A few countries in the world, mostly in continental Europe and Latin America, are collecting wealth taxes from their residents. A wealth tax is an annual charge, ranging from 0.5% to 3%, on net worth (assets minus liabilities). Wealth taxes are controversial, often leading to an exodus of the most talented and wealthiest residents (such as French entrepreneurs leaving for London and Monaco). Both Germany and France got rid of their wealth taxes (in the French case, replacing them with a property tax on real estate).
Recently, a wealth tax has been proposed in the US by the usual suspects (https://en.wikipedia.org/wiki/Ultra-Millionaire_Tax_Act_of_2021). Setting aside the fact that federal wealth taxes are unconstitutional, there is really no need for such a thing. A combination of inflation and high capital gains taxes will achieve the same result.
Let’s assume that there’s an inflation of 3% a year, and capital gains taxes have been made equal to ordinary income tax rates. A resident of California or New York City in the highest bracket will pay a marginal tax rate of around 55%. Let’s round it down to 50%. To preserve the real value of assets, an investor will have to generate 3% annual income just to keep up with inflation. But 50% of that income, or 1.5% of total assets, will go towards capital gains taxes. Effectively, the investor paid a wealth tax of 1.5% of real assets.
As inflation increases, preservation of real wealth becomes harder and harder. At 10% inflation, the investor will lose 5% of his wealth to taxes every year. In countries with hyperinflation, the end result is wholesale confiscation of private wealth and its transfer to the state. Anyone interested in the kind of society that results from hyperinflation should visit Venezuela.
There is no way to avoid the inflation tax, other than emigration. Let us hope that the monetary authorities understand the risks of loose policy and start showing greater concern about inflation risks.
Last week’s continuing trends:
- Soybeans
- Canola
- European Milling Wheat
- Corn
- European Maize
Last week’s reversing trends:
- Canadian Equities
- German Equities
- Japanese REITs
- Nasdaq
- Euro Pound Cross