After being one of the top-rated commenters on HN for some years, I have not commented in a long while. For what it is worth, here is my two cents on a topic - a wealth tax - that may seem on the surface to be benign but that is in fact just the opposite.
Silicon Valley was founded in a spirit of freedom and flexibility but that spirit is clearly and dangerously on the wane insofar as the political environment surrounding the Valley is concerned.
By the 1970s, American enterprise was in decline, a victim of the "big government/big business/big labor" trends glamorized by establishment types of that day. What this did was take away choice and flexibility.
Tech changed all that and it did so from the heart of Silicon Valley. Tech arose from a spirit of freedom and flexibility. Founders would get an idea and would have countless ways of experimenting with what they could do with it with the aim of building a venture. Many of the most wildly successful ventures came out of nowhere. No central committee could have planned for them. No overlords of big business could have had the imagination or risk-taking fortitude to push them at the expense of their established cash cows of that day. No union could comfortably impose rigid work rules onto such amorphous ventures (the first thing Intel workers did even after the company succeeded was to reject unionization). No minimum wage or overtime rules applied. Benefits packages of the type widely deployed in the analog-based large businesses of that day were unheard of.
Regulators and taxers of that era continually tried to realize their vision of locking people into situations by which they would have guaranteed security, ossifying the mature businesses over which they had control, but tech simply outran them through innovation. And, in time, upended them by disrupting their industries through innovation and risk-taking.
Today, the spirit of Silicon Valley has changed and is yielding to a belief system by which the overlords of politics believe they can dictate outcomes that will give people locked-in security forever. Want to do something as an independent to earn a livelihood? Sorry, AB5 forbids that and will penalize the hell out of any venture that seeks to use fleelancing and flexibility as a foundation for innovation and growth. Your choice to act an an independent is frozen out by dictates that, if you act at all to make a living, you must do it within rigid systems that guarantee minimum compensation, regulate overtime, prescribe minimum guaranteed benefits, and the like. If this kills opportunities, no problem: there will be other rules that guarantee basic income, limit the rent you have to pay, and otherwise regulate society such that people are guaranteed a risk-free existence courtesy of decrees enacted by political proclamation.
This new mindset is precisely the one of the 1970s-era leaders who managed to choke off innovation and growth in old-line businesses and gave a massive opening to tech innovators, particularly those in Silicon Valley.
pg's modeling of the effects of a wealth tax is spot on. And it confirms that such a tax is an innovation-killing idea that would destroy the spirit of Silicon Valley. Of course, tech innovation will not cease. It will just move elsewhere to escape the tax. Europe in the 1990s had a couple of dozen or more countries that imposed wealth taxes. Today it has three, if I recall. There is a reason for that. It is a highly pernicious tax that kills enterprise and that veers from a capitalist (even progressive) philosophy into one that is directly of a Marxist/communist variety that has left so many nations in rubble once fully implemented. Smart, innovative people are not going to stick around for the con game. They will leave.
I have watched Silicon Valley grow and flourish for decades now and have been directly involved in working with thousands of entrepreneurs who have been a part of it. There have been a lot of political changes over those decades but one thing remained constant: the foundational thinking in California always assumed a capitalistic structure. Once that is abandoned, Silicon Valley will be no more.
I know that the vast majority of HN'ers are progressive in their thinking and we all can have our own ideas about what makes for a good and just society. I am not commenting on that here.
There is a line that cannot be crossed, however, without killing the Valley itself and all that it stands for. The wealth tax clearly crosses that line and, if things are allowed to go that way, the consequences may not be what you expect them to be. It doesn't take much to switch from a tax of .4% on assets over $30M (bad as that is in itself) to a tax of a much higher rate on a much lower threshold of assets. Once that monster is unleased, who knows where it will go. It will be fundamental transformation of the Valley, and not a good one.
I think you are forgetting the major difference between now and 70s - massive wealth concentration, and the complete destruction of sustainable middle class jobs. Look at the pandemic. 40 mn people were unemployed, but billionaire wealth continued to grow. Most people in the US are one paycheck away from bankruptcy. Poverty rates among minority population have soared, and the impact is starkly reflected in COVID related death rates. One can sit in an ivory tower and deflect all societies problems to be taken care of by some mythical concept of freedom. But more and more people are questioning why wealth in the US is not trickling down. And these are very valid questions today that should really span beyond political lines
People can question all they want about why wealth is not trickling down but that doesn’t change the underlying analysis or outcomes around why this is a bad idea. You may get income redistribution and trickle down but if it changes the underlying systems that create wealthy, those same people will just end up poorer but more equitable.
You point towards regulation as the culprit of innovation being killed; I wonder how you are not aware most people live pay-check to pay-check, and therefore can not adopt the risk necessary to be entrepreneurial?
We all, live in an extremely divided economic landscape - the _most_ divided in modern history.
I do not understand how this is not a focus of your argument.
With this in mind, if our government offers support to the individual; we can innovate freely without imposing further employer regulation on private businesses. In a globalist society, where jobs are exported to the most exploitative country, this seems to be a promising solution.
The savings rate in China is 40%. Economists have observed a negative correlation between the personal savings rate and the availability of a social safety net. In societies where the state does not provide a substantial safety net, people adapt by saving high percentage of their income, and this is why the savings rate in China is so high.
Incomes are higher today than during the periods in American history when economic growth rates were highest, so the fact that more people are living paycheck to paycheck is more likely explained by the establishment of a comprehensive social safety net reducing the incentive to build up personal savings.
Social welfare spending has massively increased over the course of the last several decades.
You're going from one extreme to another. Starting your own business is not the only alternative to working for big business. There is a remarkable difference between working at Lockheed Martin and working at SpaceX, for example. One is arguably a lot more innovative than the other. And you do know that politicians are responsible for globalism right? It can be curtailed as easily as it was expanded.
Inequality in your country has risen dramatically the past 30 years. That's what your legislators are trying to address. A lot of value is created in the early stages. Should that be exempt? Remember, companies don't exist primarily to pay back investors, their first objective is to contribute to society.
Undue† wealth inequality is tied to the sort of rent-seeking that this tax will enable. Given the inordinate ways to classify and exempt movable property from a wealth tax (even greater than the existing insanity in income taxes), it is essentially inevitable that this will invite more lobbying and corruption, net more rent-seeking, and compound existing inequality.
† vs. inevitable/natural wealth inequality, associated with real disparities in productivity and the nature of sampling individuals on a widening curve
> Remember, companies don't exist primarily to pay back investors, their first objective is to contribute to society.
If a company does pay back investors, that almost always means that it has contributed to society on net. Let me explain.
If people don't pay for a company's products, that company will go out of business. Unlike a government, a company has little coercive power. If I refuse to use Facebook, Mark Zuckerberg can't send men with guns to my home and force me to create an account. Even companies that benefit from network effects (such as social media companies) must build compelling products that people want to use.
Now one could claim that most people are mistaken in what they want, or that they lack the knowledge to understand what they're really getting into, but that would also mean that you disagree with the notion of democracy (since those same mistaken, ignorant people will pick the policies and leaders that control our lives).
There are only a few ways that a company can capture value without creating it. The first is fraud, which is illegal. The second is coercion. That means using violence (or the threat of violence), blackmail, or if they lean upon the state to coerce people. This is usually illegal, though there are some exceptions such as patent trolls. The third way is if they create negative externalities. For example: if I buy a car from a car company, I am better off but everyone else is slightly worse off from the pollution I create and the increased risk of being run over. The way we solve externalities is through insurance and taxes. If I'm required to have liability insurance for my vehicle, and I'm required to pay taxes based on how much my vehicle pollutes, then I pay the costs of my externalities and am properly incentivized to alter my behavior. Perhaps I drive less than I otherwise would. Perhaps I buy a vehicle that pollutes less.
As long as we ensure that parties pay the cost of the externalities they create, we can be confident that any profitable firms are creating more value than they capture. That means they're a net benefit to society.
Of course if we follow this logic, this means that some rather ridiculous firms are beneficial to society. Is World Wrestling Entertainment, Inc beneficial to society? As far as I can tell, WWE is a way to get people to pay outrageous amounts of money to watch roided-out actors pretend to fight. But if WWE pays for their externalities (such as actors' medical bills), who am I to judge? Everyone involved knows what they're getting into and consents. So what if I think the whole enterprise is a colossal waste of time and resources? I'm sure those people think the same of some of my interests.
The alternative to this is a world in which the majority decides for everyone what is beneficial to society or not. Considering the competence of the average voter (and the competence of our government), I'd prefer to err on the side of non-intervention.
4 - Spain, Norway, Switzerland, and Belgium. I don't think it has stopped very wealthy people living in Switzerland or Norway in particular - but also I'm not sure how significant revenue it raises for the state.
I think it's becoming quite clear though that we need some more taxation on capital, particularly the rent-seeking kind, and more levelling of the playing field particularly in the field of education, which is primarily funded through taxes.
Norway is not famous for it's innovation or industry - much less than equally-populated Denmark and twice-as-populated Sweden with which it shares most culture, weather, genetics (and essentially also language). Neither are Belgium or Spain, and Switzerland, though more established, is no industrial powerhouse.
I do not claim that this is a result of the wealth tax, but it definitely doesn't attract innovators and industrialists.
This would’ve been a great opportunity to share your unique expertise on the history, efficacy, or real mechanisms of tax laws that us non-lawyers aren’t privy to. E.g. comparative analysis of property taxes, which are wealth taxes but limited to one asset class.
In retort, these companies are started by young risk takers, many of whom have a safety net. A set of redistributive policies could expand that volume to folks who are arbitrarily excluded.
A property tax is different from a wealth tax for several reasons. Wealth is constantly created and destroyed. Land, not so much. Wealth can be easily moved around the world. Land can't. Wealth can be hidden to evade taxes. Land is hard to hide.
These differences mean that a tax on wealth tends to encourage wealth flight, tax evasion, etc, while a tax on property tends to encourage more productive use of the land. For example: An empty lot in the middle of a city would be taxed based on its value, which would be quite high. The owner would be incentivized to either build something that creates value or sell it to someone else who would do the same.
Thanks for sharing. I don't expect to convince you but I want to make my opposing view clear.
For me the most important benefit of a wealth tax is eroding the wealth of billionaires. This is important because having that much money gives you _power_ in our society comparable to elected officials, but without any comparable accountability. If you have a billion dollars, you can employ two hundred people from your _personal wealth_ at $100k for fifty years each. Or, if you prefer, 2500 people for a four-year term. (This ignores the resources you have influence in deploying in business, though at least in that case there are other stakeholders. It also ignores connections.) This is a great deal of power, comparable to being an elected official, all the more so because elected officials are often constrained by politics. In my view, the existence of such a powerful and unaccountable interest group can only be a threat to democracy. Other commenters have outlined particular ways that this class has achieved its political goals in the USA. The class of billionaires poses such a threat that I would seriously consider giving up the IT revolution of the last fifty years to be rid of it.
I really appreciate this voice of reason and would further like to add a few points. As a tax paying citizen in my country i think that taxes are needed for the upheaval of the country as a whole in an "aggregate fashion". So my question is that even if a country implements wealth tax how is that money going to benefit or trickle down to the lower strata of the society? Do we just add more social benefits which i am against as if you just take money from people and redistribute you are essentially becoming a socialist economy.
Another question that arises here is if the discussion is happening because the tax collected is not sufficient currently? If that is the case then a proper solution would be to and i hate to say this increase the tax rates for everyone. The number of billionaires the people want to tax are essentially pretty low and in a country based economy where there are pretty large numbers haggling away their 1 percent wont really make a difference to a big country.
The issue with wealth tax is that it focusses on a particular well off section of society and that particular section of society is actually just being targeted because they are wealthy. The thing people take for granted is the number of jobs and employment they generate and the services they provide. They actually are so well off that i worry if someone would be able to stop them if they just decide to leave?
Its rather mundane to say that the wealth is not trickling down. These people are generating wealth. Why do you think US is the biggest world economy? Hint: its because of these billionaires we love to hate.
Thanks for coming back to share your perspectives.
While I agree that AB5 stifles freedom and innovation, it just doesn't compute for me that a wealth tax (especially the example of 1% over 50mm) would damage the spirit of freewheeling invention, creation, and capitalism.
As an entrepreneur, I feel much more stifled by FAANGs or regulation than the idea I might be taxed at less than my real rate of return one day.
I agree the spirit of the valley is on the decline, and part of that is due to things like AB5, but it feels more like the tech giants are just new giants, like those of the 70s, and will trend towards preservation of establishment and gradual decline as always.
Someone forgot to model growth in the value of the asset, and/or putting the wealth to use. A wealth tax is, to an approximation, the equivalent of the "management fee" that an ETF charges, but with the revenues going to the government.
If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy? Penalizing static value seems almost reasonable.
But a wealth tax also targets owners of assets that don’t appreciate. It taxes both the winners and the losers, and for the latter it’s nothing but a forced divestiture of their ownership stake.
A capital gains tax, on the other hand, strictly targets those whose assets have appreciated in value.
Wealth is always eventually taxed when it’s liquidated. And if it is never liquidated, then it arguably doesn’t really matter.
Wealth hoarding matters immensely for things like land, which is why the most common wealth tax is a tax on real estate holdings.
It can also matter for other resources which are finite, but land is one of the most crucial one in our current times, and why we are seeing such ridiculously large gains in housing costs in the past few decades after a century of housing costs remaining fairly constant.
> if it is never liquidated, then it arguably doesn’t really matter.
This is also not true. It does matter. It is not difficult to take extremely large "loans" (loans are not taxed) against assets that you own, in order to avoid actually selling the asset. This is a not-rocket-science way to reap the benefits of an absolutely massive fortune without any of it ever being "liquidated".
1) I agree with you, taxing asset holdings is strange logistically.
I think it be best to tax income. The only change I'd make is currently, income is taxed at a percentage based on your total income in the year. What could change is to tax income at a percentage that is a function of the current estimated value of your wealth instead. So if you cashed out 1 million and that's all you have, you'd pay less tax on it than if someone cashed out 1 million but still had another 10 million worth.
2) Maybe it's a bad idea to allow anyone to own too much of anything of great value to society.
In that regard, it could make sense to force wealthy people to sell some of it, to whatever treshold we believe is too much for one person to own.
That's where I think a wealth tax could come in as a vehicle to force people who own too much to sell some of it. So that we have a more evenly distributed wealth ownership accross the board.
The only thing here is I'm not sure if a wealth tax is the best scheme for this. I think the income tax that I described in #1 would be good when it comes to taxes (money that goes to the government). For wealth, I'd be more inclined with something like where people have to sell a percentage, but taxes don't necessarily need to be involved (beyond the income tax as described from the sell). The idea here is just that no one should own too much, so at some point, you need to sell so that ownership is better distributed. Not necessarily that this should go towards taxes.
We should incentivize productivity (thus low income/gains taxes) but pay for goods and services (thus wealth and inheritance taxes). There is nothing beneficial for society if there are people with large amounts of poorly allocated wealth (ie not productive enough to grow faster than tax rate).
Wealth tax proposals target only very high nw people. There is no inherent right to be very high net worth, if you are not productive with your wealth then it is more efficient for the society if that wealth is reallocated. This is what wealth tax does.
Currently, capital gains is on taxed on sale. Even on sale there are ways to reduce or defer it (opportunity zone investments for example). Some also donate appreciated shares to charities that are suspect (Trump comes to mind).
Most billionaires don’t sell most of their stock during their entire lifetime.
Ah yes, the economic argument of "punish savers and people refraining from consumption will lead us to our Centrally Planned Utopia"
>If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy?
Do you and I live in the same reality? When a global pandemic has shown almost every single person on earth that cash balances should have been higher -- enough to sustain unexpected periods of inactivity -- it seems a little tone deaf to say saving money is unproductive. There's already a tax on holding central-bank money -- it's called engineer inflation and it's what's exacerbated the economic repercussions. Your Central ~~Bankers~~ Planners convince you taxing fiat money holdings (price inflation) and artificially reducing the cost of bringing future production to the present (downward interest-rate manipulation) will lead us to utopia when it's actually cause over consumption, over production, and a planned economy on the precipice of collapse.
Except any reasonable proposal for a wealth tax typically leaves the first 5-10 million untouched and marginally taxes amounts larger than that. If you have $10 million in the bank, you're not just a "saver" or "refraining from consumption".
>If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy
Wealthy people don't just leave their money under a mattress, they invest it in something. Even if they just left it in a bank, the bank is still going to lend that money out and invest it. Taxing wealth just encourages riskier investments, as higher risk is needed to achieve comparable post-tax return.
Evidence points to the contrary: Taxes reduce profitability and therefore limit risk taking behaviour by companies. Same is most likely true for individuals because it reduces their income.
