Open letter to the authors of ‘the triumph of injustice’

 

Dear Mr. Saez, Dear Mr. Zucman,

The Triumph of Injustice is a sharp analysis of the origin of inequality and offers proposals on how to undo this inequality by introducing a wealth tax, income tax and a tax on national income.  I have studied them in detail and it has given me many new ideas and insights. I would like to comment on 3 topics related to your book. 1. The integration of wealth and income tax, 2. The relationship between the tax system and a sustainable economy, and 3 the relationship between the tax system and social security. I hope my ideas will inspire you as your book inspired me.

For years I have been thinking about a better organization of the societies of Europe in the areas of taxation, social security and the labor market. Recently I updated my ideas and translated them into English. In this letter I will refer to those documents. My position is that the EU should set up its own tax system that, like your tax proposals for the US, is aimed at reducing inequality. But in doing so, I go further than your proposals. I want to introduce two new European taxes: a progressive wealth growth tax and a sector-specific corporate profile tax.

The first tax merges wealth and income tax. Your proposals for the US, a progressive wealth tax and progressive income tax, can be (re) introduced relatively easily and tie in with the direction the US should take to reduce inequality. It is tempting to adopt the same proposals for the EU, as Piketty does in his manifesto (www.tdem.eu). But I propose a simpler and more radical tax. Because the EU does not yet have taxes, it is possible to introduce new types of taxes that are more effective, less bureaucratic and less susceptible to fraud. A progressive wealth growth tax is one possibility. The growth of wealth is taxed, with a rate depending on the level of the wealthl (and not the growth of wealth itself). All items of income that contribute in one way or another to the growth of personal wealth are taxed at the same progressive rate, which is consistent with the premise in your book that all income should be taxed equally as much as possible. Income that does not lead to growth of capital is not taxed. You can read more about it here.

The issue of tax avoidance is of great importance here. If the amount of wealth determines the amount of the tax on growth of wealth, tax avoidance will concentrate even more on "hiding" wealth, for example by diverting it abroad. If income tax is regulated indirectly through wealth growth, it is very important that a balanced system is devised that accurately determines the size of the wealth. I propose limited fiscal definition of wealth (for the wealth growth tax) to the territory of the EU. So someone who transfers assets abroad is no longer doing anything illegal. On the contrary, I consider it a form of development aid to foreign countries. On the other hand, when wealth is ‘imported’ from abroad to the EU, tax must be paid immediately.

This means that the private owners of all assets in the EU (fixed and current) with a value greater than 5000, - must be accurately registered within the borders of the EU: it concerns land, works of art, houses, cars, ( savings) accounts on EU banks, shares in EU companies, etc. etc .. To determine the growth, any change in the value of assets and accounts within the EU must also be registered. A bank transaction between the EU and abroad with a value in excess of 5000 is therefore directly regarded as a decrease in capital or capital growth on which tax must be paid. For example, someone who sails into the waters of the EU with his luxury yacht worth 3 million euros immediately adds 3 million euros to his fiscal wealth. If someone receives an inheritance, it is also taxable growth of wealth. The progressivity of the wealth growth tax is so great that defacto a maximum is  set for the wealth that citizens of the EU can amass within the EU. The general rule is therefore simple: wealthy people can amass more wealth by diverting it abroad, but they cannot "enjoy" it within the EU under penalty of taxation. I expect that many citizens will be shackled to the "good European life" and therefore take less wealth for granted within the EU. Note, if someones wealth is decreased in the EU and it is "supplemented" with capital from abroad, no wealth growth tax will have to be paid, because there is no growth within the borders of the EU.

A wealth growth tax for the US has a complication that does not occur in many EU member states. A US citizen living in the Netherlands pays tax to the US on his income in the Netherlands. In many EU member states, you pay income tax in the country where you earn that income. Treaties between countries must prevent citizens from paying tax twice on the same income. However, strange situations can arise due to differences in legislation. If all G20 countries would only tax wealth growth within their own territory on all living in that territory, a fair and simple global system would arise, in which double taxation would never arise and at the same time all sources of income would be taxed equally.

The second topic I want to discuss is the sustainable society. The economy must become sustainable and cyclical. In my opinion, we need a very different tax system than we have now. A general CO2 tax is necessary but certainly not sufficient. I have designed a new tax for the EU, a sector-dependent corporate profile tax, capable of transforming the economy quickly and effectively. You can read more about it here.

Again, a brief explanation of this new tax. A fiscal profile is drawn up for each economic sector. This profile contains key figures from the profit and loss account, the balance sheet and environmental key figures, each of which can be taxed with a tax rate. The fiscal profile includes the three economic production factors: labor, capital and nature (including land, raw materials and waste). In the profile, a distribution of the tax burden is made that fits the political goals of the time, such as a cyclical economy. For certain highly environmentally damaging business sectors, the burden on the environmental indicators can be set higher. The profile tax is therefore a regulatory tax. The proposal for a CO2 tax and your proposal to levy a 6% tax on national income can be 'built in' without any problems in the tax profiles of the various sectors. The great advantage of the profile tax is that it gives us a clear, integral assessment framework in which differences between business sectors are allowed. For example, it is possible to tax the turnover of the financial sector more heavily than the turnover of other sectors.

Even with a profile tax, the tax avoidance industry will make every effort for companies to avoid tax. Businesses will try to divest parts of the business and "move" to industries with lower tax rates. Again, I do not consider this form of avoidance undesirable. It is good for mutual competition in a sector if the activities of sectors become "cleaner" and more homogeneous. In addition, a progressive sales tax can be included in the profile tax to maximize "scaling up". This means that monopoly formation can easily be prevented through fiscal means.

One last note. You state in your book that tax avoidance could be effectively countered if the G20 countries were to all introduce a 20% profit tax. It will certainly help but in reality we need a more refined tool because the differences in the world are very great. We cannot equalize all countries for tax purposes. That is why tax profiles per sector are so interesting because they are a sophisticated tool. Fisscale profiles are tailor-made for each country. By setting different percentages for different countries, the economic potential of each country can be further developed.

Finally, my last comment, the relationship between tax system and social security. Here too, I believe we will have to push for radical changes. I do not agree with you that social and green should be sharply separated. A CO2 tax can not only be used to prevent climate change (green), it can just as well finance healthcare (social). In fiscal terms, we must not only "treat all income equally" but also all production factors. Labor is now too heavily taxed. Capital and the environment should therefore be taxed more heavily and labor less. Suppose that as a result of the robotisation all labor disappears, capital and the environment will have to compensate for the "loss" of tax on labor. It is better to establish a good, balanced tax mix in the profile taxes of sectors so that no one of the three production factors is taxed more heavily than others. All taxes are general resources that can then be used for any purpose.

You propose to fund health care in the US with a 6% tax on national income (corporate profits, labor income and return on capital). It seems like an excellent idea (and can be included in the tax profiles of all sectors), but it is only part of social security. By not approaching social security broadly, there is a risk that other basic facilities such as education, housing, income and labor will be affected. It is therefore important to include social security as a whole. How do we do that? Tax is not enough here. It's not all about money: it's about money and time. We need a new instrument: time rights. I want a tax system that is tightly integrated with a broad social security system. The wealth growth tax and the profile tax must therefore be "expanded" with a new type of social security that is integrated into the labor market by means of working time rights. You can read more about it here.

Johannes WH Janssen