Income, Wealth, and Taxes

Current Problems

Government Capture

Countries must define tax regimes in their constitutions rather than in legislation. Legislation is too easy to change. Governments are vulnerable to capture by special interests that want to lower their taxes. For example, when wealthy individuals donate money to help a political party win. That party then passes laws to reduce the tax rates paid by those same wealthy donors. Tax regimes that can be changed, will be changed. This process will disproportionately benefit the wealthy over time. It leads to rising inequity levels with widespread negative effects. Taxes on both annual income and accumulated wealth must remain high for the wealthiest members of society.

Progressive tax rates and related laws must be embedded within constitutions to make them hard to change. This part of the constitution must be protected by severe mandatory penalties for anyone that publicly advocates changing tax structures. Publicly advocating for lowering taxes on the wealthy must come with mandatory sentencing. Punishments for doing so must be based on a percentage of global individual income or wealth, whichever is higher.

Each successive offence must then double the penalty amount. People who continue to publicly advocate for lowering taxes on the wealthy, or who encourage others to do so, must not be permitted to influence public opinion. Tax structures can only be debated by a randomly selected and nationally represented citizens assembly. This citizens parliament would vote on any proposed change. Changes to the tax code must also then be put to a national referendum. This makes government harder to capture and ensures tax regimes are difficult to change.

Repeating Cycles

The consequences of rising income and wealth inequity contribute to the downfall of societies and civilizations. This process repeats itself throughout history. The period preceding rising inequity usually coincides with calls for greater economic freedom for private enterprises, or some version of a market economy, deregulation, and private personal gain. Entrepreneurial individuals want opportunities to innovate and build wealth. This logic has some merit, but policy and legislative changes are often reactive and overshoot a middle ground. People do not consider the predictable long-term consequences.

People that have obtained wealth, power, and status do not usually give up peacefully. They have the resources and ability to suppress early calls for greater equality. Because this is successful at first, it is pursued with greater confidence. However, if the underlying process of rising inequity continues, then the pressure for change increases until it can no longer be suppressed. The leveling of income and wealth inequity is usually a time of unrest, instability, and violence. The poorest segments of society win concessions and inequality decreases. Often this coincides with a move towards public ownership and aspects of socialism or communism.

After a period of political stability, and often a generational change, the rich once again begin relentlessly seizing a greater share of society’s wealth. Without intervention the level of income and wealth inequity starts rising over successive generations. The social contract is gradually broken as many people struggle to maintain their standard of living in the face of widespread wealth hoarding by the few. The cycle eventually starts all over again with widespread violence, concessions won, and a move towards some form of socialism.

The challenge is in breaking this cycle to create a society that maintains a middle ground. A limited amount of income and wealth inequality may be unavoidable in complex societies. But it must not get to extreme levels. A good society must learn from the mistakes of past failed societies. It must put robust mechanisms in place that prevent income and wealth inequality from getting too extreme.

Balancing Incentives and Inequity

Addressing income and wealth inequity requires a balancing act to avoid negative consequences from going too far in either direction. On one side, excessive income taxes motivate skilled workers to leave the country. It deters people from pursuing training or education to get ahead. An excessive wealth tax causes capital flight, dissuades investments, and stifles economic improvements.

On the other side, excessive income and wealth inequity leads to a host of negative outcomes and societal breakdown. It produces monopolies that stifle innovation and entrepreneurship, weakens consumer demand, hinders economic growth, decreases economic mobility, reduces funding for social services and public investment, undermines the health and education of lower income groups, corrupts the democratic process, erodes social cohesion and trust, increases crime and violence, and intensifies political instability.

In other words, some inequality is desirable to reward people for working hard, being innovative or entrepreneurial, delaying work to gain valuable skills, and saving and investing their earnings. But too much inequality undermines the social contract and erodes the fabric keeping society together.

Proposed Solutions

The following solutions enable staying within a safe middle ground on inequality for the long term. The aim is to allow sufficient inequality to reward and motivate entrepreneurialism and innovation, while keeping inequality low enough to avoid the negative consequences of inequality such as wealthy people buying politicians.

