The Investor December 2023

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ShareFinder’s prediction for Wall Street for the next 3 months(top) and the JSE (bottom):


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ShareFinder Is Optimistic

By Richard Cluver

With more than 80 nations going to the polls in the New Year it is probably fair to say that most of which you hear from the political class anywhere on Planet Earth in the coming months will need to be taken with a hefty pinch of salt.

But what is overwhelmingly clear is that, ordinary folk in almost half the nations of the world won’t be listening to them anyway. Most are dissatisfied with being over-taxed and under-served by their present governments and are demanding change. High interest rates are the final straw overwhelming them and people are angry.

For most, it simply means a swap between the lot which have regularly held office in the past and so everyone knows what they are likely to get. But for countries like Argentina and South Africa where even the grey beards have only ever known two different administrations in their entire lifetimes, dramatic change is clearly coming. Inevitably though for everyone it means that our citizens are probably more apprehensive about our political future than they have ever been in living memory.

 So readers might take comfort in the fact that ShareFinder’s three most reliable prediction tools pictured in my first graph are telling us that JSE Blue Chips are in for a bumper year. Surprisingly South Africa stands out as an opportunity!

Since it is a long-established rule that share markets cannot prosper in the midst of economic uncertainty, there is only one conclusion to reach from that graph analysis. It is that whatever the outcome of the coming elections, it will be change that is likely to spell greater prosperity for all our citizens.

And it is not just the share market that is looking good. The Rand, pictured in my second graph, has been recovering strength steadily since mid-year and ShareFinder sees that trend continuing for most of 2024. All of this for good reason because a change in government and fiscal philosophy could see the country unlock growth that has been pent up like a coiled spring for many years.

In sharp contrast, global market leaders are likely to face much heavier weather with China and the US leading the pack.

 Let’s start with New York’s Standard and Poors 500 Index which is not looking at all promising with the widening formation traced out by my yellow trend lines in the graph on the right suggesting weakness and indecision as the US presidential election increasingly favours maverick former president Donald Trump who could create a new precedent for US political history in becoming the first premier to lead from a prison cell:

The sad reality, and the reason for much of the global political instability problem is debt. Every citizen of Planet Earth who owes money is personally well aware of the impact of central banks’ war on inflation and the consequently – sometimes quadrupled – interest rates they currently face each month. Acting in concert, the banks have been trying to mop up a massive overhang of surplus money washing around the world in consequence of stimulus packages going back to the 1990s, in large measure a direct by-product of soaring debt.

 At the heart of the problem is US Government debt, now standing at a record 130 percent of US GDP. In order to keep that debt affordable, the US Federal Reserve long ago sent its printing presses into overdrive and turned the dollar into a cheap commodity. As my second graph on this page illustrates, the cost of money as measured by the yield on US Treasury Bonds fell from a peak cost of 7.17 percent in April 1997 to a March 2020 low of 0.96 percent before hyperinflationary fears drove the Fed to take action. From then until October this year T Bond yields rose more than five-fold to peak at 5.15 percent.

 Cheap money was irresistible to both business and private citizens who arguably took on far more debt than was prudent. But governments everywhere were the worst offenders. Now, despite four years of rising interest rates heaping ever-increasing pain on everyone and forcing national economies into recession, International Monetary Fund figures make it clear that despite the pain ordinary folk have had to suffer because of the elevated global interest rate pattern, governments everywhere have not achieved much success in paying down their debts. The graph below highlights how little has so far been achieved.

Though most governments – other than South Africa which has other reasons for its unprecedented unemployment rate – long ago ended pandemic-related fiscal support, the majority have nevertheless continued to operate fiscal deficits in order to try to boost growth and respond to food and energy price spikes. Arguably this explains why public debt has so far declined by just 8 percentage points of GDP over the last two years, offsetting only about half of the pandemic-related increase.

Private debt, which includes household and non-financial corporate debt has declined at a faster clip, dropping 12 percentage points of GDP. But even then, the decline was not enough to erase the pandemic surge. Before the pandemic, global debt-to-GDP ratios had risen for decades. Global public debt has tripled since the mid-1970s to reach 92 percent of GDP (or just above $91 trillion) by end-2022. Private debt also tripled to 146 percent of GDP (or close to $144 trillion), but over a longer time span between 1960 and 2022.


But the pain everyone has suffered has, as the graph composite above so chillingly highlights, to date made very little impact upon the vast sea of money sloshing about the planet.

So citizens of the world need to reconcile themselves for a lengthy period of belt-tightening.

