Economic consequences of taxing every dollar in the bank rather than earners alone

Question

EDIT Motivation: There is a clear distinction between human's "basic needs" and "wants" if not, every govt should have its own distinctions. The point is, that each Govt should be capable of satisfying the basic needs of the people first, before considering anything else. To achieve this goal, IMHO, one needs to organize the requirement at the source. For every dollar Govt prints, a percentage needs to go towards providing the basic needs. A Govt needs to be rich in order to do justice to the people. In addition, human needs to understand that primary purpose of the work is to serve humanity, not to earn money for themselves alone.

I am trying to understand the economic consequences if a country decides to tax every bank account but not the earner alone. This means instead of income tax, govt would collect money by having negative interest rates on the people or companies, who have money in their banks. The reason for such action is to reduce inequality. This can have a balance version as well, meaning some amount tax and some negative interest on the saving accounts.

The idea of negative interest is that you pay money to the Govt instead of getting money from the bank as interest. Here, saving is not encouraging as the present crisis is related to an imbalance of money in people's accounts. This is derived from the fact that poor people have no money to do anything but some have all to do anything.

EDIT: Here assumption is work and money are replaceable and a kind of one-to-one bijection and reversible mapping. The present tax system replaces work with money, my question is, can we rotate money with money (or add a map/cycle in the system). Can we have money to the money in the tax system as well (not a job to money alone, which is the present tax system)?

There is no reference to the above, as it is an idea to reduce the imbalance of living standard of people of the world.

EDIT: The question may not be clear because we tend to differentiate money between different accounts. For example money in a savings account is treated differently than in a loan account. My point is this distinction is artificial? Both should be treated as the same. Secondly, any other form of value is not in the picture, so the question has nothing to do with the existing wealth tax.

EDIT: The closest I can think of is sales tax. You pay tax for each sale it does not matter who sells to whom and what it is. Exactly you pay tax on each dollar in the bank.

EDIT: Example: A person/company has different bank accounts for example say Checking accounts, Savings accounts, Money market accounts,(MMAs), certificate of deposit accounts (CDs), and the person/company has 100 dollars in each account so the person/company pays tax on 400 dollars. One can say it is a kind of wealth tax but wealth is related to cash alone.

The question is if there is a tax i.e. to pay to the Govt, from every bank account (like every job pays tax). whether this would lead to unsustainable "economic consequences"?

EDIT: Finally, I think I got the correct terminology. Wikipedia states that the financial position of the United States contains assets of at least 269.6 trillion and debts of 145.8 trillion. I postulate there would be at least that much cash in the USA. This cash may not be in bank accounts but must be in some form, in people's or companies' names? My whole question was to tax on these amounts not on "income".

Final EDIT: It is not wealth tax. For example, X has 500K and bought a house from Y. Now X does not pay tax but Y does, as he has 500K. Now if X borrows 200K by mortgaging the house then he has to pay tax on 200K. The general concept is that X should not pay tax as he is taking a loan. The point is paying interest is not a contribution to society so it should not be an excuse for not paying taxes. Proposing to change paying tax on the basis of income but it is based on the worth of a person. I am not saying there should not be a wealth tax I am just explaining in this edit the difference between the wealth tax and the proposed one.

Answer 1

Here are a couple easy ones off the top of my head:

1. Let's say you have a negative interest rate at the bank. You do not have a negative interest rate under your mattress. So, rather than keeping your money in the bank, where it accrues negative interest, you take your savings and put it, in cash, under your mattress. Boom, you've suddenly avoided the negative interest rate. Meanwhile, the banks are unable to do business because they have no loans from customers with which to invest and produce returns. Essentially, you've put commercial banking out of business.

2. You say that the idea of a negative interest rate would be to reduce income inequality, by redistributing the money of the rich to the poor. However, it almost never actually works like that. Governments may, for a time, earmark money collected by various taxes to fund various programs, but over a sufficient timescale that rarely holds. Eventually, the government will start to use this money for other purposes and funding other projects, some (many) of which may not be anywhere close to the original goal of the tax. One famous example of this was the Federal Income Tax in Canada, which was originally intended to be a temporary measure to fund World War 1. Last I checked, World War 1 was over, but Canadians are still paying income tax. I wonder why that is...