All Income Treated Equally

All sources of income must contribute equally when calculating annual taxable income. This means earned, unearned, active, and passive incomes all contribute to an annual taxable amount. Income must be calculated as the annual total of all wages, gifts, inheritance, royalties, dividends, realized capital gains, withdrawn profits, commissions, bonuses, pensions, allowances, grants, subsidies, interest, rents, and loans received. There must be no categories of income counted at different tax rates. If a person receives something considered a liquid asset, then it must contribute to annual income for tax purposes. Illiquid assets such as unrealized capital gains and real estate contribute to total wealth calculations, which are discussed later.

Even personal loans must count towards income – and business loans cannot be used for personal expenses or personal benefit in any way. For lines of credit, the actual amount borrowed or drawn down within the year counts towards taxable income. Including borrowed money closes a loophole wealthy people use to avoid paying income tax. Interest rates are lower than tax rates for people in upper income brackets. Paying interest on a personal loan is therefore much cheaper than paying the upper band of income tax. Wealthy people borrow using their assets as security. Since most assets go up in value, they can take out additional loans to pay off previous loans. This method of tax avoidance redirects money from public services benefiting everyone, into private profit for banks benefiting only their wealthy shareholders. Making personal loans contribute towards income will stop this practice. Borrowers will have to pay the interest as well as their taxes, making this practice more expensive than simply paying their income taxes.

Minimum and Maximum Income

The maximum annual income must be fixed as a ratio of the minimum annual income. The minimum income must be calculated based on working full time at the minimum wage. If a country does not have a minimum income, then it will need to establish one. The only way for the maximum income to increase must be if the minimum income increases first. This establishes an incentive for wealthy people to encourage increasing the minimum wage.

Using a 1 to 100 ratio as a starting example, if the minimum annual income was $15,000, then the maximum annual income would be $1,500,000. However, this ratio is probably too high for maintaining a stable and harmonious society in the long term. Using a smaller ratio of 1 to 50, that maximum income of $1,500,000 would translate to a minimum annual income of $30,000. This is better, but the income inequality gap will still produce resentment, massive wealth inequality, and its associated societal problems.

An ideal ratio for a good society would be about 1 to 10, or 1 to 20 at the most.  Using a ratio of 1 to 15, a minimum annual income of $30,000 means the maximum annual income would be $450,000. The aim is to provide a broad range of incomes between what must be a minimum living wage and rewarding people for exceptional effort or skill. Society needs to provide an incentive for people performing hard or dangerous work, undertaking years of study to gain a qualification, engaging in entrepreneurial risk, or having exceptional knowledge or skills. Extremely high pay ratios, and paying everyone the same amount, are both socially destabilizing. There needs to be some inequality or a moderate range between the minimum and maximum income.

One benefit of defining the minimum and maximum as a ratio is that it removes the need for political intervention or legislation. The ratio must be established in the constitution so wealthy interests cannot capture government and change a law to benefit themselves. Establishing a fixed ratio instead motivates the highest earners in society to increase the incomes of the lowest earners. This is because the highest earners can earn a multiple of those gains. Using the 1 to 15 ratio, increasing the minimum annual income by $1,000 means the maximum income can increase by $15,000. The actual ratio applied must be decided democratically after hearing from independent and interdisciplinary experts informed by empirical research.

Whatever the minimum income, it must enable someone with one dependent to earn a basic living wage working 80% of full time. This provides at least 20% of the workday to pursue other interests. For example, people on minimum wage could choose to earn more than just a basic living wage working that final 20% to make full time. Alternatively, people could use the time to study and train for a better paying job, spend time with friends and family, or just relax and pursue personal interests. These are the benefits that society is supposed to provide.

Societies that cannot provide full-time working citizens with a comfortable life beyond merely surviving are failed societies. Citizens should allow these societies to collapse so they can rebuild a better economic system. Everyone should have the opportunity to earn enough to have a good life, even those in the lowest paid jobs in society. People should not have to work to exhaustion and burnout just to exist. A minimum full-time income must provide for a life worth living.

