To regenerate growth with equity, the driving principle should be to make labour-earned income tax-free; only money earned from money should be taxable.
The yield on German government bonds first turned negative (in this current round) in early 2016; today, 3+ years down, 85% of the German sovereign bond market is under water. Many other sovereign bonds, including some issued by governments in Eastern Europe, are also in this boat. Totally, about $13 trillion (equivalent) of government bonds are providing negative yields—about 25% of the global bond market!
Further, global central banks, notably including the ECB, appear to be gearing up for some more (?) easing, and, while markets are licking their mindless chops at the prospects of still easier money, my sense is that this poses a much more frightening reality—that (a) many investors are terrified, and (b) capital is so abundant that it is becoming progressively more difficult to manage.
On reflection, this should not be surprising given the generosity with which global fiscal policy has treated capital over the past several decades, as a result of which there has been more and more and more capital being accumulated—ask any private equity investor.
Another impact of this favouring of capital has been the huge level of inequality that burdens every economy, which has rendered monetary policy useless. Each progressive lowering of interest rates simply serves to increase the capital holdings of a minority of the population, which doesn’t even dribble into broader demand. This may explain why inflation has all but disappeared.
Clearly, things cannot continue in this vein without triggering either a major credit collapse (as more and more investors seek riskier and riskier investments) or a revolution (as savers begin to demand a reasonable return).
To my mind, there are two steps needed to regenerate growth with equity. The first is to eliminate all taxes on income earned from work (labour); thus, there should be zero tax on salaries, consulting fees, corporate profits, etc., as also no indirect taxes. Global average tax revenues are 25% of GDP, the vast bulk (assume 90%) of which is based on labour, as described above. With global GDP approximately $50 trillion a year, abolishing all taxes will provide citizens and companies additional income of at least $10 trillion a year.
Some part of this huge flow will go to increase savings, but the main impact would be an increase in demand, on the one hand, and in investment, on the other, both of which would lead to higher growth. Inflation would come back to life, bond yields would return to positive territory and monetary policy will become “normal” again.
The second step, which would be necessary to make governments solvent—addressing the loss of tax revenues, their deficits (about $2-3 trillion) and a little something for debt amortisation (say, 10% of the total debt of $20-25 trillion)—is to levy taxes on capital and capital-based income.
McKinsey had conducted a study that estimated that the total capital in global financial markets would be $200 trillion by 2010 and growing; given the collapse of 2008-09, the $200 trillion number is probably more accurate as of today. But, even this is peanuts when compared to the real elephant in the room—real estate. New York City alone has a built-up area of nearly 1 million hectares, which is 100 billion square meters; if we assume (very conservatively) that 90% of this property is primary residences—i.e., owner-occupied—that leaves 10 billion square meters of property that should be taxable as capital or capital-based income (rent or imputed rent). The median price of real estate in New York is $205 per square foot, which translates the taxable capital value to $20 trillion. (These are obviously very loose numbers and are more to give a sense of scale.) Multiplying this out through the world would provide a very conservative taxable capital value in the range of $1000 trillion—is that a gazillion?
Remember, that all we need to eliminate all income taxes is a measly $15 trillion a year.
This could readily be collected by taxing non-primary home real estate holdings (either based on the capital value or the imputed capital-based income) at an appropriate rate; levying penal taxes on salaries that are egregious—say, more than, say, 100 times the lowest salary at the organisation (this would drive up minimum salaries which would also be good for demand); ramping up tax rates on capital gains (including carried interest); and so on.
The driving principle should be that any income earned from labour is free of tax; only money earned from money is taxable—the new sharia!
Of course, there are many grey areas to figure out—for example, how should intellectual property be taxed? What about art and other collectibles? Should inheritance be taxed at all, since much of the capital in the estate would be taxed both before and after the bequest? Multiple nuances and lawyers (and accountants) would, as usual, have a field day.
The arithmetic is straightforward, and, while asset—and, in particular, real estate—prices will certainly fall, there would be sufficient savings from the income gains (from zero income tax) that will readily top up the depleting capital reserve of the world to turn this into a virtuous cycle.
CEO, Mecklai Financial
Views are personal