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EDIT: I just thought of a third reason why this is a bad idea.

3. There is a concept known as a "regressive tax". A regressive tax is a tax that has a higher effect on people of lower income, in that the percentage of money paid to this tax is inversely proportional to the income of the taxpayer (the lower your income, the higher a percentage of it you pay in tax). Most "sin taxes" (e.g. gas tax, tobacco tax, alcohol tax) are regressive in this way, as are most forms of sales tax. This proposed scheme is also regressive. Let's say you are a smart, rich person and you don't keep that much money in the bank (from a personal finance perspective, unless you are planning a large purchase, it's unwise to keep more than 5 figures worth of money in the bank at a time). So your net worth may be 1M but your bank account may be 20K (2% of your net worth), of which 1% is 200, or 0.02% of your net worth. Say you're a poor person who doesn't have a lot of money, and in order to pay your bills you have to put almost all your net worth, let's say $10k, in the bank, of which 1%, or 100, is taxed. The rich person pays a tax rate, relative to wealth, of 0.02%, the poor person pays 1%. The rich person pays more tax in dollars, but who is paying their fair share in this scenario?

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I'm sure someone else can provide a much more comprehensive and rigorous answer than this, but here are a couple simple reasons why this is a bad idea.

Answer 2

I believe the idea is to make society more equal (reduce imbalance of living standards)?

You make some bold statements like

Statement 1

In my opinion (NOT sure) 1% of total money in the bank will be 30% income tax.

I work as a risk manager for a reasonably large internationally operating bank. I have a good understanding of what percentage of money our clients hold in bank accounts and what their income is. Obviously I cannot share that data but here are some official figures that aren't that different.

• Peter G. Peterson Foundation
  2019 US white, not Hispanic median household income was \$77,007
  2019 US white, not Hispanic median household wealth (that figure takes all assets into consideration, not simply money in a bank account) was \$181,440
  That is only 2.35x the income. For other ethnicities these figures are even lower according to this source.
• Wikipedia using data from Credit Suisse's Global Wealth Databook shows similarly low numbers for regions and countries.

Statement 2

For example money in a savings account is treated differently than in a loan account. My point is this distinction is artificial? Both should be treated as the same.

A loan is fundamentally different from a savings account, in any measure I can think of (accounting, balance sheet, cashflows, net wealth, taxation,...). Moreover, large corporations would almost surely not use loans at all anymore (they can deduct interest expenses and therefore pay less tax now, as opposed to pay tax on them). Since you exclude all other assets, they would simply issue bonds.

While we (the bank I work for) do have some accounts where we charge negative interest rates (mainly wholesale, a few retail), many account holders tend to switch to alternatives (bonds, stocks, art, collectibles, structured products.. ). There was a bit of an exception in the months after COVID 19 started, potentially because savings rates went up so much due to lack of alternatives (many places were closed and people couldn't spend their money). Also it is not even legally applicable in all jurisdictions - e.g. in Austria, there was a supreme court ruling that made it illegal to charge interest on bank deposits for retail clients because (original German ruling)

... den elementaren und gesetzlich angelegten Zwecken einer Spareinlage (Gewinn- und Vermögensbildungsfunktion) diametral widerspricht.“

which essentially means that

"(negative interest) ... diametrically contradicts the elementary and statutory purposes of a savings deposit (profit and capital formation function)."

The ruling was originally for zero interest, but naturally encompasses negative interest as well.

Leaving aside legal obstacles (in some countries), the by far biggest problem (based on my banking experience only) is that you would predominantly charge this tax for low income people.