Progressive Income Tax

Income tax rates must be linked to the minimum and maximum income levels. The minimum income must automatically rise and fall with inflation and deflation. When the minimum income changes, then the currency amounts defining each bracket must change automatically. Changing tax brackets must not depend on political decision making. If tax brackets are defined as fixed currency amounts and do not change automatically, then a greater proportion of income is pushed into higher tax brackets over time. Inflation erodes purchasing power so real incomes do not increase. The combination of inflation and static income tax brackets means higher effective tax rates and lower standards of living. The tax brackets must automatically adjust.

Tax brackets must be more granular so that rates increase gradually without big jumps in percentages. For instance, there could be 101 income tax brackets with the lowest set at 0% and increasing by 1% for each of the remaining 100 brackets. The marginal rate for each bracket only applies to the income in that bracket, as happens with current progressive tax systems. Any income over the maximum level would then be taxed at 100%. This top tax bracket would apply to very few people.

The aim of having so many tax brackets is to remove disincentives for jumping into higher tax brackets. In current systems, people jumping large thresholds into the next bracket may not see as much benefit for pay raises if it means suddenly paying a lot of additional taxes. However, with more granular increases this problem decreases because pay increases are only gradually taxed more.

A prior example uses an income ratio of 1 to 15 with a minimum annual income of $30,000 and maximum income of $450,000. We can evaluate what 101 tax brackets look like with this example. Most tax brackets span $4,242. This is calculated as the difference between the maximum and minimum incomes, divided by 99. The difference is divided by 99 because the bottom bracket is 0% for everything below the minimum income, and the top bracket of 100% applies to income above the maximum. The 101 brackets minus the top and bottom brackets equals 99 brackets to divide the difference between the maximum and minimum incomes.

All income within the first tax bracket (everything below $30,000) attracts a 0% tax rate. Nobody pays any tax on this first amount of their income. Someone earning $34,242 would be taxed 1% on the next $4,242, so they would pay $42 in total annual taxes. Someone with an income of $38,484 would pay this amount plus 2% on their next $4,242. Their total annual payable tax would be $127. Each additional $4,242 earned is taxed by an additional 1%. But the higher percentages only apply to income that falls in that bracket. Someone earning the maximum income of $450,000 would pay 99% tax on their last $4,242. Anything over $450,000 would be taxed at 100%.

The effective or cumulative tax rate of someone earning $450,000 would be about 47%. This means a maximum after-tax take-home pay of $237,879. This is based on the example of a 1 to 15 income ratio with a minimum full-time income of $30,000. Changing the ratio or minimum income changes everything else.

All Wealth Treated Equally

All sources of wealth must contribute equally for calculating total taxable wealth. This includes cash, securities, land, buildings, vehicles, boats, airplanes, appliances, trusts, businesses, equipment, furniture, artwork, patents, copyrights, and anything else with financial value. All types of assets must be added together to calculate total wealth. People are then free to choose what type of wealth they want to accumulate to stay within the maximum limit.

Minimum and Maximum Wealth

Minimum and maximum wealth levels must be linked to each other by a ratio. The issue is establishing a minimum wealth baseline to anchor this ratio. There are many potential ways of deciding the minimum. A simple approach could be the average total wealth of the poorest 1% of the adult population. However, we could also define the minimum in a way that helped eradicate involuntary homelessness. The minimum wealth would be the value of a simple two-bedroom residence. This approach establishes a minimum wealth that nobody falls below. People would of course be free to work towards building wealth and living in bigger homes. But nobody would become homeless. The minimum would apply to each individual adult. People living together could combine their minimums to, for example, live in a modest home suitable for a family. Groups of people or even extended families could combine their minimums to co-own bigger homes if they wished.

Giving homes to the homeless is the cheapest option for taxpayers to solve homelessness. It is cheaper than not providing homes because homeless people often require police, justice, medical, social, and other services at higher rates. Providing the homeless with homes lowers the burden on government budgets by reducing the level of need for these services. It avoids unnecessary bureaucracy and reduces the ongoing costs of managing social housing and providing associated services.