Exactly. Capital gains tax is equivalent to a wealth tax on appreciating assets only, which is the only kind of assets you should be targeting with a wealth tax. So just implement a sensible capital gains tax, and you're done.
Assuming your thesis that taxing wealth encourages riskier investments for a minute. Why is that a problem? Isn't putting money into riskier assets a good thing for long term advancements in asset classes with high potential reward?
It doesn't seem like low risk investments like sticking money in the bank to be lent as mortgages or investing in government bonds are as good for humanity over the long term.
“Riskier”, but how much riskier? Having to beat inflation by 1% is not that much riskier compared to the gained equality in taxation. Bad argument. You can’t leave off the amount and implicitly use the worst case scenario to argue against all cases.
Modeling the growth does not change the results in any way that makes the tax seem more favorable.
Taxing away 1% of an asset that grows 0% every year leaves 45% of the assets that would be present without the tax after 60 years.
Taxing away 1% of an asset that grows 7% every year leaves 45% of the assets that would be present without the tax after 60 years.
However, to be more realistic, modeling growth makes the taxation even worse, because at times when your equity is at a high valuation, you need to sell some equity and then some extra on top of that in case your equity value crashes before the end of the year/ end of the tax period. You are forced to act defensively.
I don’t think Paul forgot, it’s why he phrased it in terms of stock not dollars. If you start a company and hold on to ownership for 60+ years, you could be forced to sell X% to cover the wealth tax over the years
Yes, but at the end you'll still have more real value in that stock then you had at the start, assuming your stock at least performs equal with the market.
> If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy? Penalizing static value seems almost reasonable.
We already do that via inflation. Leave your money uninvested and we tax it 2% or more per year, every year.
One big difference here is that inflation affects everyone equally (not exactly right, but let's ignore that for now). A wealth tax would act as an extra tax on ultra wealthy individuals.
> Someone forgot to model growth in the value of the asset, and/or putting the wealth to use.
It's surprisingly not different.
If you have an asset that is dormant, is $100, and you tax it with 1% for 20 years, you get to $81.79 by calculating 1000.99^20.
Now suppose instead, your asset grows by 10% a year, and you have no tax. That asset grows to 100
1.10^20 = $672
Now suppose that prior to the investment each year you tax it with 1% and invest the rest, for 20 years, again at 10%. So you get 1000.99^201.10^20 = $550
That $550 of $672 is exactly the same portion as $81.79 is of $100. In other words, growth or no growth, it has exactly the same effect, either way a 1% tax over 20 years takes 18.2%.
> Penalizing static value seems almost reasonable.
In the philosophy of taxation there's a different approach. Money you own is money you earned. Typically earnings are taxed. You produce X value, and a small portion of X is allocated to a general pot of money to fund general things in society, e.g. infrastructure, rule of law etc. But after that, it's your money. If you then invest it and earn more, again, a portion of those earnings are taxed. But if you don't do anything with the money, for the government to take it, is seen as a form of theft.
The principle why the one form of appropriation is okay and the other isn't, is because when you earn, you benefit. And the government benefits, too. When you just store, you don't benefit, and taking it is a purely negative experience. Many people are willing to share part of their new earnings. Few are willing to give up something that has always belonged to them.
Inflation is a natural penalty on static value anyway. So are opportunity costs. Plus, actually static value is quite rare, money in a savings account is being put to work by the bank. The amount of really static money (like money under your mattress, or a permanently vacant home) is quite a small portion of the financial system and again being penalised by inflation and opportunity costs already.
You're gussying up a "silicon valley" libertarian viewpoint in "philosophy of taxation."
> When you just store, you don't benefit, and taking it is a purely negative experience. Many people are willing to share part of their new earnings. Few are willing to give up something that has always belonged to them.
That's a real stretch when just a sentence earlier you talked about earned benefits and taxation of those benefits. Storage is just the accumulation of earned benefits beyond your spending habits. Value isn't created in a vacuum nor is it used in one. And current taxation doesn't preclude future taxation, it's why us common folk are told to do any of our retirement funding that we can as pre-tax, since who's to say something that is taxed today (and is expressly stated as not being taxable in the future) won't be taxed again later on appreciated or total value. So, by this alone, the government saying taxes now, and deferred taxes later if that valuation meets certain thresholds isn't something that the government can't or even shouldn't do.
And, in many cases, the tax wouldn't apply to startups or their founders unless they're already sitting on multiple tens of millions of static personal valuation; which is where this whole argument really breaks down, and shows its disingenuous colors. When someone like PG talks about these wealth tax valuations in general terms of percentages, many of us are still thinking on OUR terms, which means we're thinking on "normie" scales of 10s or 100s of thousands, or maybe a couple million, where a 1% drop in valuation YoY would make a significant dent in what we can and can't do; when a wealth tax is floated (at least in the US) it's looking at $10M+ in static assets at the individual level, and applies to a wealth class that only a small percentage of people can actually comprehend. And, when a wealth tax is floated in the US, it also has discussions around non-realized asset valuation (such as small businesses, start-ups, etc) and what classes of assets contribute to the total value of an individual wealth tax.
Applying a wealth tax in a general way like how PG has done it is a bit disingenuous, not wrong; but is prone to personal wealth view biases. It becomes even more obvious when we take your example and put it towards something that would actually be taxed... $100M; which you end up with $81M for static assets or $550M instead of $672M in PERSONAL assets. Most only think of numbers in these terms if the "win the lottery" so who in the general public thinks the difference of $122M over a lifetime of nearly 3/4 of a billion dollars in wealth (not earnings, but accumulated valuation) isn't a bit of a "whatever," they'll pay more in taxes on that Mega Millions winner and won't bat an eye. (this also works for the usual lower bound as well, $10M, but $100M is guaranteed to be included in any of the recently floated wealth taxes).
It doesn't matter how much your shares appreciate. You can't retain control of your company if you have to give up a significant fraction of your votes every year.
> If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy? Penalizing static value seems almost reasonable.
So now we should be penalizing unproductive assets? When did we all decide that was ok?
Based on that logic, wouldn't I be justified in draining someone's savings account in order to invest it more productively in stocks? Maybe it's ok to steal land from people if I will grow more crops on it than they will?
You can justify taking pretty much anything if you say you will use it for something more productive. What about property rights? Why should people who have played by the rules and built wealth in our society, which they were encouraged to do, then have to live in fear that their wealth might be taken from them?
> So now we should be penalizing unproductive assets? When did we all decide that was ok?
We already do that---it's called inflation. And the justification used by economists is that the economy will collapse without inflation to incentivize spending money.
Government Spending is included in GDP and government services have value to a society.
It is not simple just a management fee because instead of being used to purchase a luxury goods it may be used to improve healthcare, infrastructure or regulating industry.
If it wasn’t for government investing into DARPA none of these startups would even exist.
Graham does the classic magician's trick of showing you something shiny so you don't see what he's doing with his other hand.
In this case, the shiny is the scary 45% figure. What he draws your attention away from is the bizarre hypothetical:
> Suppose you start a successful startup in your twenties, and then live for another 60 years. How much of your stock will a wealth tax consume?
Who is this hypothetical 20 year old that becomes indepedently wealthy, and then doesn't work for the rest of her life? And despite being so wealthy, she opts to pay 100% of her taxes by liquidating her stock rather than out of her salary or investment dividends?
Even if we go with Graham's strange hypothetical, oh booh-hooh, this lucky individual can retire in their 20's and dies richer than 99% of the rest of us. But in reality the hypothetical looks more like this:
1. Very lucky 20-something makes it big and now owns $50M of stock in her company
2. She gets $1M per year in dividends, $1M per year in salary, and her stock increases in value by $5M per year (5% annual growth)
3. The first year she pays $1M on a 1% wealth tax, and her net worth increases by $6M. Similar math in following years.
4. She retires sipping martinis on a private island in Florida
The author is playing the typical Rich man's game. Oh woe is me, look at these poor people who this tax will destroy!
The fact that so many people here are defending them, is maddening and disheartening. Arguing that anyone with a value of over 50mm can't pay a higher tax rate on those funds is disengenous at best.
I find PG interesting to follow on Twitter in that I don't always agree at first with what he says, but it can lead me to investigate and confirm or adjust my position. But on these topics I often get the vibe that he's leaking personal concerns.
Maybe it's not purely selfish but the idea that he's looking out for his cohorts of young motivated founders, yet even that feels off. I doubt many start a business desperate for tens of millions; I'd guess the primary motivations are control of work schedule and basic FU money.
It's easy to dream up scenarios that prove your point. How about this one:
Company has a bad year. Dividends are cut to zero. Founder reduces salary to bare minimum required for her expenses. On paper, she still has $50 million net worth of illiquid non-public stock. Government demands $200,000 wealth tax. How does that play out?
A $50M company that gives $1M in dividends is worth $49M. It would need ~12% growth to be worth $55M. A company deciding to issue dividends does not change the net worth of any shareholder (it can actually have a negative effect due to tax inefficiency).
So to your example: A $50M company grows 5% a year. Lucky 20-something holds a stock+dividend value of $52.5M before tax at year's end. Of her $1M salary, ~$330k goes to federal income taxes, another $30k to FICA. Too bad she's in California, that's another $100k in state income taxes.
Still, she has ~$540K left over in liquid income. Perhaps she can use this to pay off her $500K wealth tax liability and keep full company ownership if she lives modestly.
Next year presents a bigger challenge. Lucky 20-something's company has grown in value by 5%, and so too has her wealth tax burden. However, her salary needs to grow by ~7% to account for income taxes (and a higher growth rate would have made this worse). This is clearly unsustainable and she will need to sell some company shares before her exponentially growing salary eclipses the value of the whole company!
She'll still be rich enough to retire whenever and sip martinis in Florida of course, she just won't hold the majority of the shares of the company she founded.
Edit: I realize that I sort of neglected dividends after the initial bit. A company could pay off 1.2% (to account for capital gains tax) of it's total value as dividends assuming it had sufficient liquid holdings (and it can't sell stock to come up with them, as that would defeat the purpose). In this case, it would cut company growth potential by about 25% but could allow lucky 20-something to retain control, provided the company can always come up with the liquid assets, even in down years. But that's probably the most realistic scenario of this working.
This is not modelling a wealth tax. This is disingenuous whining because it fails to take into account that wealth taxes kick in at the point that where people have become wealthy. Lets say it kicks in at 100 million. So you still get to keep 100 million before you pay any tax on that wealth? Or in other words you still get to be incredibly, obscenely wealthy, you just reduce the chance to become wealthy beyond the dreams of avarice. Not seeing how this is particularly demotivating to people want ting to found startups. Lets say it kicks in at 10 million instead. Again you still have the chance to become extremely wealthy before you have to pay it. And if you don't think being worth £10 million is extremely wealthy that's because youre comparing yourself to billionaires. Even if it kicks in a £1 million you still get the chance to become wealthy! Sure maybe at this point to you're reducing the number if people willing to put in 80 hour weeks in the hope of winning the startup lottery but given the number of people who pour their heart and soul into passion projects without the chance of becoming billionaires I don't see that as a problem. Seriously this idea that if we tax the wealthy to the point where they can only afford a single yacht and a modest private island they'll all go on some terrible Randian strike and well somehow lose the value they create is bollocks.
(1913 $3k -> roughly $80k 2020 in standard inflation adjustments. At a time when a recent-graduate civil engineer made ~$1k, or with 10 years experience in the low $2k's, according to https://libraryguides.missouri.edu/pricesandwages/1910-1919. A person making $3k was loaded.)
Think about it this way, in a very similar, live example:
It is common practice to pay a fee of 0.5-2% to a wealth manager. In practice for many people this fee is worthwhile and wonderful - the benefit is a safely managed and vigorously growing pool of assets.
Is a wealth tax as described by the author really so different? In one case you pay a fee to the manager, in the other case you pay the fee to a more abstract/distant manager (the social system). In both cases, that small fee (small if everyone is generally competent and the wealth grows) is what empowers further growth.
No sane, logical person complains about paying $0.20 when in return they get an extra $0.30 back. In this case, I suspect the author is trying to justify receiving that hypothetical $0.30 without having contributed their initial $0.20. Embarrassingly simplistic, selfish, and self-centered.
Reading that blog post, I’m reminded of the occasional, deluded person who believes that they alone are responsible for their successes and good fortune. In reality, all successes are collective accomplishments. This is a fundamental fact about human life.
> It is common practice to pay a fee of 0.5-2% to a wealth manager. In practice for many people this fee is worthwhile and wonderful - the benefit is a safely managed and vigorously growing pool of assets.
You pay that fee because the manager supposedly does something that helps your wealth grow faster than their fee.
When Vanguard comes along and shows you can get the same or even better returns with a 0.04% fee instead of a 2% fee, what happens? People take their money and move to where the lower fee is. Why would it be any different for a wealth tax?
I can easily fire my asset manager, or switch to a plethora of low cost options, or manage my capital myself. How exactly will I have those options with the wealth tax if you like you said, I’m not getting that rate of return justifying the tax?
If you're a citizen of a country, you automatically get all of the benefits that come with it: personal safety, transportation networks, infrastructure, etc.—all things that enable your business to be successful. Since you can't opt out of these benefits (without leaving the country), it makes sense that you shouldn't be able to opt out of their cost.
Thinking more about this and taking the wealth manager analogy deeper...
In the case of a wealth tax, I imagine wealthy, powerful people would play a more active role in ensuring the competence of their elected officials. They'd like that tax they're paying to go a long, long way, much as clients expect their fees to a wealth manager to facilitate the best possible work.
This is simplistic to the point of absurdity, and doesn't model how any sensible wealth tax would be implemented or paid.
First, any wealth tax being seriously discussed has a floor and/or has marginal rates, probably starting at 1 or 5 or 10 million (or higher).
Second, taxes don't disappear into nothingness - they pay for civilization. It is clearly beneficial to everyone to live in a society where people are well cared for and have healthcare, public education, welfare, etc. There's a reason failed states and unstable/developing countries generally aren't where people are looking to startup the next big tech company.
Third, any smart founder isn't going to just sell 1% of their stock every year and pay the wealth tax with that. They'll take dividends, or take out a loan against the value of the stock, or use some cash from other investments, or whatever, and maintain control of their company. Yes, over the long term they'll lose some wealth, but not necessarily control of their company, unless that's the decision they make.
Fourth, this effectively ignores that wealth is a thing that grows and compounds. If your wealth is increasing at 4% a year (very attainable for the class of people a wealth tax would affect) a 1% wealth tax really doesn't have as big an impact on your long term wealth as this makes it seem.
Fifth, the idea that people "will just move to another country" is very silly. If some people do leave, or start companies only in other jurisdictions, that just means there's a market opportunity for the many people who remain. Unless this supposes that no one wants to take advantage of one of the richest markets in the world because they might have to pay a small fraction of their wealth to the government. Not to mention that even very wealthy people likely want to live in a good society - we don't see many people starting companies on boats in international waters for a number of reasons (left to the reader).
I suspect that Mr. Graham is wringing his hands over potentially having to cut a large (in absolute terms, but small in relative ones) cheque to the government in the future, and I certainly feel for him, but I'd much rather we have well funded schools and welfare for those who need it.
> the idea that people [read: super rich] "will just move to another country" is very silly.
This is a recurring theme in owners/investors: they always have some story that they will be forced to leave or close shop if some labour-proteaction-laws (like weekends, or 8h days, or banning of child labour), or taxes are implemented. It's a very old story, there's a history to it.
Please note that we have weekends/8h work day/ban on child labour and also still have the super rich. They never left. They did pass law that allow them to shift production overseas. But those laws can be repelled and then we will hear the story again of how this will kill their business,or force them to leave.
But indeed corporations (which are "people") have moved en masse to Ireland.
And New Jersey saw a significant exodus towards lower tax states among its richest.
It's not empty threats - it's just that the cost of the taxes has to be higher than the cost of moving. For most people, the cost of relocating is higher than the taxes. For the richest people, this wealth tax might just tip the scales.
Ted Arison and Eduardo Saverin are the most famous examples I'm aware of - it's mostly because laws were changed after they managed to move without being taxed. Do you think there are no more loopholes? Do you think these are the only cases?
This is a great illustration that the wealth tax is not about rational policy. It's based on nothing but emotion and ideology.
We're not debating here the need for taxes, or labor protections. You don't get to justify bad policies by pointing that there are places where government regulation is called for.
Wealth tax is bad policy. Justify it on its own merits.
>>Please note that we have weekends/8h work day/ban on child labour and also still have the super rich. They never left.
The fact that are still super-rich people doesn't imply that such interventions did not have a negative on the number of people who are super-rich in the US. High taxes have a well-established negative effect on capital formation, and investment in-flows. This isn't some conspiracy theory promoted by the super-rich to manipulate you.