Happily, by comparison with the heavily indebted nations, South Africa’s current 72.7 percent debt to GDP ratio is comparatively low. Surprisingly for example, since China is still viewed by most observers as the international powerhouse of economic growth, few appreciate that China played a central role in increasing global debt in recent decades as borrowing outpaced economic growth. Debt as a share of GDP has risen to about the same level as in the United States’ 123 percent, while in dollar terms China’s total debt ($47.5 trillion) is still markedly below that of the United States (close to $70 trillion).


 As for non-financial corporate debt, China’s 28 percent share is the largest in the world and it is very likely that any new financial crisis during 2024 might begin in China which is currently trying to defuse a financial time bomb that could severely damage its banking system. Cities and provinces across the country have accumulated a massive amount of hidden debt following years of unchecked borrowing and spending. The International Monetary Fund and Wall Street banks estimate that the total outstanding off-balance-sheet government debt is around $7 trillion to $11 trillion. That includes corporate bonds issued by thousands of so-called local-government financing vehicles, which borrowed money to build roads, bridges and other infrastructure, or to fund other expenditures.

No one knows what the actual total is, but it has become abundantly clear over the past year that local governments’ debt levels have become unsustainable. China’s economic growth is slowing and the country is battling deflationary pressures that will make it harder for local governments to keep up with their interest and principal payments.

Just as Vladimir Putin arguably invaded the Ukraine in order to distract his citizen’s attention from Russia’s appalling economic woes, China’s soaring debt is likely to result in similar distractions…..like a move on Taiwan which could have dramatic repercussions for the global electronics industry since it is the leading manufacturer of computer chips!

In a bumpy 2024 investment world, a politically changed South Africa could just offer attractive safe-haven status!



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Forex and cash reserves — no free lunches

By Brian Kantor

SA needs to raise tax revenues faster and reduce the pace of government spending growth to escape the debt trap. This is made very difficult by a stagnant economy, but fortunately there is another way. That is to sell state assets.

Asset sales or leases could be a source of income for the government to replace borrowing and interest paid. Regardless of how much the asset sales would fetch they could be made to work far better in private hands. The assets would come to be worth more and their owners and service providers, including employees, would increase their output and pay incomes and taxes.

Do the foreign exchange reserves managed by the Reserve Bank on behalf of the government fall into this category of assets that could usefully be sold down? It is possible to hold too much as well as too little gold and foreign currencies on the national balance sheet. They are a useful reserve against unforeseeable contingencies such as a collapse of exports or capital inflows, or a flight of capital that would make essential imports unobtainable and foreign debt and interest unpayable.

SA’s foreign assets have grown strongly in rand value. Since 2010 these reserves have gone from R299bn to about R1.2-trillion. But while they have doubled in dollar terms since 2010, they still only amount to $62bn. There are not many battleships or jet fighters you can buy with that loose change.

Much of the growth in the stock of reserves is the result of a weaker rand. This is accounted for in the Bank’s books by mark-to-market value adjustments of their higher rand values. These currently have an accumulated value of more than R400bn and are described as the Gold & Foreign Asset Contingency Reserve (and recorded as a liability to the government on the Bank’s balance sheet).

On any consolidated Treasury and Bank balance sheets these assets and liabilities cancel out, leaving only the market value of the forex reserves as a net government asset. As Reserve Bank Governor Lesetja Kganyago has pointed out, these reserves would have to be sold to realise any value.

The other R800bn of foreign assets on the Bank’s balance sheet originally came from positive flows on the balance of payments when the Bank bought dollars in exchange for rand deposits. The extra foreign asset held by the Bank is in the form of a dollar or other foreign exchange deposit in a foreign bank. The extra liability is a (cash) deposit with the Bank.

In recent years this source of dollars supplied to the Bank is likely to have come from the Treasury rather than the private banks and their customers. A flexible exchange rate will have balanced the supply of and demand for foreign currency transactions that originate in the private economy.

The extra dollars acquired by the Treasury will have been borrowed by the government offshore, or have been the result of flows of foreign aid or concessionary finance provided to SA and then sold by the Treasury to the Reserve Bank for an additional credit on the Government Deposit Accounts with the Bank.

It is striking how rapidly government deposits with the Bank, denominated in foreign currencies and rand, have grown since 2010, though these cash reserves peaked in 2020 at close to R250bn and have been drawn down sharply in recent years. Why do these cash reserves need to be as large as they are? Why must expensive debt be raised by government to hold cash?