Giving people homes is a simple solution to a problem with more complex causes. It also enables solving other social problems. For example, children have a better chance to grow up in stable homes rather than go into foster care systems if their parents become homeless. This further reduces the burden on taxpayers because there will be less need for social workers, services, and other costs associated with caring for children from unstable homes. Moreover, instead of these poor children developing chronic mental and physical health issues requiring more resources over the long term, they are more likely to become healthy contributing members of society. This means fewer government services are needed and government budgets are smaller, while more people would be able to contribute to society. Taxpayers thus not only save money, but the tax burden is shared by more people contributing to society. Giving small and simple homes to the homeless is thus a financially responsible method of establishing a minimum wealth baseline.

Homes given to the homeless would eventually become their own personal property so that it is in their interest to look after them. It might be psychologically better to allow people to buy their homes at cost, without interest, so people worked to earn their homes. People might value them more and look after their own personal property. However, in the first instance, homeless people would be housed without needing to pay. From that position their lives become stable enough to seek employment. They would then be given the option to work towards the purchase of their own home.  Keep in mind that this may not be possible for everyone and there will always be a small percentage of the population that needs more ongoing help for a variety of reasons.

The minimum wealth value held in primary homes must not be available for collateral. Anyone with only one home could not sell it without simultaneously buying another home. Alternatively, they could have the minimum value placed in an inflation-adjusted trust to buy another home later. For example, people may not want the responsibility of a home if they go traveling for a long time or move overseas. However, they cannot withdraw the minimum wealth value to travel, and they cannot have this minimum in cash even if they move overseas and give up their citizenship. This is because anyone who used to be a citizen can reapply to be a citizen in the future. This is why nobody can withdraw this minimum value. The idea is that nobody in the country can fall below this minimum wealth level, lose their home, or become involuntarily homeless.

Defining minimum wealth as having a simple home also provides people with addresses for voter registration, employment searches, and public services. The solution thus fits within and complements a broader set of changes to build a better society.

Once a minimum wealth level is established, the maximum wealth would be set at a ratio of this minimum. It is essential that the ratio be set democratically after hearing independent expert advice and relevant research. However, using a 1 to 1000 ratio as an example, if a basic two-bedroom home costs $200,000 the maximum wealth level would be $200,000,000. Linking maximum wealth to minimum wealth motivates the wealthiest in society to push for the minimum to increase. For example, if the minimum wealth level increases by $50,000 then the wealthiest can have $50,000,000 more.

Minimums ensure people cannot fall below a certain level. But it is more important for a stable society that people are not able to exceed a maximum level of wealth. Some people always want more, and no amount is enough. But too much concentration of wealth is detrimental to the health and stability of society. There must be a limit beyond which society tells its members that they have enough, even if the individuals themselves disagree. Freedom to pursue individual interests, such as accumulating wealth, must be balanced with freedom from the deprivations that come with wealth inequality, such as homelessness.

Progressive Wealth Tax

A progressive wealth tax must be implemented to reduce wealth inequality. It must be a progressive tax because the wealthier a person is the higher returns they are able to earn on their accumulated assets. Wealth inequality is more extreme than income inequality because it accumulates over lifetimes and generations. Without taxing wealth, society gradually splinters into elites owning almost everything and the rest of the population sharing the remaining scraps. This is not a stable arrangement and historically leads to societal breakdown and mass violence. We are doomed to repeat this cycle unless we learn from it and implement a progressive wealth tax.

The marginal tax rate applicable to each bracket must increase exponentially and not linearly. The first marginal tax bracket must have a rate of 0% because it applies to the minimum wealth bracket. Taxing the minimum would erode the value of this wealth and push people below the minimum, defeating the goal of having a minimum in the first place. The wealth tax then starts with very low marginal rates in the first taxed bracket, increases gradually at first for brackets in the middle, and then accelerates quickly to a maximum marginal rate of 100% for the last tax bracket. All wealth beyond the maximum is then taxed at 100%.