I think you're giving the arguments made against high taxes a very shallow treatment.
>First, any wealth tax being seriously discussed has a floor and/or has marginal rates, probably starting at 1 or 5 or 10 million (or higher).
Uh huh.
>Second, taxes don't disappear into nothingness - they pay for civilization.
But there are bad taxes. There is such a thing as too much tax. So you have to justify the wealth tax on its own merits instead of trying to pull a motte-and-bailey fallacy by pushing a wealth tax and then arguing for the necessity of taxes when challenged. Taxes are a necessary part of a functioning modern economy. Wealth tax is not.
>Yes, over the long term they'll lose some wealth, but not necessarily control of their company, unless that's the decision they make.
No. What are you talking about? The math is very simple. You will lose control at some point, because there's only so many ways you can rearrange the deck chairs.
And no, dividends are not an option because issuing a dividend may not be in the best interest of the company. Dividends are also taxed separately.
That you think taking out debt to cover wealth taxes is a solution is insanity.
>Fifth, the idea that people "will just move to another country" is very silly
But that's exactly what happens. We have data on this from various experiments. It doesn't bring the revenue you expect it to because there is capital flight and brain drain from the country in response - and when that is taken into account, you may end up with a net loss in tax revenue. It's also expensive to administer and enforce because net-worth is not easy to calculate. It's no coincidence that this form taxation has been falling out of favor.
>I suspect that Mr. Graham is wringing his hands over potentially having to cut a large (in absolute terms, but small in relative ones) cheque to the government in the future,
No. That is a strawman if I ever seen one. Could Mr. Graham not be against this tax because it's an objectively bad tax with many unintended consequences?
Do any wealth taxes being seriously discussed not have floors/exemptions for primary residences/marginal rates/whatever?
Why is a wealth tax a bad tax? Why is it worse than income tax or a VAT or anything else we currently do? Many places currently have property taxes (a type of wealth tax) and they tend to work well.
You need to redo your math. If your net worth is $10+ million and isn't increasing by at least ~4% a year you're doing something very wrong. So ~1% of your wealth going to taxes is eminently affordable. No need to lose control.
Capital flight can be handled with exit taxes and restrictions on foreign ownership. Brain drain is usually high income (not high net worth) individuals leaving. The reason net-worth based taxation has been "falling out of favour" is because billionaires have an outsized impact on media and politics, and that very clearly suits their interests.
He could be - but if that was the case he'd have better arguments. Why didn't he talk about capital flight and brain drain, and how other taxes would be more appropriate? He's a skilled essayist; he chose his words carefully, and he used language around stocks, founders, and ownership specifically to appeal to tech geeks who expect to start successful companies.
Mr Graham may have good reasons to be against this tax but he hasn’t argued them here. The analysis is so far below his usual clear and insightful reasoning that I wonder if it’s even his.
As an occasional entrepeneur I do not at all mind being subject to this tax. I’ll worry about the wealthy when I join them, not before. They don’t really worry about me.
I think most of the reasoned objection to various taxes was summed up by Bill Clinton in his first campaign: what people mind is not getting what they’ve paid for by their taxes.
>>Second, taxes don't disappear into nothingness - they pay for civilization.
>But there are bad taxes. There is such a thing as too much tax. So you have to justify the wealth tax on its own merits instead of trying to pull a motte-and-bailey fallacy by pushing a wealth tax and then arguing for the necessity of taxes when challenged. Taxes are a necessary part of a functioning modern economy. Wealth tax is not.
Indeed. The parent is arguing that the wealth tax is better than, say, a carbon tax, which is considered a fairly efficient form of taxation.
> >I suspect that Mr. Graham is wringing his hands over potentially having to cut a large (in absolute terms, but small in relative ones) cheque to the government in the future,
>No. That is a strawman if I ever see one. Could Mr. Graham not be against this tax because it's an objectively bad tax with many unintended consequences?
To add to this, Paul Graham doesn’t live in California, and would not pay the tax. He’s opposed on principle.
> But there are bad taxes. There is such a thing as too much tax.
Having a wealth tax doesn't mean the total tax goes up. Normally when discussing the merits of a certain kind of tax it's best to assume another tax is cut, otherwise it invariably becomes a discussion about whether high/low/more/less taxes are good.
PG is tone deaf and missing the mood of the nation here.
He says:
> Even a .5% wealth tax would start to keep founders away from a state or country that imposed it.
Mr Graham doesn't consider the possibility of startup founders leaving / kept away from a place that doesn't impose a wealth tax. I am not a successful startup founder (yet), but I would consider it my duty to live in /start a company in a place with better laws and taxes that are more equitable for everyone.
Money is not the only thing that drives startup founders to do big things. Complaining about a wealth tax and suggesting it will ruin things in the valley / CA due to people leaving completely ignores the societal improvements that could come from those tax dollars.
The idea behind increasing taxes on the wealthy is to build a better society for everyone - including the wealthy! Why would the future prospective wealthy startup founders want to live in a massively unequal society, that is bent on increasing incoming inequality (the topic of another recent PG essay, where he argues that decreasing wealth inequality is a bad idea)? I sure wouldn't.
Mr Graham, a lot of startup founders may leave if large measures to improve society like a wealth tax are not 'imposed'.
You said,
> Taxes are a necessary part of a functioning modern economy. Wealth tax is not.
But you don't back this up. Why should wealth tax not be a part of modern economy? Modern economies are broken right now, obviously, for most people anyway, so keeping the status quo is a red flag and a bad sign.
> Could Mr. Graham not be against this tax because it's an objectively bad tax with many unintended consequences?
If that is his position, he does not explain it very well. Especially with the context of many of his recent essays, he does seem especially concerned with his image and wealth.
What about the unintended consequences of adopting policies that specifically intend to increase wealth inequality? PG doesn't seem to much consider the consequences that his models/opinions/plans would have on other people if implemented.
Paul's modeling of the wealth tax is incredibly naive and simplistic... to the point of either being extraordinarily dumb or intentional misleading. Given how intelligent Paul Graham is, I'm gonna say the later.
I don't even gross 200k USD per year and I could afford a 1-2% wealth tax, no sweat.. wouldn't even miss it. In fact my savings would continue to grow almost unabated.
The wealthy want us to believe that their money is the true wealth of America... that the {insert country} would fall apart if the wealthy left. In reality, our wealth is in our natural resources (food, energy generation, fresh water) and industrious, hardworking people of this country.
I say this clearly... Jeff Bezos, Elon Musk, Bill Gates (etc.) are not responsible for wealth creation in this country. There have been 10's of thousands of people who brought the technology of those respective companies to fruition, and an entire society that made it possible. The idea of the "self made millionaire/billionaire" is ridiculous in its essence.
That we DO NOT have a wealth tax, and high taxes on earning above a wealth threshold, is ridiculous and (dare I say) unethical/immoral. We need to entirely re-frame the argument surrounding taxes on corporations, wealth and sky-high incomes.
>I don't even gross 200k USD per year and I could afford a 1-2% wealth tax, no sweat.. wouldn't even miss it. In fact my savings would continue to grow almost unabated.
THIS! Most Americans just don't have many sitting assets, so even if you made the wealth tax apply equally to everyone, and we all had to pay an additional 1% on our net worth each year, for most of us that's either 1% of our house value or 1% of a small amount sitting in a bank account. For a billionaire that's $10M, which is about my city's whole budget. So another framing could be: "billionaires should annually pay for a small city's municipal expenses" -- it seems more than fair.
Even in the case of not-yet-wealthy-startup-folks, assuming shoddy implementation -- "my money isn't liquid -- paying 1% tax on $1M of monopoly money from a startup is going to be hard" it's actually just $10k. And marginal rates and floors can easily make it all work. I'm a spoiled tech employee, I'd pay 1% of my salary a year for the purpose of helping mitigate income and quality-of-life inequality.
His modeling could be naive and simplistic. But emotionally losing 2% on 200K and 200 billion have very different effects on human brain.
It's one thing to pay 2K totally different thing to pay 4 billion.
You could make an argument that for some one with 200 billion, paying 4 billion isn't that much. But they are likely thinking on the lines of some great grandchild inheriting that money.
Your first point doesn't really apply, because PG is talking about someone who starts a successful startup, which—at least for Silicon Valley levels of success—would be above the relevant floor. (And he specifies: "over the threshold at which the tax starts".)
Your second point isn't really relevant for a founder who can choose between one developed country with a wealth tax and another one without. Unless you think all developed countries are going to implement the wealth tax.
I don't think your third point speaks to the issue. The article didn't mention control of the startup, only finances, and I don't think the successful 28-year-old startup founder who's looking at the impact of a wealth tax 60 years in the future is primarily concerned with control of the company at age 88.
Your fourth point also makes no difference. Suppose you make $1 billion, and you earn zero interest on it. The wealth tax takes away 45.3% of that over 60 years. Suppose you make $1 billion and compounded interest at 4% would increase it to $10.5 billion over the course of 60 years. The 1% wealth tax still takes away 45.3% of that over 60 years, leaving you with 54.7% of the $10.5 billion. Multiplication is commutative.
To your fifth point—well, does anyone leave for tax havens, or arrange for as much as possible of a company to be officially inside a tax haven? I think they do. A wealth tax that ends up making a large difference over the long term might make a large difference in how many people leave.
I don't think you've shown that PG "doesn't model how any sensible wealth tax would be implemented or paid" in any significant way.
The wealth taxes being talked about, broadly, would impact people with wealth of tens of millions of dollars and above. But PG talks about what they would "mean in practice for a startup founder." Already he's made a clever rhetorical move and conflated startup founders (a large group) with very successful startup founder (a much much smaller group), in attempting to broaden the people who look like they're impacted directly by his argument.
Over the medium-long term, I think any countries that don't implement a wealth tax (or some other way of addressing wealth inequality) will not remain developed countries.
PG uses 'stock' throughout the essay as opposed to 'wealth', and I believe he did so on purpose; he's appealing to emotion. Startup founders care a great deal about control and ownership, more so than wealth in the abstract. Look later as well - "And at 5% this threshold is getting asymptotically close to being an upper bound on how much of the company you get to keep." - he's directly talking about ownership/control rather than simple wealth.
Yes, this is obviously true. But again, PG's phrasing here is key; he's making it seem like you'll have only 55% of what you start with, which isn't remotely true. It just means your wealth compounds at a lower rate. Much less impactful, clearly.
Maybe. A wealth tax on its own doesn't solve this, you also need to sort out tax havens. And again, you need to look at the real cost of these people leaving - if a billionaire moves away (instead of paying a wealth tax) what does that cost us?
> Your second point isn't really relevant for a founder who can choose between one developed country with a wealth tax and another one without.
This is an incredibly simplistic take.
When choosing a USA with a hypothetical wealth tax versus other existing countries, the contrasts are far larger than just a wealth tax. The USA has increasingly bad health/medical costs, university tuition costs, cost of living in affluent areas, deteriorating infrastructure, political strife, etc. It's important to talk about this hypothetical wealth tax as a weighted component of all of the likely decision points.
> Your second point isn't really relevant for a founder who can choose between one developed country with a wealth tax and another one without.
I can't get why many who advocate against a wealth tax are afraid of raising a single penny on a billionaire amid the fears of scaring him off the country. This is really a bad refuse of Reagan politics that hasn't proved to be true. Moving wealth around while bypassing capital controls is expensive. Relocating a whole business is even more expensive. And if someone really wants to do it to make sure that they don't pay taxes on their billionaire wealth, then they're welcome to go - a developed country has plenty of talent to replace them, and in many cases there will be one less lobbyist to keep inequalities high and politics hostage of his own interests. Lots of taxes have been raised on low-earning classes in the past decades without the blink of an eye, but as soon as someone proposes a tax on the rich some people cry out against the exodus of billionaires.
> Suppose you make $1 billion, and you earn zero interest on it. The wealth tax takes away 45.3% of that over 60 years. Suppose you make $1 billion and compounded interest at 4% would increase it to $10.5 billion over the course of 60 years. The 1% wealth tax still takes away 45.3% of that over 60 years, leaving you with 54.7% of the $10.5 billion. Multiplication is commutative.
Taxation on real estate isn't that different. As an house owner I pay every year a tax that is proportional to the value of my house. Sure, if I look at how much the tax compounds over 60 years I may get scared, but on a yearly basis I can barely feel its impact on my finances. And I consider it a fair tax as well - having a house in the middle of Amsterdam is a privilege, and I feel that it's fair to pay for my privilege and redistribute that money back to society. I don't get how someone sitting on a $1 billion wealth may consider a $10 million tax unsustainable. A large house, a yacht, $1 billion shares in a company or a luxury car are privileges reserved for few, and it's unfair to just let those few sit on such wealth while the government every year has to raise money from those who earn much less. That inevitably ends up with most of the wealth is accumulated in the hands of few, and that's a scenario that society should avoid at all costs.
On the fourth point, the distinction is material. A bystander may feel bad for the founder if their wealth drops from $1B to a mere $550mm. But the bystander is unlikely to feel bad for the founder if their wealth only rises, naturally, to $5.5B or so.
If the real (ie inflation adjusted) rate of growth of capital is greater than the wealth tax, the wealth tax does not cause _actual loss_ to the wealthy.
The nature of the psychology of loss aversion means the distinction between "loss" and "reduced gain" matters. The loss may sting enough to cause the founder of move, but reduced gain will only matter if it prevents them from achieving a material goal.
Of course all "developed" countries (i.e. countries with the high levels of education, health, and safety that can support development of high-margin industries) will institute a wealth tax. And, for the lucky ones that thrive without one, they'll eventually adopt it, too.
He tries to compare a wealth tax to an income tax. But they are not comparable. If a person's gains from capital are above a certain threshhold and exceed her gains from income, then that person can afford to pay an additonal tax, not based on income.
CEO's can infamously "work" for $1/year because they do not have to rely on income (labor) to support themselves.
At a certain point, "income tax" becomes a misnomer. Thanks to the value of capital, some people do not actually have to engage in labor. Through work done by well-paid advisors, it is at this point that many of them have also reduced their income tax liability to zero, more or less.
Comparing a wealth tax to an income tax makes little sense.
If Piketty is right, in today's world gains derived from capital always exceed gains from labor (income) over the long term. That excess just keeps accumulating. The wealthy keep getting wealthier. Quite the opposite picture from Graham's, where gains from wealth dissipate over a lifetime.
I will say this, his model looks great in a text-only browser. Wide margins, a basic table; succinct. The simplicity is pleasing to the eye.
Government already owns 40% of what everyone earns in the US (see government spend as % of GDP is about 40% now). If that's not enough to pay for stuff, nothing ever will be. And it's much much higher if you're living in a blue state where salaries and COL are much higher, not to mention their state taxes are higher.
Taxing the wealthy is not an effective means of helping people. If you taxed every last billionaire in the US, 100% of all the wealth they earned over the last 50 years and gave it to every member of the US, split evenly, and divided by 50 years, you'd get a pitiful small number of about 200$ per person per head. (2.7 trillion total billionaire net worth in US / 300 million / 50 )
Silicon Valley is full of millionaires who are temporarily embarrassed tech billionaires. Thus, why they come out in threads like this so wildly. Slow day at the home office - I guess.
The amount of people I know with millions in assets but think they're poor and will someday be a billionaire is astounding. ("I just bought a nice vacation home in Lake Tahoe and a rental property in Santa Clara but I'm struggling with my little home in Palo Alto, you know? I barely have any money." - real example I've encountered multiple times) They're, of course, against wealth taxes. They are all convinced they're gonna be the next billionaire and that any taxes will absolutely destroy them in their path to ... whatever their destination is. (They don't even know - they all just want recognition)
>First, any wealth tax being seriously discussed has a floor and/or has marginal rates, probably starting at 1 or 5 or 10 million (or higher).
The floor is adjustable. As more tax money is squander, the floor will be adjusted for greater taxation.
>Second, taxes don't disappear into nothingness
They actually do. The return on your tax dollar in California is abysmal.
>Fifth, the idea that people "will just move to another country" is very silly.
They can move to another state. Schwab is moving to TX. The tax savings will build their new corporate HQ in Westlake. How many Hedge Funds have left Conn, NY, NJ, etc for Florida?
I don't have a dog in this fight. Taxes are necessary but when the State is not held accountable for their spending and continues to squander tax dollars, there is no amount of money that will ever satiate them.
I hope California goes through with their plan. It will be an interesting to see the outcome.
There's a lot of assumptions in there that the economy is rapidly proving wrong right now. Wealth doesn't grow for everyone - and an income tax is more fair because people whose wealth is going up pay more than people whose wealth is going down.