Yet running down the Treasury deposits to spend in SA increases the cash reserves of the banking system. The SA banks now hold large amounts of excess cash reserves, upon which they earn high market-related interest rates at present. Should the banks turn the extra cash into extra bank lending the supply of bank deposits — the money supply — will grow rapidly and encourage inflation.

It is a possibility that will require close attention.



Thoughts after a visit to China

By JP Landman

Through the good offices of the Inclusive Society Institute of South Africa, I recently had the privilege of doing a short study tour in China. Everybody paid their own expenses, but the Inclusive Society arranged the (very efficient) programme and interesting engagements.

Obviously, China is a massive country and one study tour does not even scratch the surface. Nevertheless, I would like to share some personal observations.

Social organisation

The first observation is that Chinese social organisation is superb. From the time that you arrive at the airport, train trips, meetings … everything runs like clockwork. I arrived at about 11 o’clock at night. All along the way to the hotel, cleaning teams were busy on the streets. Over the following days, it was hard to spot any litter. Thousands of people move around, but it’s all orderly and clean. At night women walk safely in the streets.

The flip side is very strict security. You have to show your passport, or if you are a Chinese citizen, your ID card, every time you enter a train station and indeed at the platform again. There are cameras everywhere.

Infrastructure

The physical infrastructure is impressive, from the highways to the towering residential blocks and the power lines everywhere. The same goes for the digital infrastructure. In Beijing, cash is hardly used. Instead, people pay using various apps on their phones. WeChat is more functional than WhatsApp. It is uncomfortable, though, to be cut off from Google and most of the news services we use so freely in South Africa.

The high-speed train from Beijing to Xi’an in the Shaanxi province, the home of the terracotta soldiers, covers the distance from Johannesburg to Cape Town in just over four hours, travelling at an average of 350 kilometres per hour. On our journeys, every single seat was taken. Six years ago, this line did not exist.

Within 40 years

It is hard for an outsider to appreciate the enormous change that has occurred in China in the last four decades. Deng Xiaoping launched his reforms in 1978. In forty-five years, one working lifetime, the Chinese went from a very poor society to one that is quite solidly middle-class. Two anecdotes illustrate this process.

One is of a 48-year-old entrepreneur who owns a number of private schools. Fifteen years ago, he was a reporter for a Xi’an newspaper. Then he started his business. His current turnover is about R1,5 billion a year. He says that 40 years ago when he was in school, he didn’t have shoes and nobody else at school had shoes. Now he runs 10 kindergarten schools, which charge 10 000 renminbi a month or about R26 000. The schools are full. Parents can afford to pay for this. By the way, his schools are called “Curro”.

The other is a 45-year-old businessman whose mother used to send him on a bicycle to the next village to go and buy paraffin, used for lighting and cooking. It had to come from the next village because there none was available in his village. They had to use coupons, and there was rationing. For him, it is incredible that they now have an abundance of consumer goods, available everywhere, and no ration cards. No shortage of electricity, gas, food, clothes or anything else.

Pragmatism – what works

All of this could happen because of economic growth. The last 45 years have seen a single-minded focus on growth. The interesting thing, however, is that the Chinese did not pursue any prescriptive model. Instead, the central government in Beijing gave free rein to local governments, who started competing with one another to attract business and entrepreneurs, generating growth. The political system provides considerable incentives and rewards for city leaders who produce growth. Efficient local government and an embracing of private-sector entrepreneurs did the trick. That does not mean entrepreneurs are at the apex of power – ask Jack Ma.

The provincial government of the Shaanxi province, for example, see their role as promoting development in the province through cooperation with others. They are very proud of the fact that they, a provincial government, currently have business relationships with more than 100 countries in the world.

The local government in the city of Baoji has started a special economic zone built around titanium. They import titanium from countries like Mozambique, Australia and America, smelt it and refine it. This has become the centre of the titanium industry in China, home to a company which is the number one titanium company in China and the number two in the world, even though it is located in the middle of the country, in an inland province, with no big harbour nearby. The company is now pursuing high-technology applications of titanium in advanced manufacturing, automobiles and spare parts, particularly for electric vehicles. Baoji has 13 factories manufacturing complete vehicles and three hundred manufacturing vehicle parts. It all started with titanium smelters.

The other big player in the growth story is the private sector, what the Chinese like to call the ’entrepreneurs’. Coming from their background of communist principles ruthlessly enforced under Mao Zedong with purges and re-education camps, they changed direction drastically to accept the private sector/entrepreneurs as partners in their drive for growth. Deng famously said, ‘What does it matter whether the cat is black or white, as long as it catches the mice?’

