Net worth taxes are the only type of taxes that do not reallocate wealth, and theoretically there would not need to be any other type of tax.
But net worth taxes are not practical for most tangible assets, including collectibles such as gold and art, and physical currency (coins and paper money). That is because there are often no records kept regarding these items, they are easy to hide, and it can be difficult and expensive getting them appraised. Laws that can't be adequately enforced undermine credibility, and a large portion of the revenue raised trying to tax tangible assets would be wasted on enforcement.
So the net worth tax should only apply to assets that are already commonly registered, such as national electronic currency, publicly-listed stocks, bonds, real estate, and motor vehicles. In addition, the value of non-publicly listed companies which are registered with a separate bitcoin account from their owner(s) would also be subject to the net worth tax.
Most tangible assets, including collectibles such as gold and art, and physical cash, would not be subject to the net worth tax. They would be taxed only when they are sold, and at the same ten percent rate that most other transactions would be taxed at. (A ten percent transaction tax on the sale is like paying a one percent net worth tax each year for ten years.) So you could hide them, give them to your children, or even barter them; it would all be perfectly legal. No tax would be due until they were sold for electronic currency, when the ten percent transaction tax would be automatically collected.
The government would be able to collect more of the tax that is levied, than ever before. For the first time in history, the ownership of all liquidity that is legal tender would be registered; recorded as Bitcoin-like currency. As for the other forms of liquidity; those that would not be subject to registration (and therefore not subject to the net worth tax):
(1) Physical currency (coins and paper money): For reasons mentioned in an earlier essay, its use would gradually diminish, primarily because it would become more costly to use. It might eventually become as insignificant as are gift cards. The underground economy would become much smaller than it is today, and all transfers of cash from physical currency to electronic currency or vice versa would generate new taxes which are not assessed under the present system.
(2) Gold has served as money for many years because it has been uniquely suited for that purpose, being non-perishable, scarce and divisible, but now with advances in computers and networking, an electronic currency would be even better suited for this purpose. In addition to also being non-perishable, scarce and divisible, an electronic currency incurs only negligible storage and transportation costs. Another factor is that the supply of electronic currency can be completely controlled, whereas the supply of gold varies with mine output. Also, what would support the price of gold once people realize that there can no longer be inflation since the supply of electronic money is absolutely stable? That said, there would always be the possibility, however remote, of coups or wars destroying the new economic system, so gold would continue to serve as money to some extent.
To determine tax rates, we would first need to determine the total amount of money that needs to be retired by taxation. That amount would always be the total that had been created into the system by government spending. That is key. Then, the tax rates for that year, would be determined using a ratio of the transaction tax being ten times that of the net worth tax. So, if government spending increased from the prior year, the transaction tax may jump from, say ten percent to twelve percent, with the corresponding net worth tax jumping from, say, one percent to 1.2 percent.
There may be a better ratio to use than ten to one for the ratio between the taxes. By using a ratio of ten to one, we are making the assumption that tangible items are held for an average of 10 years. So, paying a 10 percent transaction tax on the sale of a tangible item is like paying a 1 percent net worth tax for each of 10 years on that item.
More items tend to be held for less than ten years than items that tend to be held for more than ten years, but the items with a longer holding period tend to be more valuable. But some people trade valuable items very frequently. It wouldn't seem fair to charge a ten percent transaction tax, for example, on collectible coins that are traded several times a year. That’s why we could allow people to voluntarily register tangible items, allowing them to use the net worth tax instead of the transaction tax. This registration could be easily done over the internet, but if elected it should be required to be done during the purchase process (and the purchase must be made using electronic currency). As an added convenience, each property registered (including property that is automatically registered, such as real estate, stocks and bonds, motor vehicles and electronic currency) would allow easy internet listing of transfer on death beneficiaries.
People often insure or professionally store tangible items, under contracts which itemize these items for valuation purposes. In this situation the net worth tax would be applied to these items during the periods of such insurance and/ or storage, even if these items were not registered at the time they were purchased. These types of contracts would only be valid if paid for using electronic currency, and a portion of each payment would automatically go to the government as payment of the net worth tax.
Adjusting the ratio of transaction tax to wealth tax, together with adjusting the anti-trust laws, could periodically be performed to limit excessive concentration of wealth. This would be the one of the rare changes that could be made in this otherwise simple, automatic and scalable tax system.
Fate Of The Income Tax
All income taxes and payroll taxes, as we know them, would be eliminated. As stated earlier, most transfers of electronic money would be subject to the ten percent transaction tax, and in addition to sales of goods and services, transactions also include such things as salary, dividends, interest, gifts and inheritances. But there are some nuances:
(1) Sales of inventory within the supply chain: The transaction tax would operate as a VAT (value added tax): The seller of inventory paying the transaction tax, would receive a rebate representing VAT tax already paid by other sellers earlier in the supply chain.
