Since the Howard government gained control of the Senate, we have been hearing numerous proposals for reducing the top marginal rate of income tax. The excuse is that high marginal rates reduce the incentive for wealth creation and encourage tax minimization. Let’s put this excuse to the test.

A holding tax is a tax of so many percent of the value of an asset per year, payable by the owner of the asset. If income tax were replaced by holding taxes, the top marginal rate of income tax would be zero. Beat that! And if those holding taxes were confined to assets that taxpayers can neither create nor destroy nor move out of the taxing jurisdiction — assets such as land and monopolies — the taxes would cause zero reduction in the stock of assets and zero discouragement to the production of new assets. That takes care of wealth creation.

What about tax minimization? With holding taxes on assets that can’t be destroyed or moved, the only way to reduce your tax is to sell assets to other taxpayers who are more willing to pay the taxes, or to the government, which can then charge rent for use of the assets (“rent” in lieu of “tax”). So your desire to minimize your individual tax bill does not cause an overall loss of revenue, but reallocates resources to those who can most easily pay the taxes or rents on them — in other words, to those who would use the resources most productively, leading to even more wealth creation.

(As for tax evasion — that is, outright fraud — you can’t hide land from the government that has sovereignty over it, and you can’t hide a monopoly from the government that grants it or regulates it.)

So, if the politicians are really concerned about wealth creation and tax minimization, why are they fiddling with income tax rates instead of replacing income taxes with holding taxes? Could it be that they’re not telling us their true motives?