At the Belt and Road Initiative (BRI) Conference that we attended; entrepreneurs were officially labelled the ‘envoys of cooperation’. Businesses are encouraged to go out and establish commercial ties with people in other countries. The businesspeople we met are hungry, very hungry for business.  (By the way, ten minutes before starting time the 600 delegates to the BRI conference were seated – that social organisation again.)

(I don’t want to discuss the pros and cons of the BRI here – readers may want to find an article in the Financial Times of the 23rd of October, which is but one of many covering the first ten years of the BRI project. It is bringing dividends to China, but also to the countries in which the projects are being run. There’s a perception that it’s all a debt trap, that China is leading countries in Africa up the garden path and so on and so on. I believe there is ample evidence to the contrary, as the FT article, among others, shows.)

Changing growth model

There is no doubt that the growth model in China is changing quite profoundly. It started out as export-led, manufacturing products as cheaply as possible and getting them out to the world markets. That model is coming to an end. China is moving up the value chain.

They are now focusing on three things: the digital economy, health services and products, and the green economy. It will still entail manufacturing – China is the world’s biggest manufacturer of solar panels, for example – but they are pushing the envelope in these three areas through science and innovation.

There used to be special economic zones that focused on exports. Now there are special economic zones focusing on innovation in these three areas. Companies are backed to innovate, and they get support from one of the levels of government, be it local, provincial or national.

The car manufacturing company, Geely Auto, started manufacturing spare parts for Geely cars in Baoji in 2016. At that point, a mere seven years ago, they had 1000 workers. They now have 350 workers. They systematically and very deliberately introduced robots, developing some themselves and some with the help of other companies.

The average price of a robot on the floor is about RMB100 000 (renminbi), or R2.6 million. The bigger ones cost more than RMB1 million, or about R26 million. The current 350 workers now produce more than 1 000 workers did before. There were a number of women on the floor.

The South China Morning Post reports that by July 2023, China has established nearly 8 000 digital factories and smart manufacturing plants. Last year 290 000 robots were installed in the country, more than half of the global total. The trend is clearly towards automation. With a shrinking population, that may be a wise choice.

Government respected and meritocratic

I was struck by the government buildings we visited, from local to provincial government. Staff lunch in the office of the provincial government of Shaanxi makes a five-star hotel buffet look ordinary. The buildings are imposing, smart, and luxurious. In South Africa, government offices are often stark and dilapidated. In China, the reverse is true. They are models of modernity and luxury, and the people who work there are expected to do their jobs to the same standard. If they don’t, there will be a social media outcry – everyone is on a smartphone, typing and chatting all the time. An official who does not deliver will be named and shamed.

Going back to ancient times, prospective civil servants have always had to write an entrance examination before they could work in the imperial service. In the week after our return, the South China Morning Post reported that 2,85 million people have applied to write the next round of the examination for a new intake of civil servants. In a recent documentary, a villager proudly showed the filmmaker two certificates of family members who had passed that examination. It is a matter of pride. They have built a capable state over a very long time.

Us and them

Historically, we have to some extent seen the Chinese in terms of them and us. ‘They’ are very different from ‘us’. It’s a much more difficult world for us to navigate than Europe or the US.  If you don’t speak Mandarin, you cannot really communicate. China has also come from nowhere to become the second largest economy in the world, technologically probably already the West’s equal, so feeling intimidated is understandable. But it is neither healthy nor feasible to hold on to the idea that anyone from the outside can block their progress.

One note of caution: the Chinese themselves may interrupt their own upward trajectory – they have done so before in history. Their civilization is almost 5 000 years old, but it has not been a continuous progression over time. There have been cycles, ups and downs. At the moment, they are going up. They may go down again. However, it will not be because outsiders have tripped them up.

So what?

  • The Chinese model of political control (centralisation) and economic pragmatism (decentralisation) is unique and can probably not be copied by anybody else. It is deeply embedded in Confucian principles and has evolved over many thousands of years.
  • Building a capable state requires a meritocratic civil service – again something that developed over millennia, but a strict entrance exam may be a good start.
  • The hallmark of the Chinese growth story is pragmatism, pursuing what works.
  • They will determine their own destiny, outsiders will not determine it.


Finding Revenue

By John Mauldin

If you really want to reduce the federal debt, you don’t have to convince Congress of anything. You can just write a check. The Treasury Department gladly accepts gifts from anyone so inclined.