We live in a world where remote work is rapidly becoming not just acceptable, but standard. Post-coronavirus geographic mobility will be high.
Look, we already have a wealth tax. Instead of dinging you every year and guaranteeing plenty of billable hours for accountants, we bundle it up in a big charge at the end. Everyone dies. How about we just enforce inheritance taxes and call it done?
There are a lot of weird incongruities in what you're saying here. First, how is an income tax more fair than a wealth tax? There is no guarantee at all that "people whose wealth is going up pay more than people whose wealth is going down.", let alone that the relative amounts of those items are fair. Additionally, wealth often accumulates via tax-advantaged vehicles that lower income individuals simply don't have access to.
Next, are you really implying that people will magically move to another country entirely because they can work remotely? The portion of workers who are even able to do such a thing, let alone likely to, is vanishingly small for many reasons (including, interestingly, income taxes).
And to your third point... again, you seem to not be aware of how estate planning works specifically to avoid paying taxes via things like trusts and inheriting shares in companies. Fixing inheritance taxation wouldn't come even close to being as effective as a wealth tax in preventing long-term accumulation of wealth with little economic input.
Here's where we're at: we have been trying income tax and the rich keep getting richer. Demonstrably and repeatedly. It isn't working, unless your definition of "working" is robber-baron era levels of economic disparity in America. If your proposed solution is variants of income taxes, well then you know the saying "define insanity". Wealth taxation is the only plan I've seen that logically prevents workarounds and actually serves to balance economic outcomes for Americans in the long term.
Yeah, but it does generally grow for people who have millions of dollars, especially over the course of the 60 year period that the original essay is discussing. In the short term, the stock market fluctuates and has recessions, but in the long term it's only ever gone up.
> How about we just enforce inheritance taxes and call it done?
Because having a semi-predictable tax base is good? It's a lot easier to manage the government budget if you get 2% of the value every year, versus 100% of the value in a lump sum at some unpredictable point in the future. There's only 630 billionaires in the US, so it doesn't seem like statistics helps even this out, either.
The difference between an income tax and a wealth tax is that currently those with wealth are able to avoid income taxes. Approaches like negative gearing and other strategies exist.
I'm on the fence on estate taxes as a general rule I'd say it definitely make sense above some threshold but if you look at the mess with Samsung there definitely needs to be some thought in how illiquid stocks are dealt with. I'd put a bit of cash on Lee Kun-hee sill being 'alive' until after my death or at least until a change in South Korean tax law.
> How about we just enforce inheritance taxes and call it done?
How about we just enforce an inheritance tax in your family alone, and donate everything you have to a local charity and see if it makes a difference in your community? Your goal is to give away your wealth, as far as your comment goes, so it sounds like a legit plan of action. Just don't impose the same goal on everyone else.
> Second, taxes don't disappear into nothingness - they pay for civilization.
Modern monetary theory disputes this commonly held idea that governments need to collect tax before they can spend it on public works. On the contrary, government creates money to pay for public works, which leads to money in circulation, and in turn allows tax to be paid. The purpose of tax is to redistribute wealth and lead to harmonious society.
Second, taxes don't disappear into nothingness - they pay for civilization. It is clearly beneficial to everyone to live in a society where people are well cared for and have healthcare, public education, welfare, etc.
Or, and that's another possibility we should consider, taxes disappear into the pockets of bureaucrats and a handful of rent seekers with very little effect on civilization.
Before arguing for additional taxes, one must first show some evidence that we're getting reasonable ROI on what we're already paying, and https://transparentcalifornia.com/ shows exactly the opposite.
I am 100% in support for public healthcare, for example, but it will continue to look like a financial absurd as long as a knee MRI is 3x of any other country. Same thing with the higher education, public housing, etc.
Don't forget that Paul's stock portfolio doubled in the past 4 months on the back of a "poor tax"... what the Fed printed and gave to banks to buy stocks (via buying bonds).
Right so the government that already has enough money to fund all those good public services will suddenly stop funding the military to a ridiculous degree and finally use taxes for the best interest of the people?
Oh, I don't disagree at all! Government spending is currently not how I would allocate things. But somehow I expect that wherever taxes were going, rich people would be displeased with the amount of taxes they were being told to pay. And honestly, I don't blame them, it's a very natural feeling, I'd rather not pay taxes either.
Here's my thinking: as a society, we should decide on what needs to be handled by the government. Defense, roads, pandemic response, scientific research, welfare, healthcare, whatever. Make your own list, we can all hash that out. Then we figure out how much that costs, then we figure out the best taxation method to pay for all of it. I think the goals of that tax system should be to encourage beneficial habits, support economic growth, lower people's standard of living as little as possible, and generally maximize utility. It seems pretty clear that in this kind of system, a progressive system that taxes the wealthy more is a clear winner.
Both are true. It's a bonfire of money. And it gives us civilization. It's horribly inefficient and wasteful, and yet very few of us want to live without it. (But more efficiency would absolutely be welcome.)
> Fifth, the idea that people "will just move to another country" is very silly.
Definitely. After a certain point, increasing wealth isn't about wealth, it's about power. I would wager that most of the uber-wealthy would rather have slightly less power in a place that they want to have power in, rather than have marginally more power in a place that's not their home.
A long time ago the Western world had a voluntary wealth tax of sorts, the tithe. That's 10% of your income and/or property to your church. Admittedly taxes were then much lower, but whatever else you may think of them, churches poured vast energy and resources into social services.
Now that it's an elected government instead of an opaque non-profit providing social services, they've become unpopular with the wealthy. I suppose the government can't assure you a place in God's Kingdom :-)
I think most people who pay a tithe base(d) it on income, not wealth, so it doesn't have the snowball effect that a wealth tax does. Islam's zakat is the only exception I know of, but IIUC even that is paid only on excess wealth.
"Fifth, the idea that people "will just move to another country" is very silly. If some people do leave, or start companies only in other jurisdictions, that just means there's a market opportunity for the many people who remain."
I think you misunderstand this in two different ways.
First, retirees on fixed incomes are acutely, almost comically attuned to state income tax rates, property taxes, etc., and many of them plan their entire retirement and residency around it.
Second, although I agree with you that it is very difficult to just arbitrarily uproot and move your family, etc., because of a tax code change, it's not that difficult for wealthy people - especially those expecting a liquidity event - to buy a house on Lake Tahoe on the Nevada side and take the kids out of school for (365/2) days. "Remember that time we spent the ski season on the lake ?"
Wealth advisors and family office managers, etc., speak of this casually. Further, if you live in a wealthy community in the Bay Area (Ross ? Los Gatos ?) you'll see third or fourth cars with Nevada plates. Not an accident.
So, yes - I think you're right - nobody is going to stop living in California if we continue to increase the top end tax rate ... but define "living".
Third, the market is (with exceptions) global. If Google moves its headquarters to Toronto, that doesn’t open up an opportunity for a new American search engine.
I agree with you, but I do think something has to be discussed about the the issue with shares. Selling shares to pay tax does seem strange, the impact of losing ownership just to pay tax is weird to me.
Seems it make more sense to tax when the shares are sold, but with a percentage based not on your taxed income, but your whole asset holding. Or just to tax the companies themselves more heavily.
Right, but I'm saying no one would actually sell off their shares to pay the wealth tax (I mean, maybe some would in some years). They'd borrow against the assets, or take dividends, or whatever.
Norway's wealth tax starts at ~$200K and has minor discounts for main residence and volatile shares, but that's about it.
And, yes, it is often possible to take dividends from an established, profitable business - but it is horrible for the way the startup (and investment in distant future) economy works, which is likely pg's frame of reference -
I start a company, a very promising one, but it needs 20 years and billions of capital to get there. I raise $30M, still keeping 50% of my company at this point; Oops; on paper, I'm worth $30M, and have to pay (at e.g. 1%) $300K wealth tax in the first year. I cannot get any dividend; I usually can't even sell my shares or borrow against them. And it gets worse each time the company valuation grows (whether I raise more money or not). Seems far fetched? That's Amazon. Okay, Amazon is one in a million you say - but notice that the bad parts apply to ALL founded companies, whether or not they were as successful as Amazon.
So, in addition to the wealth tax, something's got to give.
Either you exclude non-liquid assets (which is a huge hole that will render wealth tax moot). Or you accept wealth-tax-payment-in-kind (that is, you put 1% of your shares into government custodianship every year, and then can convert them to tax money whenever this becomes a possibility).
Or, the entire investment world changes - either investors will have to get used to paying an extra 1.5% to cover the founder's tax liability; or valuations will drop an order of magnitude to let founders pay out of their own pocket. Or investment will be diverted to places that don't have this tax. Or it will just drop significantly.
But the assumption that wealth tax will have minor (if any) effect is ridiculous. Somewhat comparably, Israel put a very small turnover tax on stock exchange trading (which is not wealth tax, but is close enough for practical purposes) and as a result, the Tel-Aviv Stock Exchange volumes went down by an order of magnitude.
"Founders" that the author wrings his hands about so much, owe 99% of their ability to generate wealth to the government. If you're from the US, you own most of it to global American imperialism and hegemony. You should be giving it up so that others can have the same opportunity as you did.
I live in a country with a 1.3% wealth tax (the Netherlands), but as long as you own more than 5% of a company it doesn't apply to that part (a bit more complicated than that, but effectively this is what happens).
The wealth tax does apply once it's cash, so dividends you received, or proceeds from selling (part of) the company. I would imagine a wealth tax in the US could do the same thing.
>taxes don't disappear into nothingness - they pay for civilization
Paying for civilization creates the conditions for even more elites to emerge. From an inequality perspective, you probably should disappear it into nothingness.
The exasperated/condescending tone of your comment is really inappropriate, given the number of specious and economically fallacious arguments contained in it.
Let's go through each:
>>There's a reason failed states and unstable/developing countries generally aren't where people are looking to startup the next big tech company.
There's a negative correlation between government spending levels as a percentage of GDP, and economic growth rates. Your implication, that society is better off with high levels of taxation, is not supported by the science on the matter.
>>Third, any smart founder isn't going to just sell 1% of their stock every year and pay the wealth tax with that. They'll take dividends, or take out a loan against the value of the stock, or use some cash from other investments, or whatever, and maintain control of their company. Yes, over the long term they'll lose some wealth, but not necessarily control of their company, unless that's the decision they make.
Completely irrelevant to the point. The point is that you lose much of the wealth you would have otherwise gained, in the absence of the wealth tax. Whether that's because you have to pay out more dividends, that would otherwise have been reinvested, to transfer to the IRS, or take on loans, that have to be paid back with revenue that would have otherwise been reinvested, is incidental.
>>Fourth, this effectively ignores that wealth is a thing that grows and compounds. If your wealth is increasing at 4% a year (very attainable for the class of people a wealth tax would affect) a 1% wealth tax really doesn't have as big an impact on your long term wealth as this makes it seem.
Wrong. The losses also have to be compounded. That 1%, had it remained invested, would have grown at a compounding rate as well. So you lose the 1% and all compounded gains on it.
>>Fifth, the idea that people "will just move to another country" is very silly. If some people do leave, or start companies only in other jurisdictions, that just means there's a market opportunity for the many people who remain.
This is a misunderstanding of the factors behind an investment. Investment does not automatically emerge to fill every market opportunity. It emerges when the ROI on potential investments meets the demands of the available investable financial capital. Investment decreases when the expected ROI decreases, and when the available investable financial capital decreases. A wealth tax decreases both the expected ROI, and the available investable financial capital.
Moreover, you're completley ignoring competitiveness. Firms in low tax tax jurisdictions will outcompete firms in high tax ones, ceteris paribus. Opportunities are not distributed across the world evenly, and one factor that affects opportunity is tax rates.
>>I'd much rather we have well funded schools and welfare for those who need it.
Government spending as a percentage of GDP has increased from 25% in the 1950s to 40% today. Social welfare spending increased by an average of 4.8%, EVERY YEAR, between 1972 and 2010.
How much more do you think government spending should increase? What share of private economic output should be non-consensually redistributed for social welfare programs in your mind? Will there ever reach a stage where you think the negative effects on capital formation, from further tax hikes, will outweigh the positive effects of a greater share of economic output being available to the poor in the form of cash payments and social services?
>>>There's a negative correlation between government spending levels as a percentage of GDP, and economic growth rates. Your implication, that society is better off with high levels of taxation, is not supported by the science on the matter.
I don't think your correlation suggests what you think it does - look closer at which countries have the highest GDP growth rates. Economic growth rates are not a good indication of countries where people would generally choose to live. I'd generally use HDI, happiness, life satisfaction, or similar, all of which correlate to higher government spending.
>>>Wrong. The losses also have to be compounded. That 1%, had it remained invested, would have grown at a compounding rate as well. So you lose the 1% and all compounded gains on it.
Yes, of course. So your wealth (above the threshold) grows at an effective 3% instead of 4% (or whatever). PG's essay makes it seem like your fortune will dwindle away to nothing, which isn't true. It'll just grow more slowly than it could.
>>>Firms in low tax tax jurisdictions will outcompete firms in high tax ones, ceteris paribus
But this misses the point - other things aren't equal! California already has a higher tax burden than many other states, the US already has higher taxes than many other nations, and still they are among the richest places on earth. Higher taxes can create a society much more beneficial to all of its members, including the rich ones.
>>>How much more do you think government spending should increase? What share of private economic output should be non-consensually redistributed for social welfare programs in your mind?
Enough to make sure every person has enough to eat, somewhere to live, universal healthcare, access to education, and the opportunity to succeed.
>>>Will there ever reach a stage where you think the negative effects on capital formation, from further tax hikes, will outweigh the positive effects of a greater share of economic output being available to the poor in the form of cash payments and social services?
Unlikely. If there is such a stage, I suggest to you it's well below ~5% on all wealth above ~$10 million (which is at the top range of what is discussed in these kind of wealth tax proposals).
> The exasperated/condescending tone of your comment is really inappropriate, given the number of specious and economically fallacious arguments contained in it.
Your own comment is considerably more condescending. As for speciousness...
> There's a negative correlation between government spending levels as a percentage of GDP, and economic growth rates. Your implication, that society is better off with high levels of taxation, is not supported by the science on the matter.
That correlation is disputed, to say the least. Even if it weren't, economic growth rates, while important, are not the be-all and end-all of society being "better", especially when a large amount of the wealth is concentrated in a few hands.
>>Fourth, this effectively ignores that wealth is a thing that grows and compounds. If your wealth is increasing at 4% a year (very attainable for the class of people a wealth tax would affect) a 1% wealth tax really doesn't have as big an impact on your long term wealth as this makes it seem.
> Wrong. The losses also have to be compounded. That 1%, had it remained invested, would have grown at a compounding rate as well. So you lose the 1% and all compounded gains on it.
Perhaps. But a 4% rate of increase would still belie the contention in pg's post that "by 5% [the threshold at which the tax starts] is getting close to being an upper bound on how much of the company you get to keep". It seems probable that pg simply did not take interest into account.
> Government spending as a percentage of GDP has increased from 25% in the 1950s to 40% today. Social welfare spending increased by an average of 4.8%, EVERY YEAR, between 1972 and 2010.
Over the same period, the share of income going to the top 1% doubled.
> How much more do you think government spending should increase? What share of private economic output should be non-consensually redistributed for social welfare programs in your mind?
> Will there ever reach a stage where you think the negative effects on capital formation, from further tax hikes, will outweigh the positive effects of a greater share of economic output being available to the poor in the form of cash payments and social services?
Ever? Certainly, if you keep cranking up the number. But the United States isn't necessarily at or even near that stage, considering that several large European countries have strong economies despite much higher government spending as a percentage of GDP.
> Fifth, the idea that people "will just move to another country" is very silly. If some people do leave, or start companies only in other jurisdictions, that just means there's a market opportunity for the many people who remain.
You're just name-calling here, it's not "silly" just because you don't like the fact. If they leave, they actually leave, period. Sweden's left-wing majority abolished the inheritance tax(!) because so many wealthy people left because of it (among them, the famous IKEA founder).
It's sad that your non-arguments and whinging are being upvoted by people who "feel" the rich ought to be taxed but refuse to think about the consequences.
It is silly. Your example isn't even about a wealth tax, it's about an inheritance tax. Sweden has a 30% Capital Gains tax (likely the vehicle for any form of future wealth tax) and seems to be doing much better than the US.
This does seem a bit of a chicken and egg issue. If more countries followed suit, same as much of them followed suit on almost all other taxation schemes that were put in place in the past, then it's just a matter of time.
And the US is not Sweden. If the US blocks your company's access to its market for leaving or not paying taxes, you'll most likely lose more money than the tax.
Not saying I'm pro wealth tax, I'm still having to think about it, but I do feel the US is in a position to be able to protect itself from founders leaving.
