Assessing the Feasibility of Asset-Backed Securities for Wealth Taxation
Does America's current financial landscape necessitate introducing a wealth tax on the richest 0.1%?
One proposal involves leveraging asset-backed securities (ABS) to monetize the assets of the wealthiest individuals. In doing so, the government aims to facilitate the collection of taxes, which ostensibly addresses a cashflow shortfall.
However, this approach raises several questions about financial strategy and governmental approach to tax collection.
Current Financial Practices and Bonds
America already engages in practices closely resembling the proposed ABS, issuing bonds or treasuries. These securities represent the government's right to levy taxes on Americans in the future. Such bonds are secure, as the risk of default remains low due to the full faith and credit of the U.S. government.
The Proposed Wealth Tax and Its Challenges
The introduction of a wealth tax, particularly on the top 0.1% of the population, presents both advantages and disadvantages. Advantageously, it allows for the taxation of vast accumulated wealth. However, its actual effectiveness is often underestimated. Despite intuitive calculations, the actual revenues generated from such a tax are frequently lower than anticipated.
The Role of Asset-Backed Securities
When introducing asset-backed securities, the government borrows additional funds, with the lenders having recourse to the assets, particularly those of the wealthiest individuals, in case of default. The current borrowing rate is exceptionally low, driven by the low perceived risk of default by the U.S. government.
Utilizing assets as collateral, while increasing complexity, does not inherently lower borrowing costs. This approach introduces unnecessary layers that do not significantly benefit the government. The government is effectively leveraging assets in a domain that does not require such leverage, essentially creating unnecessary complexity.
The Implications of Wealth Taxation and Monetary Systems
The assertion that the current system lacks sufficient liquidity for a wealth tax to be effectively implemented is incorrect. The monetary system in place ensures that while the wealthiest 0.1% of Americans hold substantial assets, a wealth tax of 5% would necessitate a significant reallocation of existing wealth. This would involve moving assets from one group to another, not creating additional liquidity from nothing.
The total M2 money supply in the U.S. is around $13.5 trillion, while the top 0.1% is worth approximately $20 trillion. A 5% wealth tax would require $1 trillion in liquidity. Given that total U.S. bank deposits are also around $13.5 trillion, it would theoretically be possible for the bottom 80% to accumulate 2.5 years' worth of assets from the top 0.1% should the need arise. This assumes the bottom 80% do not have other pressing needs for this liquidity.
Conclusion
The monetary system is designed to ensure that the value of assets is premised on willingness and ability to pay. While the top 0.1% of Americans hold significant assets, those assets are not actual liquidity that can be readily converted into cash. Introducing a wealth tax and asset-backed securities does not address existing economic realities but instead complicates the financial strategy without tangible benefit.