> If you are sitting on your assets, then this encourages you to participate in the economy.

No, it encourages me to pay people to work out how to reduce my tax liability through every legal scheme possible taking advantage of every definition and ruling, and considering every alternative. Those alternatives include sending the money elsewhere, schemes where I pay myself with my own money, getting assets valued at less (after all they depreciate by 4% extra per year), moving to another EU country that doesn't tax wealth (instant 4% gain doing that), schemes that are (borderline) illegal weighing the probability of being caught etc.

> For example, economic assets like factories would have to be ringfenced as disposal of those would be detrimental to the economy.

And so begins the complexity of your tax code. And a loophole for people with wealth to exploit. And now you have to increase your tax rates to take into account the wealth that isn't being taxed.

> Clarifications: wealth would be net (i.e. less debt)

Cool another loophole. Have a look at Larry Ellison sometime. What many people don't know is that he doesn't sell his shares in Oracle. Instead he borrows money against the value of his shares and is at over a billion dollars in debt.

> When you say saving, do you mean sticking cash under the mattress or in a bank?

Saving as in economics. http://en.wikipedia.org/wiki/Saving

> Inflation is higher than interest rates right now; why is no one telling the US/UK governments to stop printing cash?

Huh? When interest rates are low it encourages investment because the cost of money is low. It also encourages finding places with higher returns (remember housing bubbles?)

Money printed by governments that is at a higher rate than economic growth results in inflation, and less results in deflation. Neither is particularly desirable, although most aim for a little bit of inflation due to human nature. The US and UK central banks are independent and generally target an inflation rate which is why nobody has told them anything http://en.wikipedia.org/wiki/Inflation#Monetary_policy

> Investment in business yields a much better return than the stock market

It doesn't work that way. In general returns are correlated with risks. There are greater returns where there are greater risks. It would be rather foolish to take lower returns for greater risks or to offer greater returns for lower risks. Under your plan investments lose 4% per year all else being equal which reduces the potential returns. (Unless your tax code has yet more complexity.)

> stock market (which by the way is not investment - the investment happened when the shares were originally issued; if you buy shares on the stock market, you aren't an investor).

You aren't even trying now. It is true that the share issuer only gets money when the shares were first invested, but that does not mean that everyone buying shares after that point are not investors. At the simplest case a company produces dividends, so purchasing a share gives you access to those dividends. Your expectations are that the value of those dividends are greater than the NPV of the money you use to buy the shares. It is of course more complex than that - shares also reflect the assets of the company, dividends can be "paid" by increasing the share price instead of payouts, profits reinvested defer dividends and asset increases to the future etc. Going back to the original share purchasers, part of their investment reasoning is that they can sell in the future when their opinion of the risks/rewards do not match their desires. And finally the current price of shares set expectations of what value the company would get if it sold newly created shares. Note that most larger companies are constantly creating new shares such as through employee and manager incentive plans.