August 15, 2011
Updated September 20,2011 to include new references.
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Enforcement of a Balanced Budget Amendment - The Asset Tax

The debt ceiling deal is done. Now we need to work on a balanced budget amendment.

The amendment is almost surely going to fail the moment we hit another budget crisis. To make it more workable, it would be good to have a mechanism that raises revenues automatically if the budget is not balanced, on a segment of society that is capable of exerting significant immediate pressure on politicians in advance of a possible failure. It should also have the property of not immediately affecting the main stream economy. It would be nice if the economy would automatically adjust itself to pay the revenues if necessary.

One thing that could work is an asset tax, which takes upto 0.1% per month of every US resident's worldwide controlled tangible assets. This would only be levied if the budget including debt service was not balanced, or if a debt ceiling prevented the US from honoring its debts. If the reason the tax went into effect was that the US could not honor its debts, there would be no monthly limit, but every resident would pay the same percentage of his or her or its (corporations are people too!) controlled assets. Currency would not count as an asset, i.e. paper dollars and the currency value of coins, but otherwise there would be no exemptions, not even bank deposits! Congress can subcontract the collection, along with the benefit, of the asset tax on some assets to the States, who can further subcontract it to localities if they choose, although the percentage on all assets would be the same. Banks, as usual, would consider money they have lent out as an asset. The tax would end the month the budget was balanced and the US was able to service its debt without it.

First we consider how much this could raise, and how much it could affect a resident. The June 9, 2011 estimate for US household and non-profit net worth[1] was approximately 58 trillion dollars. If we just considered net worth this would mean approximately $58 billion per month, or $650 billion per year could be raised by this tax. If we use "controlled assets" instead of "net assets", the limit would be a lot more, maybe even ten times. A typical household with a 300K house could pay upto $300/month at 0.1%, assuming that the value of the house is the major part of their controlled assets, which is typical. Note that we dont have to collect the entire 0.1%, Congress can determine each month how much is necessary to cover the monthly deficit and assess that.

Who would this affect? Mostly individuals and corporations of high worth. These are people who can afford to pay in bad economic times. They are also the ones who get the most benefit from government - their assets are protected, contracts are upheld. Even Warren Buffett thinks the rich should pay more in taxes.[2] They can also appreciate the benefit of strong US financials in their lives. Even more important, they have the ability to pay attention to what politicians are doing, and have the power to influence them, even before the trigger for the tax is hit. The projected average monthly budget deficit is in the neighborhood of $100 billion for FY2011[3], or about $400/person/month. Because of the way asset distribution is skewed, the typical family would pay a lot less, and some a lot more. A corporation or individual with $50 billion in controlled assets could wind up paying $50 million a month. None of these are astronomical figures when it is crunch time. For an argument on how insignificant current income taxes are compared to a high worth individual's assets, see [4].

Why have the 0.1%/month limit? At that rate this tax would take 58 years to burn through 1/2 of a person's assets. A time long enough to fix the budget. In a person's remaining lifetime, it would make only a manageable dent in a person's net worth even if they were living off their assets. Corporations and people would need to keep only 1.2% of their assets in cash to be able to pay the tax every year if necessary. This is less than the margin most people and corporations keep anyway.

The reasons for exempting the currency value of coins and paper dollars are many. First, currency is a medium of exchange, and a generic non-appreciating claim on assets, not an asset in itself. Somebody else is holding and controlling the actual assets. Secondly, by exempting it, there is an incentive to hold currency. This provides a means for people to pay the tax when it goes into effect without having to sell their assets immediately. Paying the tax would not change the distribution of assets in the economy, except where people were truly careless. Stock and bank deposits are also claims on assets, not assets themselves - why not exclude them too? If people did not hold the cash itself, and instead kept it as a bank deposit, a run on bank deposits would occur when the tax went into effect, or threatened to go into effect. If stocks were exempt then people might hold most savings as stocks, and a run on the stock market would ensue when people had to sell them to pay the tax. You want only the forms of acceptable payment to be exempt, so people save in that form and do not cause a run on other assets when digging into their savings to pay the tax. You also want the form of savings to be effectively useless (i.e. no interest is paid on it and it cannot appreciate significantly) other than as a generic claim on assets so people dont hold too much of it. A very important reason is that payment of the tax would not cause a decrease in the effective money supply and may even increase it - dead money under a mattress would come out, and the government would promptly make it enter the economy through the budget deficit. Finally, finding currency held as paper money and coins would involve widespread search and seizure that would be incompatible with a free society, and the government can anyway tax currency via inflation.

Assets of significant size are easily taxed. The government can randomly examine assets, and require the controlling entity to declare themselves and show that they have paid the tax. Failure to do so will result in confiscation of the asset. The government can put a floor on the price of any divisible commodity including labor by stating how much of that commodity it will accept in lieu of tax.

What would be the side effects? First, the possibility of questioning the debt of the United States would be near zero. The government budget would be monitored and limited by people with real and immediate power. Wide disparity in asset levels would be discouraged although not prevented. Asset bubbles would be scarier for the people holding the assets, and so will self limit sooner. Inflation and leverage will be more punitive for people holding non-money assets. Lenders will foreclose sooner, or forgive debt quicker. The necessity for debt would also drop, and eventually the debt would be eliminated, as every so often the US would run a surplus and retire some debt.

An asset tax could be the teeth of a balanced budget amendment.

Maybe we could even eliminate the income tax as well! An income tax is a drag on getting richer - a process that makes people happy. It is intrusive and crimps freedom because it inherently asks you to tell the government what you are doing. An asset tax is recognition of being rich. Recognition is a plus, if it is not too expensive. It does not ask or limit how you got there, so it frees people to be creative about getting there.


  • 1 US Federal Reserve Z1, June 2011
  • 2 Stop Coddling the Super Rich, Warren E Buffett, New York Times
  • 3 US Budget 2011
  • 4 The Buffett Rule is Unfair, John Carney, CNBC
  • 5 How to Tax the SuperRich, Los Angeles Times
  • Index