I'm not saying that people won't leave, I'm sure some will. I'm saying worrying about some people leaving is silly. What disaster befell Sweden because the IKEA founder left?
Why cut that check to the Feds? They have destroyed schools. Look at the American placement in international tests since the Feds took over in the 1970s. Downhill.
Why have them control health? They've shown they are incompetent with Medicare (look at the waste, fraud, abuse, and anger by doctors due to red tape).
Why not have the States set the wealth tax? Be like Switzerland. The cantons and municipals set the wealth tax.
Ultimately, for me, this entire topic throws into stark relief the fact that the Federal government needs to be brought to heel. It is too large. Too incompetent. Too impossible. Look at the EU (the closest thing in the West to the US by population and economic scope). The EU doesn't set an EU wealth tax. They do not set an EU health service. They set regulatory requirements that the individual countries (from a GDP perspective equal to US States) implement.
Perhaps notable: Switzerland has a wealth tax (of up to 0.3%), and there is zero evidence that this has any deterrent effect on wealthy people settling in Switzerland or startups being created in Switzerland.
Other features of the tax system more than offset the 0.3% wealth tax.
Personally, I am a bit disappointed by the lack of depth of the discourse: Wealth taxes and their effect have been studied quite a bit in economics literature, and there are various peer-reviewed papers that attempt to measure the effects, but the Silicon Valley crowd is strangely avoidant of examining evidence or explaining their opposition with real-world data. It's all 101ism and polemics.
I'm not sure european examples are a great comparison.
First, most european wealth taxes (including recently defunct ones) have much lower floors than US proposals. $1m instead of $100m. That changes a lot. France did experience "capital flight," famously Gerard Depardieu.
Second, "capital flight" has always been present in Europe. There's a long history of it, and practical realities make it relevant.
I do agree about depth though. One point that PG does address which is often skipped over is that a wealth tax is a "deplete billionaires" policy... or a "curb billionaire growth" policy. The premise is that the very wealthy are too wealthy and that this is bad.
A wealth tax is not like a VAT, corporate or personal income tax. The tax revenue is secondary, and relatively small. It's more like a tariff, tax as an economic policy tool.
I agree that considering a 2% wealth tax as a 70% depletion of wealth over 60 years is... not nuanced. The most important nuance being that you control most of this wealth for most of this time and will be paying your taxes out of interest. If you apply the model to actual examples (say Bezos or Buffet), you'll find that their wealth will still have increased... just at a reduced rate.
But, to be nuanced we also need to address the core question: "are billionaires bad for the rest of us?" That is the premise of a wealth tax, at least the currently popular one.
The question if billionaires are bad for society is pretty much the same question as asking if the aristocracy was bad for previous societies. The existence of billionaires clearly undermines the core principles of democracy which is that all people have essentially the same political power. The existence of many laws which clearly aim to benefit billionaires only is enough evidence that this power balance does not exist when there are billionaires. Essentially strong wealth imbalance leads to unstable societies.
I find it ironic that the US which was largely founded by people who left their home because of entrenched economics and limited opportunities and who used to have some of the highest taxes for the top brackets and strong eversion to the development of a new aristocracy have after Reagan developed into a nation of defenders log the superrich.
Think about how hard Founders work to efficiently divide up the equity pool of their company in order to entice and retain top talent. Consider that the State and Federal government is already a silent partner to the tune of ~20% of the company profits, and then again ~20% on capital gains. Every little bit more carved out for the government is just reducing the portion left which has to justify the risk/return proposition.
There's another problem which I'm surprised PG didn't address. Liquidity. A wealth tax means valuing property before it's even perhaps practical to sell it, and while the government might take your last 409a valuation as the means to valuing your net worth, they aren't accepting your shares as payment, only cold hard cash.
If you have a large private holding, now you are forced to find ways to throw off cash against that notional value, e.g. by arranging loans against your holdings to pay the tax man. Shares that ultimately never sell could end up being taxed for more then they are ever even worth.
> One point that PG does address which is often skipped over is that a wealth tax is a "deplete billionaires" policy
It has long been my impression that eliminating or reducing billionaires is the primary goal of wealth tax advocates other than those whose advocacy primarily consists of sharing memes on social media. Raising revenue is largely a red herring.
> The most important nuance being that you control most of this wealth for most of this time and will be paying your taxes out of interest.
Then a wealth tax boils down to a punitive tax on interest income. Which means billionaires will be incented to save or invest a lot less, and consume a lot more of their wealth since they're going to lose it either way. (See, e.g. Larry Ellison's yachts as an especially obvious example of billionaires' consumption.) That's an "economic policy tool", alright. It's not as clear that it's a sensible one.
Oh no! France lost Gerard Depardieu! Whatever will they do! /s
In seriousness, I did have a number of French clients fleeing to California after France proposed a wealth tax. One of them famously said (of California): "I love it here! Your taxes are so low!"
The downside of a wealth tax compared to other taxes is that it drains a corpus every year. It creates "financial anxiety" in the people it would target, similar to range anxiety in EVs. Even if the target could afford to pay the wealth tax and live comfortably for the rest of their lives of their children's lives, they are suddenly terrified that they will be taxed into the poorhouse if they misspend their money, and that anxiety drives them toward places without a wealth tax.
Switzerland isn't a good example of why a wealth tax would work, since it's openly acknowledged that nobody actually pays the correct tax on their wealth; it is the same reason that Swiss banks were the financial institutions of choice for criminals and dictators for decades. (If I was being too subtle: the Swiss are notorious for under-reporting financial assets, and their banks are even more notorious for hiding the assets of account holders.)
One argument I would make is that it's a LOT easier to just move to another european country and you are still very close to your home country.
Capital flight in the US is logistically much more difficult than in europe I would imagine.
>"are billionaires bad for the rest of us?" That is the premise of a wealth tax, at least the currently popular one.
I don't think that's very accurate.. the wealth tax is saying "billionaires have so much excess money that they should be contributing on another layer than the rest of the population". While you can ALSO say "there should be no billionaires / they are bad", that is not what the wealth tax does.
> But, to be nuanced we also need to address the core question: "are billionaires bad for the rest of us?" That is the premise of a wealth tax, at least the currently popular one.
Suppose we impose such a tax. How will that affect wealth formation and accumulation by not-yet-billionaires, and how will it affect existing billionaires? As you say, Bezos and Buffet would continue being billionaires, but if new billionaires became an impossibility, then such a tax will essentially be creating barriers to competition with existing billionaires! That would be a billionaire protectionist measure disguised as a populist measure!!
If we see existing billionaires support such a measure, then we'll know they likely don't see it hurting them. Kinda like when Buffet advocated for higher income taxes knowing full well he has no taxable income (all his "income" as most people imagine it is just unrealized -and therefore untaxed- capital gains).
Also, the biggest problem with any new tax is that without a hard cap on rates it's difficult to predict what it will be in the future. When the income tax was proposed in the U.S. it was said it would never rise above 5%, but marginal income tax rates in the U.S. have been north of 90% (yet, of course, these never reach the super rich as explained earlier). A wealth tax might come with "it will never be higher than 0.2%!" claims, then rise to 5% anyways. If it comes with such a claim, that limit needs to be baked into the Constitution.
Besides the intended political and economic effects of a tax, its unintended economic impact, there's the question of how much revenue it will raise and what that shall be used for. Leviathan never shrinks, so a decision to enlarge it should not be made lightly.
Interestingly, the US is perhaps the only major country that makes capital flight like that in France quite difficult: upon renouncing citizenship, there is essentially an immediate wealth tax imposed.
The US is also the only major country to demand citizens file US income taxes even though they may never visit or earn in the US for the entire year.
In the case of billionaires like Musk, Bezos, Gates... It's unrealistic to think that the government would make better use of that capital. It'll absolutely be wasted in comparison.
Taking ever more capital from the most effective/productive allocators and giving it to one of the least effective doesn't strike me as a good strategy.
A case like the Walton heirs is another story. I suspect we'd be better off taxing most of that wealth.
s/cherry picking/showing an example with interesting properties that is different from France/g
So this is actually where the discussion should go: What properties does the Swiss wealth tax have (particularly in the wider taxation system) that the French wealth tax did not have?
What is needed for a wealth tax to have no negative effects? What about income and capital gains tax at the same time? Etc. etc.
I am not trying to make an argument pro wealth taxes, I am trying to make an argument against shallow and non-empirical arguments.
You're cherry picking as well. There are other European countries with a wealth tax [1] — notably Belgium, to which these wealthy people allegedly fled to avoid wealth taxation.
The first thing to notice about a wealth tax is how little it fundamentally differs from an income tax on investment income. If you have a billion dollars and you get a 2% return and pay 15% capital gains tax, you paid 0.3% of your wealth in tax. So then what's the difference?
For one, it pushes people towards riskier investments. At a 1% annual return, a 0.3% wealth tax is equivalent to a 30% income tax. At a 5% annual return, it's equivalent to a 6% income tax. This has various consequences, but a big one of note is that it makes it much less desirable to own government debt, which has a low rate of return, which means the government could end up having to pay significantly higher interest on the debt. It could also incentivize excessive risk taking.
Another concern is that it requires investments to be liquidated in order to pay the tax. Generally we defer taxes on investment income until the investment is sold in order to avoid this, because it can be quite problematic, e.g. you own 51% of your company but over time you're forced to become a minority shareholder just in order to pay the tax, or you owned 100% of it and are required to take on external investment over time just to stay in business. This also costs the government money because the government pays lower interest on borrowing than average investment returns, so paying 0.7% to borrow money in the interim while the investor is earning 5% returns on the money you'd have collected as tax means that when the tax is ultimately paid, the government ends up with more additional revenue than they paid in interest in the meantime.
It also increases foreign ownership of domestic resources, because domestic owners are forced to liquidate in order to pay the tax and domestic buyers are in the same boat so the liquidated securities go primarily to foreign buyers.
Another problem is that a lot of forms of wealth are hard to value. If you had a wealth tax and someone owned a piece of art, or some intellectual property, or shares in a privately held company, what are they worth? It's inherently subjective and estimates can very wildly. But then you're creating an opportunity for accountants to do their thing and avoid the tax. Waiting until the property is sold and then taxing the gain solves this neatly because then you have the sale price to go on.
It seems like, if you wanted to help stop the wealthy from ducking paying taxes, one should just stop providing a special long term capitol gains tax and tax capitol gains the same as income. It simplifies the tax code, stops punishing workers who receive a wage over those who earn investment income, and doesn't require a bunch of new accounting to implement. My cynicism hat tells me the reason it isn't the policy goal is that it could actually pass in the US, the wealth tax likely never will.
> you own 51% of your company but over time you're forced to become a minority shareholder just in order to pay the tax, or you owned 100% of it and are required to take on external investment over time just to stay in business
Doesn't this assume the owner receives no other income? I assume owners either receive a salary from the company, or are paid a dividend with which they could use to pay the monetary-valued tax.
Or especially in the case of 100% owned company, the owner pays themselves a "bonus" equal to the tax. The company now is worth less, reduced by the amount of that bonus, so the owner's wealth has decrease and the tax has been paid.
That's not true. In some cantons, the very rich get extra deals, called Lump-sum tax, independently of their revenues. E.g. the Ikea founder only paid around 165000$ in total taxes in 2014 on a fortune of 46.5 billion US $ and all his revenues which he had.
The lump sum tax is only possible for non-citizens, who do not have direct W2 income from Switzerland. Local governments (if the state allows it) can use it as a shortcut to estimate the tax amount. Nevertheless wealthy Swiss citizen don’t leave Switzerland either. Probably also because there is no capital gains tax which offsets the wealth tax easily.
"the Silicon Valley crowd is strangely avoidant of examining evidence or explaining their opposition with real-world data. It's all 101ism and polemics."
It’s often not even self interest; fairly often it’s obvious that some participants in these discussions are searching for arguments to validate pre-held beliefs and policy positions.
Although sometimes self interest is also a factor.
What's strange is that the same cohort that doesn't deeply discuss higher tax rates on tens of millions in wealth, love to get out tomes of research to support the social cause du jour.
Came here to say this. If I have the time stamps right it looks like rabois even replied before this HN post even existed, which makes the comment a little dubious. I'm sure it was a mistake, but rabois only took 5hrs to reply. Please give someone an appropriate amount of time to reply and check before posting on other social media calling them out.
Not strictly contradicting what you said, but I take the implication of your statement to be "the wealth tax actually doesn't change people's behavior", but it seems to in some cases.
Agreed. I doubt a very wealthy man's short blog post against taxing very wealthy people would make it to the front page of HN if it wasn't for the identity of the very wealthy man.
Is the blog post "against taxing very wealthy people"?
Literally, it is a demonstration by mathematics of the effect of a tax on capital.
Polemically, it is an argument by induction that a higher level of such a tax will discourage junior entrepreneurs from attempting to create start-ups in a jurisdiction.
What's clever about the polemic strategy is how it appeals to the hopes and fears of young entrepreneurs who have not yet accumulated great wealth, to recruit them to support the interests of older entrepreneurs who may have done so in the absence of the tax.
"Suppose you start a successful startup in your twenties" gets you hooked. You readily identify and strap yourself in for the ride.
"if you live for 60 years after acquiring some asset" appeals to your fears by tapping in to your understanding that once you are older, you will not have boundless energy, and unbridled understanding of the zeitgeist. You'll need protection then.
The young entrepreneur, with little wealth accumulated, consults the table, reads linearly down from the top to the lower right, building understanding, until bang 95%! At this point, he or she viscerally feels the pain of losing 95% of his or her capital, which, at this point, still being meagre, is unbuttressed by the psychological accoutrements that great wealth affords its owners.
The conclusion is genius.
"Even a .5% wealth tax would start to keep founders away from a state or country that imposed it. That's more than a quarter of your stock." Ouch! The budding entrepreneur must now pack up and move to have any chance at a decent life. The tax must be resisted!
I never understood..what’s the fascination in turning one county into another? We have Switzerland, France, Belgium, Germany. Why force America to become one of these? Those countries already exist. Turning one country into another doesn’t make sense and isn’t what makes America unique.
Imagine I moved to Germany and kept stating “Germany should be more like America because X Y and Z.” Can you imagine how offensive that would be?
It's not about turning the US into a European country, it's about decreasing wealth inequality. The US is doing a lot worse than the countries you mention--Gini of 41 for the US, vs 27-32 for Switzerland, France, Belgium, Germany. The poverty rate and poverty gaps are also a lot higher in the US.
https://data.oecd.org/inequality/poverty-gap.htm
If you offer compelling arguments for changing certain aspects of a country to be more similar to another country that handles things better (in your opinion), then I don't see the problem. Sure, some people will always be offended if you propose to change amything about their country, but many more people are open to suggestions for specific changes. Very few people, on the other hand, are actually proposing change just for the sake of "turning one country into another". If that were the case, then I would think it a very weird fascination too.
I believe it's because the people most affected in these situations are also the people who are unable to simply move to a country that benefits them more.
One problem with a wealth tax is rich people who are not in publicly traded corporations are not extremely liquid. Often times this means having to sell off assets which is hard to do if their assets are largely in private corporations.
I always wonder how the farmer would deal with a wealth tax. Farmland, for example, is worth an incredible amount of money (where I live, at least), but cashflow is marginal, and net incomes are often negative.
That would mean that the farmers would often have to sell off their land to cover a wealth tax on the land. Severing farmland is rarely permitted, so it would have to be entire parcels.
It seems like soon you'll find yourself without any land on which to farm. Which means that we'll start to carve out exemptions, like we already do with existing wealth taxes, and then the race to find loopholes begins.
You are right that the discourse is not nuanced, but it highlights a very basic problem with taxing an asset again and again, especially on unrealized gains.
We gladly support this idea, because it affects "the billionaires" but not when it comes to everyone else and for good reason. Repeated taxation on an asset can erode your wealth really quickly. Here in California, your house gets taxed on the purchase price, but not the current valuation. Therefore you have people sitting on more than one multi million dollar houses that they bought for low 6 figures 3 decades ago. (Ironically this is one of the main contributor to sky high real estate prices and housing crisis) But we don't tax people on those unrealized gains, that too again and again, because if we do, most people would lose all their wealth in a matter of couple of years.
> it highlights a very basic problem with taxing an asset again and again, especially on unrealized gains.
Why is it so hard to understand the concept of a floor? If we only tax wealth above $10m or $100m, it will literally never result in "all of your wealth" disappearing.
> We gladly support this idea, because it affects "the billionaires" but not when it comes to everyone else and for good reason.
> Ironically this is one of the main contributor to sky high real estate prices and housing crisis
Right. We support it, but we don't do anything about it, even though it causes one of the most obvious policy problems in the state.
