In the idea of a wealth tax, or even for properties taxes, many times assets are illiquid. What mechanisms can be introduced to promote compliance and ensure the revenue collection goals of the taxing authority in the face of illiquidity?
1 Answer
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This is a problem often asked in the context of a land value tax where 100% of the rental value of land is taxed. If the value of the land rises substantially, and the person on the land isn't making direct income from the land, they may be forced to do something about that.
One thing that could be done is use the land to make money - eg rent it out. But another possibility is simply to get a loan with the land used as collateral.
An example: Let's say you had a \$300,000 property and the rental value of the land was \$30,000/year (\$2500/month). If the value of your land doubles so next year you have to pay double the tax. If you can still afford to pay the original tax, but not the new tax, you would have to borrow $30k each year.
If you take out a loan at 4% interest, you would still be above water for 8 years before the amount you owe on the loan exceeds the extra value your land got (not including its original value), and 15 years before your loan would need to be liquidated. Certainly long enough for you to be able to make arrangements to move if necessary.
If instead of a single one-time land value increase, your land increased at a steady rate, you could potentially sustain such a loan forever. For example, if the loan rate was 4% and your land increased in value at a rate of 4%, the value of your land would increase faster than your loan liability would (because your loan principal would always be lower than the value of your land). If instead the land increased in value at 3% and your loan was still at 4%, you could remain above water for literally over 250 years before you would have to liquidate the loan.
So as long as you can get a loan using your illiquid wealth as collateral, it seems to be quite reasonable to simply obtain a loan for the payment of taxes. For other kinds of illiquid wealth, you would probably want to simply sell the wealth in whatever timeframe is possible, so your loan would not need to be very long (however long it takes to sell those assets).
