March 28, 2024

A Wealth Tax Would Look Beyond Income

INCOME tax rates have recently been raised slightly for some affluent people, and there is pressure for additional increases. But some economists say raising marginal income tax rates on high earners may miss the mark.

One reason is that the truly wealthy employ all kinds of legal means to minimize their tax liability, including shifting income around the world, deferring gains on their assets and many other sophisticated strategies. Another, though, is that taxes on ordinary income simply don’t apply to inheritance or investment, principal sources of wealth.

Under legislation that Congress approved on New Year’s Day the top marginal income tax rate for 2013 has risen to 39.6 percent from 35 percent for individuals on ordinary income over $400,000 and for couples on income over $450,000, while tax deductions and credits start phasing out on income as low as $250,000. But what is being taxed is often just a small portion of the income and wealth of the very richest Americans; unearned income, including unrealized gains and gains on investments, is either not taxed or taxed at a fraction of the top rate on wages.

Taxing wealth in addition to income is one way to make sure that the rich contribute more to government coffers. That would essentially be a tax on household assets like property, stocks, bonds, unincorporated businesses, trusts, art and yachts.

The idea is to aim at the wealthiest part of the population, perhaps the top 1 percent, a group that has seen the most significant and consistent accumulation of wealth over the last few decades.

“A wealth tax is an attempt to fill the holes in income tax,” said Douglas A. Shackelford, a tax expert at the University of North Carolina. “The primary hole is unrealized capital gains. That’s behind the big buildup of dynastic wealth.”

COUNTRIES like Canada have a tax on asset appreciation, based on the value of the assets at the time of the owner’s death. The United States does not, and the tax code contains a huge loophole through which to pass wealth to one’s heirs.

Here is how that can work in practice:

A billionaire can borrow against his stocks, art and real estate, and spend that borrowed money without paying tax. All he has to do is pay interest on the loan. When he dies, his heirs can sell the assets to pay off the debt. Under an existing rule known as the “step-up in basis,” no matter how much the assets have appreciated in value, no one will owe income tax on that gain. And the rest of his fortune goes to his heirs without anyone ever paying income taxes on the appreciation in the assets.

Partly to close loopholes like this, Ronald I. McKinnon, an economist at Stanford, advocates a wealth tax in addition to income tax. He outlined his proposal in a recent op-ed article in The Wall Street Journal titled “The Conservative Case for a Wealth Tax.”

Professor McKinnon’s plan would require households to list all domestic and foreign assets annually. There would be a $3 million wealth exemption, which, in his estimation, would exclude more than 95 percent of the population. The remainder would be subject to a flat tax of about 3 percent of household wealth.

In Europe, in addition to a wealth tax, many countries have a value-added, or consumption tax. Because the idea of a consumption tax is politically unpopular in the United States, he said in an interview, “I think the case is even stronger in the U.S.”

“Plus,” he added, “the income tax is a poor vehicle for hitting the wealthy.”

Other economists say that a wealth tax would also address other problems.

“Wealth inequality and lack of access to opportunity is destroying the meritocratic aspects of our economy,” said Daniel Altman, an economist at New York University and a former member of the editorial board of The New York Times. “That will cost us growth in the long run.”

Mr. Altman proposes replacing the income tax with a wealth tax. He estimates that a flat wealth tax of 1.5 percent would be more than enough to replace the revenue from current income, estate and gift taxes. But he proposes establishing tax brackets according to wealth levels. For instance, no tax might be imposed for a household’s first $500,000 in wealth, 1 percent for the next $500,000 and 2 percent for wealth above $1 million.

Proponents of a wealth tax also say it would encourage innovation and risk-taking because it wouldn’t tax wealth in its early phases, but only after it has been amassed.

There are several main criticisms. For one, valuing unfamiliar assets — say, private businesses or art collections — would not be easy. A related issue is liquidity, as an owner may not be able to readily obtain cash based on the value of the assets in question. And some fear a negative effect on capital formation.

There are also possible legal roadblocks. Matthew J. Franck, writing for National Review Online, said instituting a wealth tax might require a constitutional amendment. A similar concern haunted proponents of the income tax until ratification of the 16th Amendment in 1913.

IT is unclear whether the idea of a wealth tax will ever gain traction in the United States. But longtime deficit problems remain, and tax increases of some type may well be part of the solution. According to the Organization for Economic Cooperation and Development, the United States raised less tax revenue in 2010 as a proportion of gross domestic product than any other industrialized nation, aside from Chile and Mexico.

“Should we reform the income tax, the estate tax or bring in a third tax like the wealth tax?” asked Professor Shackleford at the University of North Carolina. “We have to do something. There’s a tremendous amount of tax escaping because we don’t tax the deceased and we don’t tax the heirs.”

Article source: http://www.nytimes.com/2013/02/10/business/yourtaxes/a-wealth-tax-would-look-beyond-income.html?partner=rss&emc=rss

DealBook: Wall St. Giants Seek a Piece of Nigeria’s Sovereign Fund

Wanted: A reliable overseas business partner to invest more than $1 billion presently trapped in Nigeria.

This is not a scam.

Nigeria, the West African nation that has gained notoriety for the illicit e-mail spammers aiming for Western bank accounts, is attracting attention for legitimate financial opportunities — investing its own savings.

