A property tax on investments?

Last updated December 11, 2015.

If we are going to have a tax system, we might as well make it as fair as possible. In the US there are property taxes on housing, but not on investments. I don't know any reason for this, and this doesn't seem fair.

Compare an investor with a $2m equity portfolio, to an individual with a $200k house. The investor will pay taxes on dividends received. Dividends are around 2% of market value, or $200k. In 2015, the first $37k of qualified dividends were tax free, and then qualified dividends were taxed at 15% until you get into the $400k+ of income range. Doing a little math, the investor's tax bill is $450. The home owner will pay property taxes on the homes value. Across the US property taxes average around 1% of a home's value. So the home owner faces a property tax bill of around $2,000.

Despite being 10 times as wealthy as the home owner, the investor is paying less in tax.

When it comes time to sell, both the investor, and the home owner are hit by capital gains taxes. The home owner however has the ability to exclude the first $250k or $500k of gains from taxes, but unlike the investor the home owner is unable to carry forward any capital losses. On the other hand, the investor effectively excludes $37k per year from taxes. Which is better is hard to tell.

What I would like to see is the property tax rate on homes reduced from 1% to say 0.5%, and the introduction of a property tax on investments also of say 0.5%.

This would be revenue neutral. At the end of 2013, Zillow reported the US housing market totaled $25 trillion. Meanwhile the Fed reported that in 2013 households held about $28 trillion in deposits, debt securities, corporate equities, and mutual funds. Taxes on housing would reduce by $130 billion, and taxes on investments would be increased by a similar amount.

Administration would be relatively simple. Banks and brokers already prepare monthly reports listing the value of assets held. It would be a simple matter to report the annual average asset values. Indeed charitable foundations are already required to report their annual average asset values in order to compute the minimum amount of grants they much disburse, and the administrative costs there are negligible.

This would redistribute $130 billion per year primarily from the wealthy towards the middle class. In 2013 there were 120 million households, so that is roughly $1,100 per household per year.

The most difficult part of this proposal might be who should collect the property tax on investments, the Federal, State, or County government. Property taxes are typically collected by the County. But the Federal or state governments seem best equipped to process statements from banks and brokers. Taxes collected by the Federal or State governments would need to be redistributed to the the counties, which would otherwise experience a tax shortfall. Additionally Wikipedia indicates that any Federal collection of a property tax on investments might need to be redistributed to the states in proportion too their populations.


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