The marginal rate must increase exponentially because wealth grows exponentially over time. Marginal income rates can increase linearly because income is a steady annual flow. Wealth usually grows faster than inflation, whereas income growth has not kept up with inflation, meaning wage earners have gradually become poorer in real terms. For example, someone with a million dollars invested in assets receiving a 7% interest will double their wealth in about 10.2 years without working.  However, someone working for an income worth 7% of a million, or $70,000 per year, will only earn $714,000 during the same 10.2 years. The $286,000 difference is due to compound interest accruing on wealth. The difference becomes more extreme over longer periods of time and with greater wealth. Marginal rates that increase exponentially for each bracket take this reality of wealth into account.

Inheritance Tax

The most any individual can inherit must not enable them to exceed the maximum total wealth. Someone at the minimum wealth level could therefore inherit almost the full maximum wealth amount. But someone with considerable wealth would only be able to inherit the amount that would take them to the maximum wealth level. The underlying principle is that nobody can exceed the maximum wealth level under any conditions.

Inheritances can be placed within a managed trust for a maximum of one year from the date of inheritance. The purpose of this would be to facilitate the reorganization and redistribution of assets if needed. For example, if someone wanted to inherit a property that had been in the family for generations but already had too much wealth in other assets. They could gift some of their other assets to family, friends, charities, or others rather than pay them as taxes. This would bring the receiver of the inheritance under the maximum with room to inherit the family property. Each receiver would not be able to exceed the maximum income or wealth limit. Note that this scenario would only impact the most extraordinarily wealthy members of society.

Tax Simplification

The complexity of tax laws advantage wealthy individuals. They can afford to pay lawyers to establish complex legal structures and accountants to navigate lengthy tax codes. Poorer individuals cannot do this and often pay higher effective tax rates despite having lower incomes and less wealth. To counteract this problem, tax laws must be radically simplified. There must be no tax concessions, subsidies, deductions, or exceptions allowed. All forms of earned and unearned income count towards annual income. All types of assets and capital must count towards total wealth. Aggregated annual incomes and total wealth are then subjected to the relevant tax brackets and their applicable marginal tax rates. Calculating payable income and wealth taxes becomes a simple process that no longer provides advantages to wealthy individuals because they can afford lawyers and accountants.

Changing to a simplified tax regime should happen slowly and in stages. This helps reduce unintended negative consequences. Subsidies and exceptions must be reduced gradually as programs are enacted to render them redundant. For example, health care deductions are removed once universal public health care systems are established. Student concessions are eliminated once all levels of education are available for all. Childcare subsidies are eliminated once childcare services are available to all parents. These systems and programs may take decades to establish, depending on the country, but the end goal is to eliminate all tax deductions and subsidies. Even deductions for charity donations must eventually be eliminated. The end goal is a simplified tax code in which annual income and total wealth are straightforward to calculate.

Income donations to charity would no longer be tax deductible. Total wealth would be calculated based on remaining assets after donations of wealth to charity. The claimed value of the donation must be irrelevant. All that matters is the total value of remaining wealth. This eliminates loopholes used by wealthy individuals to reduce their taxable income.

For capital gains, unsold or unrealized gains count towards total wealth. Once assets are sold, then realized gains are counted as income in the year sold. This does mean assets could be taxed twice, but capital gains are not earned through work. The wealth tax thus captures some of the socially created value, such as the increase in property values that result from nearby infrastructure paid for with taxpayer money. Wealth tax rates are much lower, increase very gradually at first, and this issue of double taxation will therefore only impact a minority of the richest members of society. There is no need to feel bad for them as they will still be the richest members of society.

Organizations must not be able to pay for or own assets for personal use by employees. Benefits such as vehicles, homes, accommodation, travel, food, clothing, and personal services or expenses would for tax purposes be treated like the equivalent value in income for that employee. Any assets provided for personal use must count towards the total wealth calculation for that individual. The value of benefits and assets would be based on market rates or professional assessment. Organizations might also opt to give employees money to pay for expenditures, in which case this must count towards the income for that employee. These features of tax simplification are necessary to avoid individuals shifting the ownership of assets to hide them inside corporations while using these assets as if they were personal property. It also avoids complex pay packages to provide incomes above the maximum.