Statement 3

@Alex Did you think who is entitled for a loan? The person who already has money.

you completely ignore that most people can in fact afford a house. You can look at home ownership rates. So you either only care for the very poor (who anyhow do not pay taxes apart from some taxes like VAT that apply to everyone who can buy stuff - but than again, they must have money to buy stuff after all).

In reality, your proposal would make renting a lot more attractive for most people because if you had say \$20,000 (assume in a bank account for simplicity) and take out a loan of \$380,000 (borrowing a conventional loan — one available through or guaranteed by a private lender or either of two government-sponsored entities, Fannie Mae or Freddie Mac — requires a down payment of 5 percent or higher) your tax basis would all of a sudden increase to \$380,000 if you paid \$400,000 for a house based on your proposed scheme. Add a student loan, a car loan and a few other things the average John and Jane Doe have, and you end up paying a lot of tax, despite being highly indebted.

The people or firms that would remain to be home owners will be the more wealthy fraction of society. However, hardly any wealthy person has considerable amounts of their wealth as money in a bank account. In a simply example, if they had the \$400,000 in a bank account and would have bought a house for it, they would in fact no longer pay taxes (as opposed to the unfortunate individual that needed to take out loans, and now not only pays interest on the loans but also taxes on top of it) You can have a look at the current composition of wealth in the US. Combined with my simple example of buying a house, it should be clear that the wealthy will pay very little tax under your proposed scheme (even if you assume they would not change the composition - in reality they would avoid holding money in bank accounts). If you want to tax assets (everything from houses, cars stock ownership, art,..) you actually are proposing a wealth tax.

Statement 4

@1muflon1 interest is money to money mapping, is not ir?

@erik Here work and money is replaceable and a kind of one-to-one bijection and reversible mapping. The present tax system replaces work with money, my question is can we replace money with money.

I guess you think of mathematical maps, but that statement simply makes no sense and no one working in finance, banking or law firms would understand what you mean in my humble opinion. Also, taxing income is taxing money because income is paid in "hard earned dollars" (that directly go into your bank account, after it was taxed - at least in most circumstances - in some cases taxation may happen afterwards).

Statement 5

Here, saving is not encouraging as the present crisis is related to an imbalance of money in people's accounts.

I am not sure what crisis you are referring to? Also, what is an imbalance of money in people's accounts? From an accounting perspective, a balance sheet always balances, because for every debit, there is an equal and opposite credit. Lastly, discouraging saving is economically troublesome as well because lower savings rates lower the level of output (you can look at any growth model really). That unfortunate character needing a loan for his / her house may in fact not get a loan if no one saves. Taken to the extreme, all machinery and investment will also go to zero and we will end up as hunter-gatherers again.

Statement 6

If money to money was the system, the objection to the present system would have, been "people won't work". Where the money will disappear with the proposed system if govt restricts cash transactions? Present Govt forcing the beggers to pay tax, (they beg as pay is not compatible to price for all jobs).

I read this several times, and I still have no clue what you really mean to be completely honest. People will work, even if taxed because it is the only way to earn a living (apart from the relatively few who decided that long term unemployment benefits are enough to get by). If you beg and earn more than the tax free allowance, why should you not pay tax? What makes income from begging different from any other income? Since you write that pay is not compatible to price for all jobs, I assume you think the beggars chose their "profession" over a lousy alternative. If so, it makes even more sense to tax them, as they do something that is deemed more worthy than the alternative sources of income and are hence better off that way.

At least one statement is actually correct (for some countries)

if Govt restricts cash transactions like many these days?

It depends a lot on the country you are from though. Many countries do not have restrictions and the reason for these restrictions is to fight black markets and underground / illicit activities.

Summary
I have no idea how you can think this would have the potential to reduce inequality.

Wealth, ultimately comes from income earned. It is harder than you think to maintain wealth across generations. It seem that 70% lost their wealth by the end of the second generation, and 90% by the end of the third. The research is from a wealth consultancy The Williams Group and may not be 100% accurate but there are other studies, like from the top 1%, less than 15% comes from wealth transfers (mainly inheritances, but also including gifts).