Few are, apparently. So far this year, donations totalled less than $1 million. Shocking, no? The government’s revenue is mostly involuntary via taxes, and it’s still not enough to cover spending. We fill the gap with borrowed money that must eventually be repaid from tax revenue with interest.

We can and should work to reduce spending, but finding more revenue is part of the answer, too. The easy button went away 20 years ago during Bush 2. It could have been fixed under Obama except once again everyone wanted to spend more and Congress wouldn’t raise taxes enough to cover it. Interest rates were low so why not borrow when rates were 2% or less? Ironically, interest costs went down even as the debt increased. Now we are paying the piper.

Now, when I say the government needs more revenue, it doesn’t necessarily mean via income tax. That’s just one kind of tax. There are things we can do to make that system fairer and more efficient, but also other ways to raise revenue. When the crisis hits, and it will, everything should be on the table as we seek ways out of this mess.

I know there are readers who would prefer not to raise taxes and would somehow like to think that we can do it with cutting spending. I was in that camp myself for decades. The markets aren’t going to give us our wish. At some point in the future when the debt is clearly unacceptable to the markets, bond buyers will want to see at a minimum a plan that keeps the deficit under nominal GDP. We will need something closer to balanced budgets and a clear path to sustainability.

When I write we’re going to need more tax revenue, it is not because I think US citizens are under taxed. It is that we have increased our spending in ways nobody wants to cut. Think pensions, Social Security, Medicare, and a host of government benefits. It is technically possible to cut them, but not politically possible. When the crisis comes, we will have to compromise. Those who want government spending are going to have to accept lower spending through a variety of means testing, simple across-the-board cuts here and there, etc.

Those who have always opposed tax increases of any kind (I’m looking at you, Grover) because any tax increase lets government get bigger will have to accept that taxes must be raised. Their goal should be to determine what is the best way to increase revenue while doing the least damage to individuals and the economy.

Nobody is going to be happy. That’s just the world we live in. We have dug a very deep hole and unfortunately, we continue to dig. At some point we’re going to have to stop digging and start filling. It would be nice to have some magic bullet fix everything. I don’t believe it will work that way. The answer, if it exists, will more likely be a combination of many smaller solutions. None will suffice on their own, but each can contribute.

As a political matter, “spreading the pain” may also be the only way to reach consensus. People will be more willing to sacrifice if they see others giving up something, too. I think I conclusively demonstrated last week that simply raising income taxes is nowhere near sufficient and is potentially destructive if taken too far. That does not mean we don’t need more revenue.

Raising Cash

Let me begin with what should be an obvious, if philosophical, point. A tax system’s purpose is to raise cash for government expenses. In my opinion, part of the solution is to recognize taxation shouldn’t be a tool of social engineering, used to reward some behaviours and punish others. That’s inevitably what will happen, of course; people will respond to whatever incentives the tax system offers. But the system should try to minimize those incentives out of fairness and to reduce economic distortions. We’ll soon find our revenue needs no longer allow the luxury of rewarding some groups over others with tax benefits.

Government debt is one of those distortions. With the power to tax, governments shouldn’t need to borrow except in rare emergencies like war. The mere presence of that debt distorts the private bond markets. It forces households and businesses to compete against the government for the available supply of credit. Some government debt is necessary for the functioning of the financial markets, benchmarks, etc. But not $35 trillion going to $60 trillion.

Taxes distort the economy as well but have the advantage of not generating additional interest costs. So generally (again, with exceptions like infrastructure, etc.) it’s better to fund government via taxes than debt. I’m not saying everything government does is worthwhile. Much of it isn’t but that’s a discussion for another time. My point here is that whatever government functions we think are legitimate should, ideally, be funded through taxes, with debt added only in crisis situations.

However, US tax revenue is nowhere near enough to cover the spending we seem to demand. Hence the annual deficits which compound into an ever-growing national debt. To change this, we need to somehow bring tax revenue in line with expenditures.

Capital and Labour

In an income tax system, tax revenue should rise if income rises. But it’s not quite that simple because different types of income are taxed differently.

Wage income, or money you are paid in exchange for your time and labour, is taxed at gradually rising rates. The highest bracket is currently 37%. That same income is also subject to payroll taxes for Social Security and Medicare (anywhere from 1.45% to 3.8%), up to a certain threshold.

The US also taxes capital gains, which is income derived from buying and selling assets (stocks, real estate, etc.) held more than a year. These rates are much lower—currently 20% at most, with an additional 3.8% Medicare tax in some cases.