Transparent Ownership

The ownership of all assets and capital must be easily linked to specific individuals. Where there are multiple owners, such as shareholders of corporations or beneficiaries of trusts, it must be clear what proportion of assets are owned by everyone. The purpose of making the human owners of all assets transparent is to enable accurate assessments of everyone’s income and wealth. It also acts as a check on some types of financial fraud, such as large-scale stock manipulation schemes where more shares are traded than exist in the market. Asset transparency makes tax evasion more difficult and limits the ability of organized crime hiding their illegal gains within legitimate assets. Transparent ownership of assets also enables a clearer picture of overall economic conditions. This reduces uncertainty for financial and economic regulators and makes the outcomes of policy changes more predictable.

Considerations

A Healthy Society

A good metaphor for capitalists in society is having parasites in a host body. Another metaphor is when a host develops cancer. In these metaphors the host is the rest of society. In both cases, the parasites and cancers are using up resources needed by the host. The host suffers and will eventually die as the parasites and cancers grow, taking an increasing amount of energy and resources. This is what is happening in capitalist societies. The wealthy continue taking a greater proportion of available income and assets. Resources are hoarded by the few at the expense of the majority. This leaves less for the rest of society to stay healthy. Life expectancy and quality of life in the most capitalist societies have been declining. This is one way the sickness of parasitic or cancerous capitalism materialises in a society. Hosts cannot recover until their parasites are removed or their cancers are treated.

Treatments for parasites and cancer produce unpleasant and uncomfortable short term side effects. Likewise, the treatment for removing capitalists have negative short-term consequences. There is short term shared discomfort to achieve long term societal health. This means economic downturns and financial adjustments before society can recover and thrive again. The wealthy will try to inflict pain and generate fear in their host populations to try and keep their positions and assets. There will be short term negative consequences for the countries undergoing treatment, but the long-term benefits will make the transition worthwhile.

Society should welcome the departure and downfall of capitalists, even if the adjustment period is difficult and uncomfortable. Capitalists do not contribute the value they extract, making them a net negative for everyone else. Even when capitalist investments and activities increase the size of the economy, their goal is to capture and extract this growth for their own private gain as possible. Average growth and productivity figures are meaningless if the benefits go to a tiny minority at the top. The wealthy only share what is necessary to further enrich themselves. They have been successful in capturing most new wealth generated. The majority do not see the benefits.

Responses of Wealthy Interests

Wealth taxes will be opposed by the wealthy, much as abolitionism was opposed by slave owners and republicanism was opposed by monarchs. Ultimately it is all about power. The wealthy are losing some of their power and will use fear to try and hold onto that power. The fact that wealth taxes will slowly chip away at wealth levels is precisely the point and by design. Wealthy interests will view them as an existential threat, because they are an existential threat to their excessive way of life.

Media owned by wealthy interests will run stories about impending economic disaster from raising taxes on the wealthy. There will be much fear mongering. There will be hysteria about potential job losses, capital flight, and recessions. Wealthy interests will lobby politicians to further their own interests at the expense of society. They have gotten used to imposing their will on populations and will not give up their privileged positions without a fight.

The wealthy will attempt to create an economic crisis to remove the government from power. Depending on the country, they may even influence overseas militaries and intelligence agencies to arrange a coup, occupation, or special military operation to bring back the good old days of wealth extraction. This has happened to many countries. Any country wishing to cure itself of the disease of capitalism must plan and prepare. The wealthy use every possible strategy and tactic to get the country to reverse course. However, doing so will only help a tiny minority of wealthy individuals while the rest of the population is disadvantaged.

Capital Flight and Brain Drain

Raising taxes can cause people to leave the country. There are two associated risks. The first is capital flight, where money to invest in the economy leaves the country. The second is brain drain, where skilled and productive citizens leave the country. Different policies are needed to address these two risks.

Regarding capital flight, it is important to note that people cannot take fixed sources of wealth with them. For example, the wealthy cannot take raw resources, infrastructure, houses, farms, land, and factories with them. Governments with sovereignty over their currencies can create money to buy these assets as the wealthy leave. The inflation risk from creating new money must be balanced by higher taxes on the wealthy to remove money from circulation. What results is a transfer of wealth from the rich to the poor, which is the intended goal. However, governments must only create new money in the quantities that it leaves the country. This requires having the data to know these values in real time.

