Nation Top/Income Tax Rate
United States-35%
United Kingdom-50%
Austria-50%
Germany-45%
Japan-50%
Ukraine-flat rate 15%
PTR vs FTR: The FTR taxes people at all income levels thus discouraging people from reporting even the smallest amount of income, while PTR encourages people of modest income levels to report because there is little or no taxes due. The PTR gets more people to be tax compliant because more people are taxed less. You then have more people reporting income and they are more likely to report their true income. Improved tax reporting and compliance has a number of advantages well beyond that of the income tax revenues. They include:
1. Increased compliance provides more reliable economic statistics allowing lawmakers to make better decisions and measure the results of those decisions.
2. Increased consumer spending: Spending power increases with the population segment most likely to accelerate Money Velocity (MV), which is vital to the local economy.
3. Increased consumer spending and accelerated MV generate increased Value Added Taxes revenues (VAT).
4. Adjusting tax rates at different levels allows lawmakers to better react when inflation is too high or if deflation occurs.
5. Increased Lending: Allows creditors to make informed decisions by reviewing tax returns, which also accelerates MV.
Estate tax vs no estate tax: As mentioned above, the top five economies with a thriving middle class all have a reasonable Estate Tax. Estate taxes only account for a small but meaningful slice of the tax revenue pie. Their main purpose is not so much to raise revenue but to prevent a nation from becoming a Banana Republic. No. Not the fashion retailer, but there is an interesting correlation.
The term banana republic comes from the US Secret Service in the 1970s. It is described a very poor and horribly corrupt Latin American nation. It is usually a military dictatorship with a hand full of super rich families in control of all economic activity. (The retailer Banana Republic cheekily adapted this name because it got its inventory of uniforms from toppled governments. Google the origin’s of BR.)
A reasonable estate tax can prevent a nation form becoming a Banana Republic by encouraging super wealthy individuals to spend or donate their assets before they pass on. All of the above mentioned nations with a thriving middle class allow the vast majority of its citizens to pass considerable wealth to heirs tax-free. Only a small number of super rich individuals actually pay Estate Taxes.
Estate taxes provide more of an economic and social benefit rather than atax revenue stream. When super wealth families are allowed to accumulate an ever-increasing percentage of nations assets, the economic activity derived from those assets tends to slow down. As the trend of wealth concentration continues, industry monopolies form and investment halts because there is little or no competition. Also, as wealth is concentrated into a small number of super wealthy families, MV slows down as the wealth families invest offshore, in gold and other investments that do not help the local economy.
So what are the social benefits of an estate tax? There are two:
1. Wealth produced while working is taxed at a lower rate that that of wealth given to the heirs of the super rich.
2. Charity: Schools, Hospitals, Public Parks, Arts and the list goes on.
Adapting a new tax policy is super difficult, lawmakers have no trouble cutting taxes. The problem is they tend to cut taxes for their financial supporters, at the high end. This of course is not very helpful if there is any hope of cultivating a middle class. I would say only a grassroots effort at the university level could do it because they will inherit Ukraine as nation with a growing middle class or a banana republic.
Eugene Harrison is a senior technology architect in New York.