> if we do, most people would lose all their wealth in a matter of couple of years.
Like literally every other state? I'm sorry, no. This comment is internally logically inconsistent, ignores obvious examples to the contrary, and asserts itself as its own proof.
Economists actually love recurring land value taxes because they're non-distortionary, but almost all land value tax proposals exclude primary residences under a certain value, for the reasons you've described.
Another question I would like to see discussed w.r.t. Switzerland is whether they are, in crude terms, dependent on other countries not being stable.
An example would be the South African originated company Compagnie Financière Richemont SA. Apart from economy of scale reasons, the reason why they moved to Switzerland is absolutely the stability of that country. South African citizens, many pensioners, now pay tax in Switzerland on dividends. (Yes, you have a DT treaty that allows you to go from 35% dividends tax to 15%, but still paid in Switzerland. And yes, probably they spend tax money much better than the SA government.)
LVMH by contrast doesn't have to move around, but in theory could have moved to Switzerland if it were the only stable country around.
So, to be Devil's advocate, is Switzerland a well performing country when considered critically or do they get a lot of money that in practical terms is or was historically generated in other geographic areas?
Conversely, if you don't have any stable countries at all, and you're left only with an option like South Africa, then there are countless examples of companies that simply could not survive. By the way, South Africa's taxes are getting quite high and there is absolutely no correlation between tax rates and service delivery. My personal opinion is somewhat more focused on practical terms. My first question about a country is not about taxes, but about the poverty line and buying power; and then about environmental issues. South African's don't have much hope for governments making any kind of sensible decisions.
Wealth taxes are one solution. But in my opinion the only way to get extremely wealthy is to own a company that goes public. Personally I'm starting to think that when a company goes public there should be limits on what percentage of that company an individual can hold. Bezos being able to control 11.1% of Amazon given it's size seems a little ridiculous. The entire point of the stock market or "going public" was to allow public ownership and benefit of these massive behemouths (whether they should even grow that large in the first place is another discussion).
But when one person owns such a large percentage it really tips the scales.
I don't know how you'd solve this. Forced pay out to the owners when a stock goes public? There are probably negatives I am not thinking of. But it just seems like public markets let companies grow to levels so large that having an individual have such a large share doesn't make sense anymore.
There are plenty of companies that are private that have large ownership shares. The point of going public is to raise capital buy relinquishing some ownership. Owners don't want to give their shares unless they have to. If there were mandates to sell out of a company that you started and at a stage before you realized the gains on the capital you raised, it would incentivize companies to stay private and find their funding through private channels.
I don't necessarily disagree with what you said. This is because I don't know what you're arguing for.
Wealth taxes are one solution for what? For the anger people feel when they realize billionaires exist, absolutely. To improve the lot of the very poor, maybe (but an argument needs to be made here).
These discussions assume too much about the end goal of society.
Someone not replying to you isn’t an argument when an answer is trivially found. That too me ten seconds to find. (Finding the report would take longer but should be doable)
No offense, but I personally hate it when someone online mentions the existence of scientific research supporting their position, and then doesn't post a link to said research.
I'm personally interested in reading the papers you mentioned, could I get the link(s)?
@thomasdullien Re: "Other features of the tax system more than offset the 0.3% wealth tax.". Yes, but the problem is the other countries contemplating implementing a wealth tax want to have their cake and eat it. They want to implement a wealth tax whilst not making any tweaks elsewhere. All take and no give does not make for an attractive environment, especially in this globalised world where resettlement of people and businesses elsewhere is not as difficult or time consuming as it might have once been.
There should be some ROI for the individual paying the wealth tax. How good is their infrastructure? how well do they handle social problems like homelessness?
Though the parts of Switzerland where the billionaire class settles have lower wealth taxes - they don't have their main residence in Geneva or Basel, but in canton Zug, ore even Obwalden/Nidwalden where the maximum wealth tax rate is 0.13% (and capital gains taxes are laughably low too).
The top wealth tax rate is definitely higher than 0.3% in Switzerland. In Zurich it's up to 0.7%.
There is no capital gains tax for private long-term investments in Switzerland (with the exception of real estate). However, dividends are normally taxed the same as income from employment.
Here in India Switzerland is mainly famous for their bank accounts where all the corrupt politicians store their ill gained wealth. Everyone here knows the phrase "swiss bank".
2) The Swiss wealth tax is only charged on Swiss tax residents, so corrupt politicians who stash their money there won't be paying it unless they are Swiss resident (which is pretty unlikely).
I'd also like to point out that we already have a wealth tax for everyone who would otherwise put their income taxes into savings. The lower the savings rate, the higher the effective wealth tax rate on the middle class.
Assuming an absurdly high 25% savings rate on your pre-tax income and a 25% tax rate on that income, boom, there's your 50% wealth tax. So the 45% wealth loss over 60 years in PG's toy example that ignores asset growth sounds totally fair to me in this light.
And with this "absurd" wealth tax on the middle class, why do we still have educated people from all over the world pounding at the door to get into the US? I would posit that it's for the same reasons that a wealth tax wouldn't suppress startups in this country.
On the other hand, the wealth tax is not the same across the country and definitely there is evidence of wealthy people choosing their residence accordingly.
Which is a good reason to only tax natural resource wealth, rather than all assets. You can't move a private beach or a n oil reserve from one country to another. It also is a fairer way to tax, since natural resources are not wealth created.
>Switzerland has a wealth tax (of up to 0.3%), and there is zero evidence that this has any deterrent effect on wealthy people settling in Switzerland
The model in PG's post appears to predict around a 12% "lifetime" (60-year) rate from an 0.3% wealth tax and thus suggests (at least to me) that this would be at most a minor concern for most wealthy people. So this does not seem like contrary evidence.
>there is zero evidence that this has any deterrent effect on wealthy people settling in Switzerland or startups being created in Switzerland
Got a peer-reviewed citation that there is zero evidence? Or is that your opinion?
Here's some evidence on Swiss rich mobility [1]: ".. tax records of two cantons with quasi-randomly assigned differential tax reforms suggest that 24% of the effect arise from taxpayer mobility .." [4]
Taxpayer mobility.... means rich people moving for tax reasons, correct?
Many countries had a wealth tax; almost all of them dropped it because it did cause capital flight and didn't generate much revenue compared to the costs. Switzerland was late to that party, and will likely drop theirs for the same reasons.
Here's but one paper on the actual effects of the Switzerland wealth tax:
[1] "We estimate that a 0.1 percentage-point rise in wealth
taxation lowers reported wealth by 3.5% in aggregate. Expressed relative to taxable capital income flows, this implies a net-of-tax elasticity of roughly 1.2, which is large compared to the elasticities typically estimated in the income literature. The elasticity of tax revenues with respect to tax rates is only -0.2"
So you see it's already pushing wealth out of the tax base.
As to where wealthy people settle, look for the papers on wealthy moving between Swiss cantons to get the best tax advantage (the tax rates are by canton). So there is absolutely evidence of rich moving to take better tax advantage.
>Wealth taxes and their effect have been studied quite a bit in economics literature, and there are various peer-reviewed papers that attempt to measure the effects, but the Silicon Valley crowd is strangely avoidant of examining evidence or explaining their opposition with real-world data
Yes, there is ample economic evidence. It's odd that those pushing for one in the US ignore the past case evidence.
For example, [2] shows that a wealth tax does lower entrepreneurship, in [3] Stiglitz shows that a wealth tax does have a negative effect on investment and increased risk-aversion.....
Google scholar has lots of papers on what happened to countries that implemented such taxes, and why those taxes got dropped.
It's honestly embarrassing that PG would even post this. The post strikes me as particularly lazy and dismissive because it doesn't engage with any of the arguments for a wealth tax or the motivations behind one. As other comments have pointed out, the example is not even close to a good "model" of a real-world wealth tax. It's a straw man. I would expect an overconfident high school student who just finished The Fountainhead to make this kind argument but not a successful and supposedly smart venture capitalist.
I've seen this pattern from PG and other people in tech over and over. They assume their expertise in one domain translates into other fields in which they have no special knowledge. Underlying a post like this is the arrogant assumption that nobody smart has ever thought of calculating .99^60, and that PG knows what's best.
“ and there is zero evidence that this has any deterrent effect on wealthy people settling in Switzerland or startups being created in Switzerland.”
- I can’t name any startup out of Switzerland, but can name at least one for pretty much any european country.
I'm highly skeptical of the claim that such tax would discourage startup founders.
Wealth tax proposals I've seen don't kick in until $50 million or $100 million. This means that there is a floor on how "poor" the government can make you via a wealth tax.
This has two implications:
1. Most "successful" startup founders don't break that threshold of personal wealth.
2. For most startup founders, the startup is the only way to get to $50 million. The practical lifestyle difference between $50 million and $1 million is a lot larger than the difference between $50 million and the unicorn-founder $ billion.
Furthermore, as noted by glutamate: money earns money. A conservative drawdown of 3% pay the most commonly proposed wealth tax while still leaving you wealthier at the end of the year.
Exactly — I've always thought that what drives multi-millionaires and billionaires isn't really the monetary value of the extra money that they make. To the extent they care about money at all anymore, surely it's only as a relative measure of success?
I can't see many people that have already accrued personal wealth of $50M but choose to keep working suddenly being turned off because of a wealth tax.
> I can't see many people that have already accrued personal wealth of $50M but choose to keep working suddenly being turned off because of a wealth tax.
That's not the argument. If you accrue a wealth of $50M because you own half of your $100M company (or 100% of your $50M company), then a wealth tax will — over time — force you to give up ownership in your own company.
An income tax or a capital gains tax on the other hand, has the effect that you describe: if you already have $50M, then any tax on more money than could possibly have close to 0 negative impact on productivity.
I know a lot of HNWI and they all complain about tax burden regularly and never mention anything even resembling 'relative position'. IMO the relative status thing is a myth perpetuated by people with a political axe to grind. Most people who keep working past a high level of net worth just like working... don't forget there's a lot of moral value and personal inspiration in building a second or third company that 'changes the world'.
I'm shocked people think a wealth tax on startup founders is OK. Let's think of a scenario for instance:
ACME startup raises Series C @500M. Founder equity is worth 100M on paper. Founder needs to borrow money every year to pay 'wealth' tax. After 10 years of struggles, company sells for $100M, VCs get money back, founder makes no money. But now founder is millions in debt for past 'wealth' tax payments. Founders will be declaring bankruptcy in those cases. And interest rates for wealth tax loans will skyrocket as a result, making effective wealth tax rate much higher.
Problem is startup founder 'millionaires' and 'billionaires' are only that on paper. Any asset that is volatile (like startups) will become impossible to own long term even with a small wealth tax.
Won't startups just go public sooner? Or maybe private company valuations will become less ridiculous since the value of your shares would actually matter for something besides ego now? I do think that taxing paper wealth is a problem, but if you are creating billions of dollars in economic value, there is usually a solution (e.g. as part of raising that $500M, a portion of that goes towards paying wealth taxes). Anything that incentivizes people to do away with this trend of a decade plus before exiting sounds fine to me.
This is a problem for startup employees, too, and should be solved in both cases by allowing you to defer the taxes on your paper gains until you can actually realize them (yeah, there would be issues here, but the issues are solvable).
It's like this in some European countries and the situation you describe with founders having to declare bankruptcy has happened some times. It doesn't make it impossible to own volatile assets, but it increases the risk.
Some places the rules have changed a bit to avoid some of these cases where people owe more tax that they can pay, but it can still happen.
> Wealth tax proposals I've seen don't kick in until $50 million or $100 million. This means that there is a floor on how "poor" the government can make you via a wealth tax.
That’s just the starting point. Once people begin to figure out how to avoid it or have been tapped then the qualifier will be lowered to 40m. And then eventually 30m and do on until anyone above average is paying it. And then anyone above median.
The state will, as always, become reliant on it and find ways to expand it to wield more power and pay debts that were taken on to “collect/spend in advance” as they’ve done countless times.
This is why people that will likely never meet today’s threshold are against these schemes. These things always get a wider, and wider net until anyone just starting to get ahead is caught in it.
>The state will, as always, become reliant on it and find ways to expand it to wield more power and pay debts that were taken on to “collect/spend in advance” as they’ve done countless times.
This hasn't been true for the income tax [0], nor the capital gains tax [1], nor (at least in Silicon Valley) for real estate taxes[2], which are closest to a wealth tax. It's a reasonable thing to consider, but given the evidence we have, should not be a driving consideration.
Not that you're necessarily wrong, but I find it fascinating that the state of social trust is so low in the united states that the most powerful and resonant arguments against potential laws are even if the law is good, a future law in the same vein might go too far and thus even the good law should be shot down.
You can see this on a variety of topics. Gun control legislation, immigration reform, healthcare reform, etc. Reasonable laws are perpetually overshadowed by the boogeyman on the horizon.
States like the US can just spend in advance without taxing, there’s no necessary relation. We’re not on the gold standard anymore. The point of a tax isn’t to pay for things, it’s to attempt to control inflation and the money supply, and to combat inequality. The idea that a state (read nation, for US states things are different) would become reliant on such a tax to pay for things doesn’t hold water. It may become ‘reliant’ on it as a means to reduce inequality but that’s another matter.
The avoidance issue is a big one and the mechanism of making sure people pay is at least as important as where one sets the floor. Cross border capital flows can be pernicious.
Piketty gets into how different rates of capital accumulation create huge rifts between people who own appreciating assets like land and equities and people who don’t who primarily earn wages. The idea behind the wealth tax is to try and narrow the rift.
I don't understand why you think the slippery slope argument works for the rate and threshold, but not for the existence.
The problem with wealth taxes is not slippery slope, but rather that wealth can be obfuscated and moved around much more easily. Transactions are easy to tax; wealth worth taxing is about what you control, rather than stuff you have.
There's good reasons the most successful wealth taxes are land taxes. You can't easily move land.
This is exactly what happened with the US federal income tax. It was originally only a small amount, and only on the wealthy. Now it's gradually been expanded to everyone.
Slippery slope is a logical fallacy [0], which you likely already knew. Of course, that doesn't make your argument wrong, just fallible.
I think it's arguable that taxes only ever go up. Income taxes on the rich used to be near 90% in the top bracket, so it's not a one way ratchet. That said, I agree government tends to expand and needs to fund that growth somehow. But I think it's much more likely that need manifests as an increase in the wealth tax rate rather than a lowering of the wealth threshold. The billionaires have so much more money than everyone else (and so much more than they need) that it will be much more politically popular to raise the wealth tax on them than it would to expand the pool. Not to mention, there are more of us.
I'm not advocating a wealth tax, and I think it's problematic for other reasons, but I don't think the slippery slope argument is much more than fearmongering in this case.
This is not what actually happened in several European countries that had wealth taxes. In fact, they found the taxes ineffective at collecting revenue, and abandoned them. This isn't exactly a recommendation of wealth taxes (which I'm skeptical of), however it is evidence that your assumptions about what would happen are not inevitable.
I wish you had made this as a top level comment. This should be at the top, not the pro wealth tax comment. Like you said, the net always gets wider and wider.
> money earns money. A conservative drawdown of 3% pay the most commonly proposed wealth tax while still leaving you wealthier at the end of the year.
That is only true if your wealth is in diversified ETFs or funds. That is not where most of the wealth of super-rich founders is. If 90+% of your wealth is in a single company (I.e. the one you founded), then there's no guarantee that this wealth will necessarily appreciate on its own (esp relative to inflation).
no, in a similar vein to my other comment, any founder who's reached millions in personal gain from their single, undiversified startup, will begin to employ financial strategies to diversify some of that gain into other instruments to reduce risk. there's a whole industry eager to help the rich and the getting rich do so.
The money ears money thing is key. A wealth tax that equals the money you can earn from having money would prevent runaway inequality due to the "rich getting richer" effect.
S&P 500 has a long term annualized return of 10%. If you have a 5% wealth tax on stock you have in S&P 500 then you are still earning 5% returns (well above long term average inflation) without actually lifting a finger.
But none of the people you are trying to target with the wealth tax have their holdings in the S&P500. Instead they have close to 100% of their holdings in a single asset represented by the more diversified S&P500.
There is no guarantee that the single individual super-wealthy founder whose wealth derives from the ownership of their own company will appreciate at an annualized rate of 10%.
The two most pervasive myths about wealth among the super-rich appear to be:
1. They are sitting entirely on liquid cash
2. They are sitting entirely on highly diversified funds that enjoy 5+% annualized appreciation.
The S&P has a long-term annualized return of only 7.41% since the end of the Bretton Woods system (beginning of the modern financial system). And that ignores investment costs such as trading and mutual fund fees; actual annualized returns will be lower for real investors.