Preparatory legislation must be enacted prior to implementing any taxes that could cause capital flight. The legislation must establish national fiscal and economic monitoring systems and the capacity to analyse and report on this data in real time. The legislation must also put in place mechanisms for automatically determining how much new money can be created without raising inflation. It must allow for real time monitoring of prices, capital flows, employment levels, migration numbers, and other relevant metrics. The government needs to be ready for capital flight and have the tools in place to address the issue before it becomes a problem. It then needs to enact tax level changes gradually and incrementally to avoid sudden shocks.

Once taxes on wealthy capitalists get high enough, some may want to leave the country. This is a good thing because capitalists extract more value from the economy than they give back. They would not have enormous private wealth if this was not the case. The risk is capital flight happening so quickly that it causes an economic crisis. It must be engineered to happen gradually so that government can adjust in stages. When taxes are raised gradually on the wealthy, government policies can mitigate the pain caused by the transition.

Keep in mind the wealthy are still people with social roots that are not easily discarded. Fewer people will ultimately end up leaving than the number that first threaten to leave. Even if some wealthy do leave the country, this could benefit a country because the income these individuals currently earn could instead be redistributed to more people.

In the short term, there will be negative consequences from causing wealthy people to leave the country. They will have to sell their assets before leaving, which could drive down the demand and cost of these assets. There may be factory closures and job losses unless the government has adequately prepared for these predictable outcomes. The transition will look like an economic decline in terms of stock values and asset prices. But the amount of farmland, homes, and infrastructure of the nation will remain unchanged. The speculative value of things will decline, but this does not mean that people’s standard of living will decline.

Other articles will discuss mitigating solutions in other areas of the economy. For example, one of the key areas left unaddressed here is people’s retirement savings, which are tied up in stock markets that will be impacted. Also important are house values, which represent most wealth held by people in the middle. Other articles will address this issue as it is more complex than can be explained quickly here. The focus here is on an innovative approach to income and wealth taxes.

The other risk of raising taxes too quickly is a sudden brain drain and skills depletion that removes valuable expertise, knowledge, and labour from society. Once again, the government must enact preparatory legislation prior to implementing maximum income and wealth taxes. For example, the government must make education and training freely available to all. Then tax changes must be phased in over a long enough period to train people to replace those that chose to leave. This will smooth the transition and enable replacing workers as others chose to leave. It is again important to remember that most people would prefer to stay where they grew up, close to family, friends, and familiar surroundings. People stay where they are unless conditions get extremely dire.

Changes to tax rates must align with improvements in public services and infrastructure. People need to see tangible benefits. The quality of life must stay the same or preferably improve for most people. Tax rates must change slowly to avoid a sudden brain drain or capital flight. This allows time for society, government, and the economy to adapt to these changes.

Entrepreneur Motivation

Entrepreneurs that found highly successful companies should be able to maintain control even if they cannot claim the full wealth associated with that control. This requires companies to have voting shares separate from ownership shares. Entrepreneurs could maintain control by retaining 51% of the voting shares but sell off their ownership shares to keep below the maximum wealth limit. This model strikes a balance between enabling entrepreneurs to maintain control of their creations and ensuring maximum wealth levels are not exceeded.

We do not want to risk the founders of successful companies losing interest before fully executing their visions. Having government officials take over the control of successful firms will not be good for society. Government employees are risk averse, bureaucratic, and lack the motivation to fulfill the legacy started by an entrepreneur. 

However, we also want to avoid individual entrepreneurs gaining enough wealth to unilaterally influence government and public decisions. Having separate voting shares enables founders to retain control over their companies, no matter how large they get, while their personal wealth remains within the maximum limit. This protects society from undue influence by wealthy individuals.

Since entrepreneurs maintain control over their business decisions, they are free to take risks and run businesses how they want. Government bureaucrats are meanwhile free from the liability associated with any negative consequences of entrepreneurial decisions. More of the value is shared across society, but control stays with the people who created the enterprise.

Double Taxation

One criticism of a wealth tax is that the income used to build that wealth has already been taxed. The criticism is that it is a double tax. Putting aside the fact that most taxes besides income tax are a double tax, and thus that this criticism is meaningless and misleading, there is a more important underlying reason to tax wealth.

