have no hesitation in paying my taxes, no matter who is in power (at least out of the current crop of potentials in Canada). But there are a number of big things missing.

Some of these have to do with the need for better protection of the environment and of shared access to common resources, but the one I want to focus on here is wealth inequality.

It is my belief that the common good is best served by the building of a social economy in which as many people as possible feel that they have a “fair” share of the world’s resources. This can be achieved in at least a couple of ways. One is to brainwash people throughout their lives with a belief that inequalities of birth are “fair”, and another is to strive to remedy inequities of birth by redistributing inherited assets. I lean toward the latter.

Rather than encouraging people to believe that there is some inherent fairness in having them retain control of any assets that they may have acquired or inherited, I favour encouraging them to believe instead that it is fair to use the collective power of the state to progressively take away some of those assets that exceed the global average and distribute them for the benefit the less advantaged – especially of those born in a disadvantaged state.

In other words I favour taxation of all the assets of each individual at a rate which increases with the extent to which those assets exceed the global average.

This does not mean that I favour a taxation system which would have the effect of actually reversing wealth relationships – except under special circumstances such as where the wealthier individual is being penalized for some illegal behaviour other than just happening to have more wealth. Such a system of wealth reversal might be argued by some as a fair correction needed to bring the average lifetime wealth into balance, but I won’t go there.

Also, I do not see complete elimination of wealth inequality as a necessary goal. Some inequality is unavoidable, and there might actually be value in having to accept that the decisions we make may have consequences for our future wealth and happiness.

But I do find the wealth distribution of our present societies offensive. And so I want to reduce its inequality as much as possible.

Unfortunately, giving up my own above average wealth would not solve the problem. In fact, by eliminating part of the mid-range it would make the overall distribution even more unequal. The only solution is to persuade or require those with the greatest wealth to make the biggest contribution. And this does not mean to contribute an equal share of their wealth since that would just preserve the current wealth-distribution shape. No, what is needed is indeed a progressive wealth tax in which the tax rate on an individual increases with the amount of that individual’s wealth.

Some kinds of wealth are harder to assess than others, and there may be some unfairness and intrusivity in having mandated assessment. But there are various ways of overcoming this – such as only allowing insurance and legal protection of property rights up to whatever value the owner has declared for tax purposes. And while paintings etc may be hard to properly evaluate, real estate is less so. So it makes sense to start with a progressive real estate tax.

Why Not Have a Progressive Real Estate Tax?

Some people are lucky enough to have acquired homes that are now valued by the market at much more than they paid for them. And indeed in some cases many times more than they could afford to pay if they had to re-purchase the property now. For such people, the burden of even a non-progressive property tax percentage might be more than they can now afford. And the pain and disruption of having to eventually move might well be an unfair price to have to pay for the lucky circumstances that they currently enjoy. Fortunately, a closer analysis shows that such cases are actually quite rare, and there are many ways of reducing or eliminating any actual unfairness.

Let’s start with the fact that a progressive property tax with higher rates on hugely above average properties might actually provide for a reduction on the tax rate for more modestly valued homes. And in any case the only owners at risk are those whose property values are above the cutoff, which for COPE’s proposed ‘Mansion Tax’ in Vancouver captures a tiny percentage of single family dwellings. A properly implemented progressive tax would have a cutoff expressed as a percentile rank of the house prices so that it always hit only the top few percent rather than capturing more and more owners as inflation pulls all prices higher, and for Vancouver right now a $5 million cutoff means no increased taxes for any of the 99%.

And of course the impact is not sudden, for when a house price does cross the barrier the extra tax is only collected on the excess value. For example  let’s consider a lower cutoff, say at the now modestly above average price of $2 million (but without the obviously necessary inflation adjustment). If a property now valued at $1.9 million gains 10% in value to reach $2.1 mllion next year, then with a 1% mansion tax the extra amount the owner would have to pay next year would be just 1% of the amount by which the new price exceeds $2 million – ie 1% of $0.1million or just $1000. (That’s less than one fancy cup of coffee per day!)

But let’s forget about the Province’s cynical tax grab and go back to the real Mansion Tax designed to hit only the 1% (with inflation adjusted cutoff) and think of the nicest poor old pensioners you know who happen to have somehow acquired a property currently valued at $6million back when they could afford it. (Do you remember when you just missed the chance to buy such a property when it only cost a price you could afford? No, I didn’t think so!). Anyhow these two old dears somehow lost all their other savings and are rattling around that great big mansion living on just CPP and OAS with barely a crust of bread to put on the table after paying their current property taxes. And now the Mansion Tax kicks in. What will become of them?

Well, let’s see. The tax will be 1% of their excess value ie  1% of $1million or a whopping $10,000!  Oh dear! Oh dear!! What can they do?

Well they’re wearing black, but I don’t feel blue!

Why haven’t they been deferring taxes for many years already? (They’ve got to be older than me to have been around when Shaughnessy mansions were selling for peanuts.) “Oh, but then the taxes will be charged when they sell” you say. Yes, but why would they sell? You said the didn’t want to ever leave. And if they do want to move out of town ten years from now, the ten years of Mansion Tax which amounts to ten times $10,000 or $100,000 will be only a tenth of one of the six (or by then maybe more) millions they will have to play with. My eyes are stiil dry!

The real victim of course is the prosperous looking gentleman who has been selling this sob story to you. For the two old sweeties are his parents and what he’s really worried about is the fact that if they defer their taxes for ten years and then die, that $100,000 hit will end up coming out of his SIX MILLION DOLLAR inheritance. Which brings up my next question.

Why Don’t We Have 100% Inheritance Taxes?

…stay tuned.