A) history shows these things eventually apply to everyone. E.g. FATCA was originally relevant to a few hundred people, no it applies to almost all Americans living outside the US (hundreds of thousands). It’s just a reporting requirement, but one that can potentially cost you 3%-50% of your net worth per year if not filed or improperly filed.
B) I know people who were bankrupted by existing tax laws - had shares in internet companies during the dot com boom; company IPOd making them paper millionaires, thus owing millions in taxes, but had 6 months lockup. By the time the lockup expired, company went bust, nothing to sell to cover the tax bill. Any law that takes valuations into account (as a wealth tax law is bound to) is likely to wrong some people in a similar way, especially entrepreneurs and early employees.
Agreed, I've always thought these sorts of "Atlas Shrugged" arguments were ironic coming from free-market thinkers. In a free market, if one person refuses to work for less than $100 million, there's always someone right behind them willing to work for $99M. It would take a pretty extraordinary tax to have any effect on motivation in the economy at large.
It's not quite so black-and-white; wealth taxes change the incentive structure, so that the returns to creating increasingly valuable companies is non-linear. Wealth taxes (especially those with 'floors') discourage risky, high potential ventures, thereby skewing entrepreneurship towards smaller, less risky projects.
I personally think there are too few of the big, risky ventures these days, and too many low value-at-risk software-only startups (aiming to be bought up by a FAANG), but that is just an opinion.
> I'm highly skeptical of the claim that such tax would discourage startup founders.
Discourage starting a company at all? Probably not, but the article does not suggest that. Do you think it might influence where they start it? Looks reasonable to me, at least qualitatively.
>Do you think it might influence where they start it?
This has always been the argument, and I've never bought it.
Now, more than ever, is the time to start a company remotely, thanks to Mr./Mrs. Covid. Have we seen a massive move away from SV and other tech centers? Have we seen a massive wave of startups in 'flyover' country?
Yes, but other factors likely influence it more. Are you going to start it in Barcelona or SF, just because of the tax rate? Surely there is something to be said for startup experience, investor networks, founder communities, etc...
> I'm highly skeptical of the claim that such tax would discourage startup founders.
It'd discourage the people who pay the bills (VCs, wealthy, etc.) from living in those states. Founders would simply follow the money to other states as they have done in the past.
Startup founder wealth comes from VCs. The reason people found startups in California is because that's where the VCs are. If you drive away the VCs, you will drive away the founders as well.
I am a multimillionaire on paper due to restricted founder stock from a previous startup. I have left that job and don’t expect to ever see that money as the guys in charge now are unlikely to ever realize an exit. I’m now back to earning just a regular software dev salary at a big corporation. I never got to see a return on any of my founder shares and not wealthy by any means.
Nevertheless, I’m now at risk of having a six figure tax bill every year for paper wealth that is 100% illiquid.
If this passes I would be leaving the state and guarantee you I would NEVER found a startup in California again.
> Wealth tax proposals I've seen don't kick in until $50 million or $100 million.
The very first U.S. income tax, imposed during the Civil War (the nation's bloodiest conflict), was 3% on income over $12,720, rising all the way to 5% on income over $159,000 (in 2020 dollars). This was unconstitutional at the time, and was eventually repealed.
The first income tax imposed after the ratification of the 16th Amendment was 1% on income over $78,510, with an additional 6% on income over $26,170,000 (2020 dollars).
The current U.S. income tax ranges from 10% to 37%, with a standard deduction of at least $12,200. There are also payroll taxes under FICA, which are even more.
I recount all this riveting history as evidence for my contention that there is absolutely no way that a wealth tax would remain at 1% for anything above $50 million. I guarantee that within a few years to decades most citizens would be required to pay wealth taxes, and that they would amount to a considerable amount even before taking into account their compounding nature.
> This means that there is a floor on how "poor" the government can make you via a wealth tax.
The only floor is zero: a government can, if it chooses, take everything from its subjects — or just from some of them.
Readit News
Silicon Valley was founded in a spirit of freedom and flexibility but that spirit is clearly and dangerously on the wane insofar as the political environment surrounding the Valley is concerned.
By the 1970s, American enterprise was in decline, a victim of the "big government/big business/big labor" trends glamorized by establishment types of that day. What this did was take away choice and flexibility.
Tech changed all that and it did so from the heart of Silicon Valley. Tech arose from a spirit of freedom and flexibility. Founders would get an idea and would have countless ways of experimenting with what they could do with it with the aim of building a venture. Many of the most wildly successful ventures came out of nowhere. No central committee could have planned for them. No overlords of big business could have had the imagination or risk-taking fortitude to push them at the expense of their established cash cows of that day. No union could comfortably impose rigid work rules onto such amorphous ventures (the first thing Intel workers did even after the company succeeded was to reject unionization). No minimum wage or overtime rules applied. Benefits packages of the type widely deployed in the analog-based large businesses of that day were unheard of.
Regulators and taxers of that era continually tried to realize their vision of locking people into situations by which they would have guaranteed security, ossifying the mature businesses over which they had control, but tech simply outran them through innovation. And, in time, upended them by disrupting their industries through innovation and risk-taking.
Today, the spirit of Silicon Valley has changed and is yielding to a belief system by which the overlords of politics believe they can dictate outcomes that will give people locked-in security forever. Want to do something as an independent to earn a livelihood? Sorry, AB5 forbids that and will penalize the hell out of any venture that seeks to use fleelancing and flexibility as a foundation for innovation and growth. Your choice to act an an independent is frozen out by dictates that, if you act at all to make a living, you must do it within rigid systems that guarantee minimum compensation, regulate overtime, prescribe minimum guaranteed benefits, and the like. If this kills opportunities, no problem: there will be other rules that guarantee basic income, limit the rent you have to pay, and otherwise regulate society such that people are guaranteed a risk-free existence courtesy of decrees enacted by political proclamation.
This new mindset is precisely the one of the 1970s-era leaders who managed to choke off innovation and growth in old-line businesses and gave a massive opening to tech innovators, particularly those in Silicon Valley.
pg's modeling of the effects of a wealth tax is spot on. And it confirms that such a tax is an innovation-killing idea that would destroy the spirit of Silicon Valley. Of course, tech innovation will not cease. It will just move elsewhere to escape the tax. Europe in the 1990s had a couple of dozen or more countries that imposed wealth taxes. Today it has three, if I recall. There is a reason for that. It is a highly pernicious tax that kills enterprise and that veers from a capitalist (even progressive) philosophy into one that is directly of a Marxist/communist variety that has left so many nations in rubble once fully implemented. Smart, innovative people are not going to stick around for the con game. They will leave.
I have watched Silicon Valley grow and flourish for decades now and have been directly involved in working with thousands of entrepreneurs who have been a part of it. There have been a lot of political changes over those decades but one thing remained constant: the foundational thinking in California always assumed a capitalistic structure. Once that is abandoned, Silicon Valley will be no more.
I know that the vast majority of HN'ers are progressive in their thinking and we all can have our own ideas about what makes for a good and just society. I am not commenting on that here.
There is a line that cannot be crossed, however, without killing the Valley itself and all that it stands for. The wealth tax clearly crosses that line and, if things are allowed to go that way, the consequences may not be what you expect them to be. It doesn't take much to switch from a tax of .4% on assets over $30M (bad as that is in itself) to a tax of a much higher rate on a much lower threshold of assets. Once that monster is unleased, who knows where it will go. It will be fundamental transformation of the Valley, and not a good one.
As I said, just my two cents.
It reflects on free markets and the failure of trickle down economics.
Sadly, it was flagged as too controversial, and was taken down from Amazon for a limited period, but it's now available again.
We all, live in an extremely divided economic landscape - the _most_ divided in modern history.
I do not understand how this is not a focus of your argument. With this in mind, if our government offers support to the individual; we can innovate freely without imposing further employer regulation on private businesses. In a globalist society, where jobs are exported to the most exploitative country, this seems to be a promising solution.
Incomes are higher today than during the periods in American history when economic growth rates were highest, so the fact that more people are living paycheck to paycheck is more likely explained by the establishment of a comprehensive social safety net reducing the incentive to build up personal savings.
Social welfare spending has massively increased over the course of the last several decades.
My €0.05
† vs. inevitable/natural wealth inequality, associated with real disparities in productivity and the nature of sampling individuals on a widening curve
If a company does pay back investors, that almost always means that it has contributed to society on net. Let me explain.
If people don't pay for a company's products, that company will go out of business. Unlike a government, a company has little coercive power. If I refuse to use Facebook, Mark Zuckerberg can't send men with guns to my home and force me to create an account. Even companies that benefit from network effects (such as social media companies) must build compelling products that people want to use.
Now one could claim that most people are mistaken in what they want, or that they lack the knowledge to understand what they're really getting into, but that would also mean that you disagree with the notion of democracy (since those same mistaken, ignorant people will pick the policies and leaders that control our lives).
There are only a few ways that a company can capture value without creating it. The first is fraud, which is illegal. The second is coercion. That means using violence (or the threat of violence), blackmail, or if they lean upon the state to coerce people. This is usually illegal, though there are some exceptions such as patent trolls. The third way is if they create negative externalities. For example: if I buy a car from a car company, I am better off but everyone else is slightly worse off from the pollution I create and the increased risk of being run over. The way we solve externalities is through insurance and taxes. If I'm required to have liability insurance for my vehicle, and I'm required to pay taxes based on how much my vehicle pollutes, then I pay the costs of my externalities and am properly incentivized to alter my behavior. Perhaps I drive less than I otherwise would. Perhaps I buy a vehicle that pollutes less.
As long as we ensure that parties pay the cost of the externalities they create, we can be confident that any profitable firms are creating more value than they capture. That means they're a net benefit to society.
Of course if we follow this logic, this means that some rather ridiculous firms are beneficial to society. Is World Wrestling Entertainment, Inc beneficial to society? As far as I can tell, WWE is a way to get people to pay outrageous amounts of money to watch roided-out actors pretend to fight. But if WWE pays for their externalities (such as actors' medical bills), who am I to judge? Everyone involved knows what they're getting into and consents. So what if I think the whole enterprise is a colossal waste of time and resources? I'm sure those people think the same of some of my interests.
The alternative to this is a world in which the majority decides for everyone what is beneficial to society or not. Considering the competence of the average voter (and the competence of our government), I'd prefer to err on the side of non-intervention.
Why should I or anyone care?
I think it's becoming quite clear though that we need some more taxation on capital, particularly the rent-seeking kind, and more levelling of the playing field particularly in the field of education, which is primarily funded through taxes.
So, their wealth tax is just for their "normal" earners. Don't glorify it or ignorantly use it as an argument.
I do not claim that this is a result of the wealth tax, but it definitely doesn't attract innovators and industrialists.
Enjoy your ever growing prison population, crime, unemployment and inequality.
But hey! You can become the next Bezos! Isn't that grand? Freedom baby!
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In retort, these companies are started by young risk takers, many of whom have a safety net. A set of redistributive policies could expand that volume to folks who are arbitrarily excluded.
These differences mean that a tax on wealth tends to encourage wealth flight, tax evasion, etc, while a tax on property tends to encourage more productive use of the land. For example: An empty lot in the middle of a city would be taxed based on its value, which would be quite high. The owner would be incentivized to either build something that creates value or sell it to someone else who would do the same.
For me the most important benefit of a wealth tax is eroding the wealth of billionaires. This is important because having that much money gives you _power_ in our society comparable to elected officials, but without any comparable accountability. If you have a billion dollars, you can employ two hundred people from your _personal wealth_ at $100k for fifty years each. Or, if you prefer, 2500 people for a four-year term. (This ignores the resources you have influence in deploying in business, though at least in that case there are other stakeholders. It also ignores connections.) This is a great deal of power, comparable to being an elected official, all the more so because elected officials are often constrained by politics. In my view, the existence of such a powerful and unaccountable interest group can only be a threat to democracy. Other commenters have outlined particular ways that this class has achieved its political goals in the USA. The class of billionaires poses such a threat that I would seriously consider giving up the IT revolution of the last fifty years to be rid of it.
Another question that arises here is if the discussion is happening because the tax collected is not sufficient currently? If that is the case then a proper solution would be to and i hate to say this increase the tax rates for everyone. The number of billionaires the people want to tax are essentially pretty low and in a country based economy where there are pretty large numbers haggling away their 1 percent wont really make a difference to a big country.
The issue with wealth tax is that it focusses on a particular well off section of society and that particular section of society is actually just being targeted because they are wealthy. The thing people take for granted is the number of jobs and employment they generate and the services they provide. They actually are so well off that i worry if someone would be able to stop them if they just decide to leave?
Its rather mundane to say that the wealth is not trickling down. These people are generating wealth. Why do you think US is the biggest world economy? Hint: its because of these billionaires we love to hate.
just my 2 cents.
While I agree that AB5 stifles freedom and innovation, it just doesn't compute for me that a wealth tax (especially the example of 1% over 50mm) would damage the spirit of freewheeling invention, creation, and capitalism.
As an entrepreneur, I feel much more stifled by FAANGs or regulation than the idea I might be taxed at less than my real rate of return one day.
I agree the spirit of the valley is on the decline, and part of that is due to things like AB5, but it feels more like the tech giants are just new giants, like those of the 70s, and will trend towards preservation of establishment and gradual decline as always.
A wealth tax just seems orthogonal to all that.
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If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy? Penalizing static value seems almost reasonable.
A capital gains tax, on the other hand, strictly targets those whose assets have appreciated in value.
Wealth is always eventually taxed when it’s liquidated. And if it is never liquidated, then it arguably doesn’t really matter.
It can also matter for other resources which are finite, but land is one of the most crucial one in our current times, and why we are seeing such ridiculously large gains in housing costs in the past few decades after a century of housing costs remaining fairly constant.
For large segments of wealth (real estate) this is untrue.
Inherited property receives a step-up in cost basis to the current "fair market value", such that the capital gains liability is removed.
You might argue that this is realm of the "Estate Tax", but that is a different topic.
https://www.investopedia.com/terms/s/stepupinbasis.asp
> if it is never liquidated, then it arguably doesn’t really matter.
This is also not true. It does matter. It is not difficult to take extremely large "loans" (loans are not taxed) against assets that you own, in order to avoid actually selling the asset. This is a not-rocket-science way to reap the benefits of an absolutely massive fortune without any of it ever being "liquidated".
1) I agree with you, taxing asset holdings is strange logistically.
I think it be best to tax income. The only change I'd make is currently, income is taxed at a percentage based on your total income in the year. What could change is to tax income at a percentage that is a function of the current estimated value of your wealth instead. So if you cashed out 1 million and that's all you have, you'd pay less tax on it than if someone cashed out 1 million but still had another 10 million worth.
2) Maybe it's a bad idea to allow anyone to own too much of anything of great value to society.
In that regard, it could make sense to force wealthy people to sell some of it, to whatever treshold we believe is too much for one person to own.
That's where I think a wealth tax could come in as a vehicle to force people who own too much to sell some of it. So that we have a more evenly distributed wealth ownership accross the board.
The only thing here is I'm not sure if a wealth tax is the best scheme for this. I think the income tax that I described in #1 would be good when it comes to taxes (money that goes to the government). For wealth, I'd be more inclined with something like where people have to sell a percentage, but taxes don't necessarily need to be involved (beyond the income tax as described from the sell). The idea here is just that no one should own too much, so at some point, you need to sell so that ownership is better distributed. Not necessarily that this should go towards taxes.
Nobody who's sitting on $50M of assets is a loser.
Ah yes, the economic argument of "punish savers and people refraining from consumption will lead us to our Centrally Planned Utopia"
>If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy?
Do you and I live in the same reality? When a global pandemic has shown almost every single person on earth that cash balances should have been higher -- enough to sustain unexpected periods of inactivity -- it seems a little tone deaf to say saving money is unproductive. There's already a tax on holding central-bank money -- it's called engineer inflation and it's what's exacerbated the economic repercussions. Your Central ~~Bankers~~ Planners convince you taxing fiat money holdings (price inflation) and artificially reducing the cost of bringing future production to the present (downward interest-rate manipulation) will lead us to utopia when it's actually cause over consumption, over production, and a planned economy on the precipice of collapse.
I'll keep the "unproductive" savings, thanks.
You're sitting on greater than 50 million dollars? That what a wealth tax would most likely target
We're talking about multi-millionaires, often in the tens of millions, and more.
No-one is saying that regular Joe's with $800 in their savings account should be penalized for just letting them sit.
Wealth tax would only apply to the very reach. i.e. the “job creators” whose wealth is supposedly “trickling down” the economic ladder.
Wealthy people don't just leave their money under a mattress, they invest it in something. Even if they just left it in a bank, the bank is still going to lend that money out and invest it. Taxing wealth just encourages riskier investments, as higher risk is needed to achieve comparable post-tax return.