This discrepancy between capital and labour income was originally intended to encourage capital investment and help the economy grow. It worked, too. But it also has unintended consequences. The fact that you pay capital gains tax only when the gain is realized produces a “lock-in” effect as investors hesitate to sell assets with open gains, knowing it will trigger a tax liability.

You probably see this in your portfolio decisions. You have a stock with a big gain. It might get even bigger, or it might shrink if the stock price falls. The money might perform better in something else, but a “sell” decision has tax consequences. This is messy and confusing, sometimes leading to poor decisions [not unlike Keynes’ Paradox of Thrift (Savings)].

The same thing happens at the macro level. Often the economy would benefit if more people sold their underperforming assets and moved the proceeds to other ventures with higher potential upside. The tax system encourages them to stay put.

The fact investors can choose when to be taxed while workers can’t also creates some inequity in the system. Many workers are investors, of course, and enjoy that same privilege for their investment income. But the benefit of lower capital gains rates still goes mainly to the wealthy, since they are the largest owners of capital.

One proposal would change this by taxing capital gains and dividends at ordinary income rates for taxpayers with income above some threshold. This would almost double the top rate on that income from 20% to 37%. It seems to me that this would potentially worsen the lock-in problem.

Experts who try to estimate the revenue from this usually find surprisingly low numbers, due mainly to that lock-in effect. The CRFB calculator has an option that would raise only $240 billion over 10 years. I say “only” even though it is a huge sum of money because this amount is only about 12% of the roughly $20 trillion needed to balance the budget by 2033. And it would do so only by significantly infringing on the capital markets, which would likely have other negative effects.

Some capital gains tax reforms may be part of the solution but won’t be near enough. We have to keep digging.

Death and Wealth

The best example of taxation as social engineering, rather than revenue source, is the estate tax. The ultra-wealthy have many ways to avoid it and rarely pay much. What little is paid comes from less-wealthy small business owners, farmers, and investors who don’t have access to those tools or don’t think to use them.

The estate tax that has never raised much revenue. It exists mainly to serve the ideological goal of reducing dynastic wealth but doesn’t actually do so. It simply generates a lot of income for accountants and tax lawyers—good for them but not economically beneficial. Nevertheless, people keep trying.

Personal anecdote but which is played out thousands of times: I have a good friend who is inheriting a massive estate from his grandfather (born in 1910) who made a massive amount of money and then created a generation-skipping trust that my friend gets and then his grandkids will ultimately benefit from. Don’t feel sorry for his kids as they get money from a different generation-skipping trust from his father. Plus, so many other angles it is mind boggling.

The estate tax was much more onerous before 2009, when the threshold at which it applies was raised and indexed to inflation. Then it was raised again in 2017. According to CRFB, rolling back those changes to the pre-2009 level would produce about $370 billion in debt reduction over 10 years. That number depends heavily on how people with large estates respond; many would just rearrange their affairs and still pay nothing. The revenue raised could be substantially less.

So, similar to capital gains reform, estate tax reform would raise some money but at best be only a small part of a debt solution. Realizing this, some progressives prefer to tax wealth annually while the owner is still alive. CRFB analyzes an “Ultra-Millionaire Wealth Tax” that would impose a 2% yearly tax on all net worth above $50 million and 3% on all net worth above $1 billion. This would produce far more revenue than the estate tax—an estimated $2.71 trillion over 10 years. Or would it? As every investor and accountant knows, “net worth” is a slippery concept. Defining it requires putting an estimated value on illiquid assets like homes, real estate, closely held businesses, artwork and collectibles, yachts, etc. How does that happen? I don’t know but I can foresee a lot of disputes and enforcement problems. Breathes there a soul who hasn’t seen an asset get huge and then fall? What if you got taxed at the top? Will the government pay you back when you lose?

One thing that might happen is a move to store more wealth in subjectively valued assets. A publicly traded stock is easy for the IRS to value. A private company isn’t. So, we might end up with fewer public companies, meaning fewer opportunities for average people to invest their savings alongside the wealthy. That doesn’t seem helpful.

But before you even reach that point, there’s the question of whether wealth would even stick around to deal with such a tax. An old rule of public policy is that you get more of something when you subsidize it and less by taxing it. Taxing wealth would give the wealthy a reason not to be US residents and citizens. Money flows to where it is treated the best. A wealth tax in the US might give the world’s best and brightest reason to go elsewhere – over time making our debt problem worse instead of better.

Stabilizing the budget will require a whole new approach to taxation.



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