The Coming Global Wealth Tax?

By Romain Hatchuel

What the IMF calls “revenue-maximizing top income tax rates” may be a good indication of how much further those rates could rise: As the IMF calculates, the average revenue-maximizing rate for the main Organization of Economic Cooperation and Development countries is around 60%, way above existing levels.

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Of course these measures won’t return the world’s top economies to sustainable levels of debt. That could be achieved only through significant economic growth (the good way) or, as the IMF puts it, “by repudiating public debt or inflating it away” (the bad way). In October the IMF floated a bold idea that didn’t get the attention it deserved: lowering sovereign debt levels through a one-off tax on private wealth.

As applied to the euro zone, the IMF claims that a 10% levy on households’ positive net worth would bring public debt levels back to pre-financial crisis levels. Such a tax sounds crazy, but recall what happened in euro-zone country Cyprus this year: Holders of bank accounts larger than 100,000 euros had to incur losses of up to 100% on their savings above that threshold, in order to “bail-in” the bankrupt Mediterranean state. 

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Wealth taxes are unconstitutional in the United States. Further, all tax raising bills must originate in the House and treaties do not trump the COTUS (see: Reid v Covert).

The Unconstitutionality of a Wealth Tax 

I’d like to see a direct comparison between US taxes and EU tax rates, since EU countries don’t seem to have equivalents of US State income taxes, let alone SS, Medicare, and now Obamacare taxes. I don’t know enough of EU countries property taxes either.

I have been paying well North of 60% taxable income taxes for years.

Jimmy Doolittle on December 5, 2013 at 12:58 AM

Europe has income, payroll, capital gains, financial transfer, province/council, and other taxes, including VAT.  A few do have a wealth tax, i.e., a tax on accumulated wealth, not the fruits of it.

I did some work on Sweden a few years ago.  If you're interested:

The Non-Existent Stairway To Socialist Heaven In Sweden

And, here is some other info from around the world... 

Big Government Robs The Middle Class Because That's Where The Money Is! 

But, you're correct about Europe not taxing enough to pay for their exorbitant welfare state...and their taxes are already astronomical.  This is the reason that Europe has chronically high unemployment, lower productivity, lower standards of living, and fiscal crises. 

Margaret Thatcher was only partially correct.  One problem with socialism is that you eventually run out of other people's money.  The other is that you eventually run out of other people.

Not a single country in all of Europe has a fertility rate of 2.1, which is considered the replacement rate, ie, the rate necessary for the population to remain stable? Even before the financial meltdown, Spain and Greece, in particular, had fertility rates so low that their populations would halve themselves with successive generations.

Several decades ago, white Europeans decided that they just couldn’t be bothered to have children. Of course, this presented a huge problem given the fact that they not only loved their luxurious welfare hammocks, they believed they were entitled to them. Konstantinos in Athens thought he was entitled to retire to his Speedos at 50 at 97% of his highest annual salary and it was up to the government to figure out how to pay for it. And, while Marina and the rest of the bamboccioni in Italy find it perfectly acceptable to be sleeping in their childhood bedrooms when they are in their late 30s and have absolutely no problem with suing their elderly parents for allowances, they aren’t having children, which is probably a good thing, nor is anyone hiring them, which is likewise understandable. Soooo, there aren’t enough workers paying taxes to support the retirees.

We are in the throes of a wealth tax right now as I type this. It’s called “quantitative easing,” and it sucks the value out of everyone’s accumulated wealth equally. Hell, it’s probably the most egalitarian tax in the history of the United States of America!

gryphon202 on December 5, 2013 at 6:09 AM

Obviously, I was referring to an actual (legislative) tax on wealth, but you are quite correct that QE is a stealth tax. I disagree, however, that its effects are egalitarian. The top 5% have done quite well during QE, as evidenced by the tremendous inflation in the stock market. Everyone else has seen their purchasing power and actual incomes decrease. One Fed official just apologised to Americans for QE saying that it has helped Wall Street not Main Street.

From the Wall Street Journal, Confessions of a Quantitative Easer:

We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street.

By Andrew Huszar 

I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

Five years ago this month, on Black Friday, the Fed launched an unprecedented shopping spree. By that point in the financial crisis, Congress had already passed legislation, the Troubled Asset Relief Program, to halt the U.S. banking system's free fall. Beyond Wall Street, though, the economic pain was still soaring. In the last three months of 2008 alone, almost two million Americans would lose their jobs.

The Fed said it wanted to help—through a new program of massive bond purchases. There were secondary goals, but Chairman Ben Bernanke made clear that the Fed's central motivation was to "affect credit conditions for households and businesses": to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative "credit easing."

My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed's trading floor? The job: managing what was at the heart of QE's bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history. 

This was a dream job, but I hesitated. And it wasn't just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank's credibility, and I had come to believe that the Fed's independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.

In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.

It wasn't long before my old doubts resurfaced. Despite the Fed's rhetoric, my program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

From the trenches, several other Fed managers also began voicing the concern that QE wasn't working as planned. Our warnings fell on deaf ears. In the past, Fed leaders—even if they ultimately erred—would have worried obsessively about the costs versus the benefits of any major initiative. Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street's leading bankers and hedge-fund managers. Sorry, U.S. taxpayer.

Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank's bond purchases had been an absolute coup for Wall Street. The banks hadn't just benefited from the lower cost of making loans. They'd also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed's QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.

You'd think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany's finance minister, Wolfgang Schäuble, immediately called the decision "clueless."

That was when I realized the Fed had lost any remaining ability to think independently from Wall Street. Demoralized, I returned to the private sector.

Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.

And the impact? Even by the Fed's sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn't really working.

Unless you're Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets. 

As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again "bubble-like." Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.

Even when acknowledging QE's shortcomings, Chairman Bernanke argues that some action by the Fed is better than none (a position that his likely successor, Fed Vice Chairwoman Janet Yellen, also embraces). The implication is that the Fed is dutifully compensating for the rest of Washington's dysfunction. But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street's new "too big to fail" policy. 

Mr. Huszar, a senior fellow at Rutgers Business School, is a former Morgan Stanley managing director. In 2009-10, he managed the Federal Reserve's $1.25 trillion agency mortgage-backed security purchase program.

 

Also, keep in mind whenever you read anything from the IMF that its Chairwoman is Christine Lagarde, a French Socialist, and she (along with others in the organisation) DO NOT PAY TAXES.  They are exempt.  They're special.