In an effort to preserve and increase its oil revenue, the country recently established a so-called sovereign wealth fund, following the path of many resource-rich countries. Now, Wall Street titans like Goldman Sachs, Morgan Stanley and JPMorgan Chase are courting top government officials, aiming to grab a piece of a portfolio that could eventually be worth tens of billions of dollars.

“The country is at a point of inflection, and what we do in the next few years will set the pace,” said Olusegun Aganga, the former Nigerian finance minister and current minister for trade and investment, who helped create the sovereign wealth fund. “It’s a land of opportunities, which unfortunately has not been tapped well.”

More than half a century after discovering oil in the Niger Delta, the country continues to subsist barrel to barrel. Poverty is rampant. Public corruption is pervasive. And the government coffers are bare, even though Nigeria is the 10th-largest oil producer in the world.

By saving and investing the petro dollars, Nigeria hopes to break the resource curse. The nation, which derives 80 percent of its revenue from oil, created the sovereign wealth fund to buffer its economy from volatile commodity prices and impose fiscal discipline. The government so far has set aside $1 billion for the fund, and it could funnel as much as $2.5 billion a year, if oil prices remain high.

“One of our biggest problems in civil society is the time horizon that we’re operating on — whether election cycles or quarterly reports,” said Ashby H.B. Monk, a research associate at the University of Oxford who studies sovereign wealth funds. “The idea of a sovereign fund is to give government bureaucrats an opportunity to make long-term policy knowing that the buffeting winds of capitalism won’t blow them off course.”

Such funds have become powerful investment forces over the years. Abu Dhabi and Kuwait have amassed hundreds of billions of dollars by plowing their oil riches into stocks, bonds and other global assets. During the financial crisis, sovereign wealth funds provided critical capital to banks and other troubled firms.

To grab a piece of the lucrative business, big banks and asset managers have tirelessly cultivated relationships with governments worldwide and added teams dedicated to sovereign wealth funds. In recent months, bankers, lawyers and consultants flew to the Nigerian capital of Abuja to pitch officials on their services. The government chose JPMorgan Chase as one of its advisers on the structuring of the fund.

In other countries, the Wall Street feeding frenzy has drawn criticism. The Libyan Investment Authority, which was started in 2006, has complained that it lost millions of dollars on several investments, while money managers generated huge fees, according to documents leaked this summer to Global Witness, an advocacy group.

The Securities and Exchange Commission is looking into whether American money managers, in trying to land business with sovereign wealth funds, violated antibribery laws, according to people with knowledge of the matter who were not authorized to speak publicly about the inquiry. “If you don’t get these organizations designed correctly as sophisticated investment operations, you can lose a lot of money,” Mr. Monk said. “It’s the power of finance — for good or bad.”

Nigeria’s new fund is the brainchild of Mr. Aganga, a Nigerian native who worked at Ernst Young’s London office before joining Goldman Sachs in 2001. Last year, the Nigerian president, Goodluck Jonathan, asked Mr. Aganga to join his cabinet.

As the minister of finance, Mr. Aganga pushed to start a sovereign wealth fund almost immediately. He had helped oversee part of Goldman’s Africa business, and knew Nigeria was among the last oil-rich nations without an investment portfolio.

“It’s important that we have some savings for the future generations,” Mr. Aganga said. “It just makes sense for your economy. You’re completely exposed otherwise.”

But Nigeria has a spotty record managing its money. In 2004, the country started plowing extra oil revenue into a separate account, as a way to build savings. At one point, the portfolio held an estimated $20 billion, analysts say.

The funds did not last long. State and federal authorities leaders regularly siphoned off money to fill budget holes, build utilities or pay for other projects. By last year, the assets had plummeted to less than $1 billion.

“There were no rules about withdrawals or whom it belonged to among the three tiers of government in Nigeria,” said Razia Khan, head of African research at Standard Chartered Bank.

To avoid making the same mistakes, Nigeria is earmarking assets for different purposes in a structure that mirrors older sovereign wealth funds. One portfolio, which will invest in stocks and bonds, is focused on long-term growth in preparation for the day when the oil wells run dry. An infrastructure portfolio will support upgrades to the country’s bridges, roads, buildings and railways.

During periods of weakness, the government will have an emergency account to prop up the economy. But officials will be able to access the money only under certain circumstances, like a steep drop in oil prices.

Commitment will be crucial. Some politicians are already grumbling that the sovereign wealth fund will divert assets that the economy desperately needs now, and they are threatening to derail the effort. Such pressure, said John Campbell, a former United States ambassador to Nigeria and a senior fellow at the Council on Foreign Relations, a nonpartisan research center, could prompt the country to “raid the cookie jar” to deal with short-term issues. “Unless there is the political will to live up to those aspirations,” he said, “it’s not going to work very well.”

“My view is, better mute the trumpets for the time being,” Mr. Campbell said.

It will come down to execution, say Nigerian officials and outside analysts. The government is tapping an independent board to oversee the investment process and to ensure compliance. While critics point to the delay in naming those directors as a potential concern, authorities defend their position. They argue that the new finance minister, Ngozi Okonjo-Iweala, a former managing director at the World Bank, who was sworn in this August, needs time to learn all about existing matters.

The board “will define how effective this becomes,” said Fola Oyeyinka, an adviser to the Nigerian minister of finance. “The flavor of that board will dictate not just to Nigerians but to the world how serious we are.”

Article source: http://feeds.nytimes.com/click.phdo?i=e6ea3131f75b28952331653b91ceb9fd