The Head Tax
A type of tax that is rarely discussed anymore is the head tax. A head tax is a per-person tax that is fixed regardless of the person’s wealth, income or anything else. Head taxes are widely disparaged as being unfair to the poor or even racist. But few people are aware of the primary economic foundation to head taxes: head taxes do not punish creation of wealth.
Most taxation is levied on economic activity. Wage taxes are based on employment activity, sales taxes are levied on the fruits of production, income taxes are levied on gains, and real estate taxes and other wealth taxes are levied directly on the accumulated assets from economic activity.
The problem with these taxes is that they discourage economic activity and productivity. Higher and higher levels of taxation reduce the level of activity that generates the taxes. Taxation of productivity lowers our economic growth – and let’s remember that it is high levels of wealth that enable societies to meet our most treasured goals: healthcare, leisure time, travel, education, conveniences and pollution controls.
The dampening effects of taxation on the activities being taxed are well understood. Sin taxes are levied on alcohol, tobacco, gambling and marijuana not just to raise money but also to discourage activities that are widely viewed as being detrimental to society. It is understandable to tax destructive behavior, but the super majority of taxes are on wealth-creating behavior.
Governments tax just about everything that is vital enough to human life that the activity will persist despite the penalty of taxation. But there are limits to how many economic activities can be identified to meet the seemingly insatiable appetite for government spending.
The latest idea to increase taxation is the worst: financial transaction taxes. People that support taxation of financial transactions simply do not understand the importance of trade and the importance of securities trading in particular.
We all want liquidity in our investments – the ability to enter and exit investments relatively quickly, easily and inexpensively. We want our pension contributions invested on a timely basis and we want to be able to withdraw out money on a timely basis. When our pension funds or mutual funds buy securities or sell securities with whom are these institutions trading? The answer is short-term speculators. Trading costs have decline dramatically in the last 50 years. Liquidity has soared. Short-term trading by hedge funds and other speculators means that the ordinary person receives better and better price executions at lower and lower trading costs.
If the government levies a new tax – such as a huge tax on groceries – the tax will not be paid by the grocery stores. The stores will simply pass the tax on to the consumers. Likewise, a stiff financial transaction tax will be paid by long-term investors through poor executions.
Biltmore Capital Advisors is NOT an accounting firm. For specific advice regarding taxes, please consult your tax advisor.