Households from the United States to Europe and
Japan may soon face fiscal shocks worse than any market crash. The White House
and New York Mayor-elect Bill de Blasio aren't the only ones calling for higher
taxes (especially on the wealthy), as voices from the International Monetary
Fund to billionaire investor Bill Gross increasingly make the case too.
In his November investment commentary for bond giant
Pimco, Mr. Gross asks the "Scrooge McDucks of the world" to accept
higher personal income taxes and to stop expecting capital to be taxed at lower
rates than labor. As for the IMF, its latest Fiscal Monitor report argues that
taxing the wealthy offers "significant revenue potential at relatively low
efficiency costs."
The context for this argument is the IMF's expectation
that in advanced economies the ratio of public debt to gross domestic product
will reach a historic peak of 110% next year, 35 percentage points above its
2007 level.
What the IMF calls "revenue-maximizing top
income tax rates" may be a good indication of how much further those rates
could rise: As the IMF calculates, the average revenue-maximizing rate for the
main Organization of Economic Cooperation and Development countries is around
60%, way above existing levels.
For the U.S., it is 56% to 71%—far more than the
current 45% paid in federal, state and local taxes by those in the top tax
bracket. The IMF singles out the U.S. as the country where raising top rates
toward 70% (where they were before the Reagan tax cuts) would yield the most
revenue—around 1.25% of GDP. The IMF admits that
its revenue-maximizing approach takes no account of the well-being of top
earners (or their businesses).
Taxes can rise in ways both prominent and subtle. In
the United Kingdom, the highly advantageous "resident non-domiciled"
status—requiring wealthy residents to pay taxes on overseas earnings only if
they "remit" the money to the U.K.—has become much harder to qualify
for and more costly after recent reforms.
In France, President François Holland finally
managed to pass a 75% tax on income above one million euros and now he is
seeking to limit the tax benefits of "life insurance contracts," a
long-term savings instrument used by most wealthy households. As for the
uniquely French "impôt sur la fortune," taxing those with net worth
above 1.3 million euros, it is alive and well. Japan too is taking steps to
increase personal taxation, though it hasn't yet targeted top earners in
particular.
As applied to the euro zone, the IMF claims that a
10% levy on households' positive net worth would bring public debt levels back
to pre-financial crisis levels. Such a tax sounds crazy, but recall what
happened in euro-zone country Cyprus this year: Holders of bank accounts larger
than 100,000 euros had to incur losses of up to 100% on their savings above
that threshold, in order to "bail-in" the bankrupt Mediterranean
state.
Japanese households, sitting on one of the world's largest pools of
savings, have particular reason to worry about their assets: At 240% of GDP,
their country's public debt ratio is more than twice that of Cyprus when it
defaulted.
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