The wealthiest people in society do not make their money working for a salary. They hold assets and their capital gains are neither earned nor subject to income tax. Once people reach a certain level of accumulated asset wealth, it accumulates faster than people can spend their wealth. For example, a diversified investment portfolio can return an annualized rate of return above 10% over the long term. Someone with $100 million invested could see gains of $10 million per year. They can comfortably live on much less and re-invest the remainder to stay ahead of inflation. They will grow richer every year without working and without paying income tax. That is why it is necessary to tax wealth.

Even if the super wealthy pay capital gains tax on assets sold for spending money, they are growing wealthier without paying any taxes on that increasing wealth. This wealth does not come from nowhere, it represents value created by others. Land values increase because taxpayers fund infrastructure developments nearby. Business profits and thus share prices and dividends come from the fact that workers and suppliers are underpaid, while customers are overcharged relative to the actual cost of production. The standard defense to this is that business owners deserve this profit because they are taking a risk. The risk is that if their business fails then they will have to become a worker. But workers risk becoming homeless and destitute if the business fails. The businessperson taking a risk argument misrepresents where the actual risk lies.

Cooperative Businesses

One of the most important policies for transitioning the economy is government backed low or zero interest loans for workers that want to buy their workplaces. This should also be accompanied by a long-term marketing campaign to make workers aware of this option. It should additionally be accompanied by free educational programs to train workers in how to transition into being worker-owners. This is a better option than having the government nationalise the business. The workers have a vested interests in the business succeeding. They are also the ones with the knowledge and skills necessary to keep the business running efficiently.

With higher taxes wealthy people may sell assets to pay taxes or before leaving the country. These assets will include businesses, which is why the government must plan accordingly before enacting tax reforms. An economy with a maximum wealth level should encourage cooperative businesses to facilitate spreading the benefits of economic growth and productivity between more people in society.

Cooperative businesses have the advantage of recognizing the fact that successful enterprises require the hard work of many people. They are better structures for rewarding the hard work of many people working towards a collective goal. It is favorable to reward key personnel with ownership rather than share profits with external owners that do not contribute to the success of the business.

A cooperative business can divide high asset values between multiple owners to spread wealth between more people. This enables capital intensive businesses or those requiring large infrastructure investments to surpass individual wealth limits.

The more democratic nature of cooperative decision-making and greater accountability to workers as owners makes cooperative businesses less susceptible to control by sociopaths. Worker-owners cannot be easily removed so if they are negatively affected by the influence of sociopaths, they are likely to band together to remove these individuals from corporate structures.

Welfare Abusers

Individuals that choose to live on the minimum provided by society can be assigned work to contribute back to society. When this happens, it should be part time work so they can take advantage of apprenticeships, training, education, coaching, or social connection programs. Even if people do not take advantage of these opportunities, they must be made to contribute back to society because they are taking up resources and must give back.

Even if the education and training programs do not work for some people, it is still cheaper for society to support these individuals because they will be less of a burden on the police and justice system. They will be less of a nuisance to the rest of society if they have homes to stay in and their basic needs are met. But if people are content to get by with this bare minimum, then society is justified in making these individuals contribute enough to balance what they have received.

Constitutional and Educational Protection

The ratios between minimums and maximums for both income and wealth must be included within constitutions to make them hard to change. Without this protection wealthy and powerful interests will seek to remove the effective limits to wealth accumulation. This will gradually undermine the wellbeing of most citizens. The ratio can only be changed by a popular referendum.

Severe mandatory penalties must be written into the constitution for anyone trying to undermine, cast doubt upon, or remove minimum and maximum limits. Penalties must escalate for successive offences. Penalties must be means-tested and calculated based on each person’s income or wealth, whichever produces a greater fine amount.

The education system must also include curriculum teaching the importance of having ratios. The requirement to teach this curriculum must be embedded within the constitution to avoid society gradually forgetting why the ratios exist. These constitutional protections help ensure that the only way for the rich to become wealthier would be to make the poor better off first.