(2) For assets subject to the net worth tax: There would be no transaction tax on getting your own invested capital back. A central database would keep track of each registered asset, which would include subsequent additional investments made to the asset, as well as transfer on death instructions for that asset. When the asset is eventually sold, the transaction tax would automatically apply to any amounts received in excess of the cost. There would be no transaction tax paid on amounts received that represent recovery of cost, from the first dollar received until fully recovered. This would be true regardless of whether the amounts received were characterized in the form of salary, interest, dividends, or return of capital, including proceeds from a sale. See examples below.*
(3) Individuals operating a business without using a separate business entity: The value of the business would not be subject to the net worth tax, and a sale of the business would be looked at as the sale of the individual assets of the business, using the normal rules for the transaction tax as they apply to each type of asset. The transaction tax would also be assessed on any goodwill or premium received.
(4) Investors in businesses that are separate entities (have a separate bitcoin account) from their owner(s):
Owners of publicly traded businesses would pay the annual one percent net worth tax on the average market value of their stock over the year.
For business that are not publicly traded, valuation for net worth purposes can be difficult to determine. Where the amount of business activity is below a certain threshold, owners would not be subject to this tax. Otherwise, a good method would be to compare net asset value with a capitalized valuation multiple applied to net income. Then, use a formula to determine the valuation that the net worth tax would be applied to.
(5) Business that are separate entities from their owners:
Entities receiving funding from investors would not pay the transaction tax on such incoming funds.
Businesses would pay their own transaction taxes on their own activities.
Net worth taxes would apply to entities' assets which are of the type that are commonly registered. For example, inventory would be exempt from the net worth tax, but real estate would be subject to the tax. Note that these rules could result in double taxation. For example, there would be transaction taxes when an
entity sells goods to the retail public and again when profits are distributed. There would be net worth tax on the real estate (and other assets of the entity that are of the type commonly registered), and again (payable by the owners) on the overall value of the entity.
With all these rules, there may be more wealth reallocation under the new system than originally contemplated. But from the government’s perspective, it shouldn't really matter if there is some wealth reallocation, or even if people figure out some tax loopholes. Unlike the old system with its income and payroll taxes, a goal of the new tax system would be to prevent the tax from reallocating wealth wherever it is practical to do so.
a. A person sells his car at a loss. Cars are registered and subject to the net worth tax, so the transaction tax is zero; it would only apply to gains.
b. A house is sold for more than it's cost. Real estate is registered and subject to the net worth tax, so the transaction tax would only be applied to the gain from the sale.
c. Interest received on a bond: Bonds are registered and subject to the net worth tax. From the first dollar of interest received until full recovery of an amount equal to the cost of the bond, the transaction tax would be zero. Any interest received thereafter would be subject to the transaction tax.
d. Sale of a bond: First, add up the interest that has been received so far. Subtract that from the cost of the bond (but not below zero) to determine the adjusted cost. Any of the sales proceeds that exceeded the adjusted cost would be subject to the transaction tax.
e. A person owns stock in a business. He is also a director of, an employee of, and a lender to the business. Stocks and loans are registered and subject to the net worth tax. From the first dollar received from the company, until he has fully recovered the cost of his stock and loan, the transaction tax would be zero. It would not matter whether the money received was in the form of dividends, return of capital, interest payments, loan repayments, director fees, or salary. All such amounts received would adjust the cost of his stock and/ or loan accordingly. If the adjusted cost of the stock and of the loan are now both zero, any additional salary, director's fees, dividends or interest received would incur the transaction tax. When he eventually sells the stock (or is repaid his loan), any of the sales proceeds that exceeded the stock's (or loan's) adjusted cost would be subject to the transaction tax.
f. A person buys gold and later resells it. This is a tangible asset that is not subject to the net worth tax, so the transaction tax applies to the full amount of the sales proceeds, regardless of gain or loss.
g. A person buys gold and registers it so that it is subject to the net worth tax. When he later resells it, the transaction tax on the amount of the sale representing recovery of his cost, would be zero. The transaction tax would only apply to any gain on the sale.
h. A business buys gold and later sells it. The gold is inventory and not subject to the net worth tax, so the transaction tax applies to the full amount of the sales proceeds, regardless of gain or loss. But there would be a VAT rebate on any transaction taxes paid duplicating amounts paid by others earlier in the supply chain on this item of inventory.
Next, read the F.A.Q. page.