It doesn't seem like low risk investments like sticking money in the bank to be lent as mortgages or investing in government bonds are as good for humanity over the long term.
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Taxing away 1% of an asset that grows 0% every year leaves 45% of the assets that would be present without the tax after 60 years.
Taxing away 1% of an asset that grows 7% every year leaves 45% of the assets that would be present without the tax after 60 years.
However, to be more realistic, modeling growth makes the taxation even worse, because at times when your equity is at a high valuation, you need to sell some equity and then some extra on top of that in case your equity value crashes before the end of the year/ end of the tax period. You are forced to act defensively.
What about dividends? Starting another company? Working as a CEO or board member?
The article has a terrible foundation because he's intentionally misleading the reader.
We already do that via inflation. Leave your money uninvested and we tax it 2% or more per year, every year.
It's surprisingly not different.
If you have an asset that is dormant, is $100, and you tax it with 1% for 20 years, you get to $81.79 by calculating 1000.99^20.
Now suppose instead, your asset grows by 10% a year, and you have no tax. That asset grows to 100
1.10^20 = $672Now suppose that prior to the investment each year you tax it with 1% and invest the rest, for 20 years, again at 10%. So you get 1000.99^201.10^20 = $550
That $550 of $672 is exactly the same portion as $81.79 is of $100. In other words, growth or no growth, it has exactly the same effect, either way a 1% tax over 20 years takes 18.2%.
> Penalizing static value seems almost reasonable.
In the philosophy of taxation there's a different approach. Money you own is money you earned. Typically earnings are taxed. You produce X value, and a small portion of X is allocated to a general pot of money to fund general things in society, e.g. infrastructure, rule of law etc. But after that, it's your money. If you then invest it and earn more, again, a portion of those earnings are taxed. But if you don't do anything with the money, for the government to take it, is seen as a form of theft.
The principle why the one form of appropriation is okay and the other isn't, is because when you earn, you benefit. And the government benefits, too. When you just store, you don't benefit, and taking it is a purely negative experience. Many people are willing to share part of their new earnings. Few are willing to give up something that has always belonged to them.
Inflation is a natural penalty on static value anyway. So are opportunity costs. Plus, actually static value is quite rare, money in a savings account is being put to work by the bank. The amount of really static money (like money under your mattress, or a permanently vacant home) is quite a small portion of the financial system and again being penalised by inflation and opportunity costs already.
THE philosophy of taxation? There is no central deciding authority here on a singular philosophy.
> When you just store, you don't benefit, and taking it is a purely negative experience. Many people are willing to share part of their new earnings. Few are willing to give up something that has always belonged to them.
That's a real stretch when just a sentence earlier you talked about earned benefits and taxation of those benefits. Storage is just the accumulation of earned benefits beyond your spending habits. Value isn't created in a vacuum nor is it used in one. And current taxation doesn't preclude future taxation, it's why us common folk are told to do any of our retirement funding that we can as pre-tax, since who's to say something that is taxed today (and is expressly stated as not being taxable in the future) won't be taxed again later on appreciated or total value. So, by this alone, the government saying taxes now, and deferred taxes later if that valuation meets certain thresholds isn't something that the government can't or even shouldn't do.
And, in many cases, the tax wouldn't apply to startups or their founders unless they're already sitting on multiple tens of millions of static personal valuation; which is where this whole argument really breaks down, and shows its disingenuous colors. When someone like PG talks about these wealth tax valuations in general terms of percentages, many of us are still thinking on OUR terms, which means we're thinking on "normie" scales of 10s or 100s of thousands, or maybe a couple million, where a 1% drop in valuation YoY would make a significant dent in what we can and can't do; when a wealth tax is floated (at least in the US) it's looking at $10M+ in static assets at the individual level, and applies to a wealth class that only a small percentage of people can actually comprehend. And, when a wealth tax is floated in the US, it also has discussions around non-realized asset valuation (such as small businesses, start-ups, etc) and what classes of assets contribute to the total value of an individual wealth tax.
Applying a wealth tax in a general way like how PG has done it is a bit disingenuous, not wrong; but is prone to personal wealth view biases. It becomes even more obvious when we take your example and put it towards something that would actually be taxed... $100M; which you end up with $81M for static assets or $550M instead of $672M in PERSONAL assets. Most only think of numbers in these terms if the "win the lottery" so who in the general public thinks the difference of $122M over a lifetime of nearly 3/4 of a billion dollars in wealth (not earnings, but accumulated valuation) isn't a bit of a "whatever," they'll pay more in taxes on that Mega Millions winner and won't bat an eye. (this also works for the usual lower bound as well, $10M, but $100M is guaranteed to be included in any of the recently floated wealth taxes).
If I have a 100 shares they'll take 1 share year one, slightly less year 2, etc regardless of the price of a share.
77% of Google is owned by mutual funds & other institutional investors.
62% of Apple is owned my mutual funds & other institutional investors.
79% of Facebook is owned by mutual funds & other institutional investors.
So now we should be penalizing unproductive assets? When did we all decide that was ok?
Based on that logic, wouldn't I be justified in draining someone's savings account in order to invest it more productively in stocks? Maybe it's ok to steal land from people if I will grow more crops on it than they will?
You can justify taking pretty much anything if you say you will use it for something more productive. What about property rights? Why should people who have played by the rules and built wealth in our society, which they were encouraged to do, then have to live in fear that their wealth might be taken from them?
We already do that---it's called inflation. And the justification used by economists is that the economy will collapse without inflation to incentivize spending money.
When we went off the gold standard?
It is not simple just a management fee because instead of being used to purchase a luxury goods it may be used to improve healthcare, infrastructure or regulating industry.
If it wasn’t for government investing into DARPA none of these startups would even exist.
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In this case, the shiny is the scary 45% figure. What he draws your attention away from is the bizarre hypothetical:
> Suppose you start a successful startup in your twenties, and then live for another 60 years. How much of your stock will a wealth tax consume?
Who is this hypothetical 20 year old that becomes indepedently wealthy, and then doesn't work for the rest of her life? And despite being so wealthy, she opts to pay 100% of her taxes by liquidating her stock rather than out of her salary or investment dividends?
Even if we go with Graham's strange hypothetical, oh booh-hooh, this lucky individual can retire in their 20's and dies richer than 99% of the rest of us. But in reality the hypothetical looks more like this:
1. Very lucky 20-something makes it big and now owns $50M of stock in her company
2. She gets $1M per year in dividends, $1M per year in salary, and her stock increases in value by $5M per year (5% annual growth)
3. The first year she pays $1M on a 1% wealth tax, and her net worth increases by $6M. Similar math in following years.
4. She retires sipping martinis on a private island in Florida
The author is playing the typical Rich man's game. Oh woe is me, look at these poor people who this tax will destroy!
The fact that so many people here are defending them, is maddening and disheartening. Arguing that anyone with a value of over 50mm can't pay a higher tax rate on those funds is disengenous at best.
Maybe it's not purely selfish but the idea that he's looking out for his cohorts of young motivated founders, yet even that feels off. I doubt many start a business desperate for tens of millions; I'd guess the primary motivations are control of work schedule and basic FU money.
Company has a bad year. Dividends are cut to zero. Founder reduces salary to bare minimum required for her expenses. On paper, she still has $50 million net worth of illiquid non-public stock. Government demands $200,000 wealth tax. How does that play out?
So to your example: A $50M company grows 5% a year. Lucky 20-something holds a stock+dividend value of $52.5M before tax at year's end. Of her $1M salary, ~$330k goes to federal income taxes, another $30k to FICA. Too bad she's in California, that's another $100k in state income taxes.
Still, she has ~$540K left over in liquid income. Perhaps she can use this to pay off her $500K wealth tax liability and keep full company ownership if she lives modestly.
Next year presents a bigger challenge. Lucky 20-something's company has grown in value by 5%, and so too has her wealth tax burden. However, her salary needs to grow by ~7% to account for income taxes (and a higher growth rate would have made this worse). This is clearly unsustainable and she will need to sell some company shares before her exponentially growing salary eclipses the value of the whole company!
She'll still be rich enough to retire whenever and sip martinis in Florida of course, she just won't hold the majority of the shares of the company she founded.
Edit: I realize that I sort of neglected dividends after the initial bit. A company could pay off 1.2% (to account for capital gains tax) of it's total value as dividends assuming it had sufficient liquid holdings (and it can't sell stock to come up with them, as that would defeat the purpose). In this case, it would cut company growth potential by about 25% but could allow lucky 20-something to retain control, provided the company can always come up with the liquid assets, even in down years. But that's probably the most realistic scenario of this working.
(1913 $3k -> roughly $80k 2020 in standard inflation adjustments. At a time when a recent-graduate civil engineer made ~$1k, or with 10 years experience in the low $2k's, according to https://libraryguides.missouri.edu/pricesandwages/1910-1919. A person making $3k was loaded.)
This is about income tax. 6% on someone making 13mill (2020$'s) a year seems fine
Think about it this way, in a very similar, live example:
It is common practice to pay a fee of 0.5-2% to a wealth manager. In practice for many people this fee is worthwhile and wonderful - the benefit is a safely managed and vigorously growing pool of assets.
Is a wealth tax as described by the author really so different? In one case you pay a fee to the manager, in the other case you pay the fee to a more abstract/distant manager (the social system). In both cases, that small fee (small if everyone is generally competent and the wealth grows) is what empowers further growth.
No sane, logical person complains about paying $0.20 when in return they get an extra $0.30 back. In this case, I suspect the author is trying to justify receiving that hypothetical $0.30 without having contributed their initial $0.20. Embarrassingly simplistic, selfish, and self-centered.
Reading that blog post, I’m reminded of the occasional, deluded person who believes that they alone are responsible for their successes and good fortune. In reality, all successes are collective accomplishments. This is a fundamental fact about human life.
You pay that fee because the manager supposedly does something that helps your wealth grow faster than their fee.
When Vanguard comes along and shows you can get the same or even better returns with a 0.04% fee instead of a 2% fee, what happens? People take their money and move to where the lower fee is. Why would it be any different for a wealth tax?
These are things that help your business create more wealth. As the grandfather comment said, it's wanting the 30c bonus without paying the 20c fee.
On second thought, I suppose you could vote or otherwise participate in politics.
In the case of a wealth tax, I imagine wealthy, powerful people would play a more active role in ensuring the competence of their elected officials. They'd like that tax they're paying to go a long, long way, much as clients expect their fees to a wealth manager to facilitate the best possible work.
First, any wealth tax being seriously discussed has a floor and/or has marginal rates, probably starting at 1 or 5 or 10 million (or higher).
Second, taxes don't disappear into nothingness - they pay for civilization. It is clearly beneficial to everyone to live in a society where people are well cared for and have healthcare, public education, welfare, etc. There's a reason failed states and unstable/developing countries generally aren't where people are looking to startup the next big tech company.
Third, any smart founder isn't going to just sell 1% of their stock every year and pay the wealth tax with that. They'll take dividends, or take out a loan against the value of the stock, or use some cash from other investments, or whatever, and maintain control of their company. Yes, over the long term they'll lose some wealth, but not necessarily control of their company, unless that's the decision they make.
Fourth, this effectively ignores that wealth is a thing that grows and compounds. If your wealth is increasing at 4% a year (very attainable for the class of people a wealth tax would affect) a 1% wealth tax really doesn't have as big an impact on your long term wealth as this makes it seem.
Fifth, the idea that people "will just move to another country" is very silly. If some people do leave, or start companies only in other jurisdictions, that just means there's a market opportunity for the many people who remain. Unless this supposes that no one wants to take advantage of one of the richest markets in the world because they might have to pay a small fraction of their wealth to the government. Not to mention that even very wealthy people likely want to live in a good society - we don't see many people starting companies on boats in international waters for a number of reasons (left to the reader).
I suspect that Mr. Graham is wringing his hands over potentially having to cut a large (in absolute terms, but small in relative ones) cheque to the government in the future, and I certainly feel for him, but I'd much rather we have well funded schools and welfare for those who need it.
This is a recurring theme in owners/investors: they always have some story that they will be forced to leave or close shop if some labour-proteaction-laws (like weekends, or 8h days, or banning of child labour), or taxes are implemented. It's a very old story, there's a history to it.
Please note that we have weekends/8h work day/ban on child labour and also still have the super rich. They never left. They did pass law that allow them to shift production overseas. But those laws can be repelled and then we will hear the story again of how this will kill their business,or force them to leave.
The remaining jobs in the US are salaried position where "8 hour workday" and "weekend" are often meaningless.
Plus we're talking about a wealth tax in California. You can start a company in Nevada and still access the market of California just fine.
Some didn't leave.
There's a reason why Singapore has the highest concentration of millionaires in the world, and it's not because of their school system.
I'm not saying that all will leave, or even that most will, but some will.
And New Jersey saw a significant exodus towards lower tax states among its richest.
It's not empty threats - it's just that the cost of the taxes has to be higher than the cost of moving. For most people, the cost of relocating is higher than the taxes. For the richest people, this wealth tax might just tip the scales.
Ted Arison and Eduardo Saverin are the most famous examples I'm aware of - it's mostly because laws were changed after they managed to move without being taxed. Do you think there are no more loopholes? Do you think these are the only cases?
We're not debating here the need for taxes, or labor protections. You don't get to justify bad policies by pointing that there are places where government regulation is called for.
Wealth tax is bad policy. Justify it on its own merits.
The fact that are still super-rich people doesn't imply that such interventions did not have a negative on the number of people who are super-rich in the US. High taxes have a well-established negative effect on capital formation, and investment in-flows. This isn't some conspiracy theory promoted by the super-rich to manipulate you.
I think you're giving the arguments made against high taxes a very shallow treatment.
Uh huh.
>Second, taxes don't disappear into nothingness - they pay for civilization.
But there are bad taxes. There is such a thing as too much tax. So you have to justify the wealth tax on its own merits instead of trying to pull a motte-and-bailey fallacy by pushing a wealth tax and then arguing for the necessity of taxes when challenged. Taxes are a necessary part of a functioning modern economy. Wealth tax is not.
>Yes, over the long term they'll lose some wealth, but not necessarily control of their company, unless that's the decision they make.
No. What are you talking about? The math is very simple. You will lose control at some point, because there's only so many ways you can rearrange the deck chairs.
And no, dividends are not an option because issuing a dividend may not be in the best interest of the company. Dividends are also taxed separately.
That you think taking out debt to cover wealth taxes is a solution is insanity.
>Fifth, the idea that people "will just move to another country" is very silly
But that's exactly what happens. We have data on this from various experiments. It doesn't bring the revenue you expect it to because there is capital flight and brain drain from the country in response - and when that is taken into account, you may end up with a net loss in tax revenue. It's also expensive to administer and enforce because net-worth is not easy to calculate. It's no coincidence that this form taxation has been falling out of favor.
>I suspect that Mr. Graham is wringing his hands over potentially having to cut a large (in absolute terms, but small in relative ones) cheque to the government in the future,
No. That is a strawman if I ever seen one. Could Mr. Graham not be against this tax because it's an objectively bad tax with many unintended consequences?
Why is a wealth tax a bad tax? Why is it worse than income tax or a VAT or anything else we currently do? Many places currently have property taxes (a type of wealth tax) and they tend to work well.
You need to redo your math. If your net worth is $10+ million and isn't increasing by at least ~4% a year you're doing something very wrong. So ~1% of your wealth going to taxes is eminently affordable. No need to lose control.
Capital flight can be handled with exit taxes and restrictions on foreign ownership. Brain drain is usually high income (not high net worth) individuals leaving. The reason net-worth based taxation has been "falling out of favour" is because billionaires have an outsized impact on media and politics, and that very clearly suits their interests.
He could be - but if that was the case he'd have better arguments. Why didn't he talk about capital flight and brain drain, and how other taxes would be more appropriate? He's a skilled essayist; he chose his words carefully, and he used language around stocks, founders, and ownership specifically to appeal to tech geeks who expect to start successful companies.
As an occasional entrepeneur I do not at all mind being subject to this tax. I’ll worry about the wealthy when I join them, not before. They don’t really worry about me.
I think most of the reasoned objection to various taxes was summed up by Bill Clinton in his first campaign: what people mind is not getting what they’ve paid for by their taxes.
Indeed. The parent is arguing that the wealth tax is better than, say, a carbon tax, which is considered a fairly efficient form of taxation.
> >I suspect that Mr. Graham is wringing his hands over potentially having to cut a large (in absolute terms, but small in relative ones) cheque to the government in the future, >No. That is a strawman if I ever see one. Could Mr. Graham not be against this tax because it's an objectively bad tax with many unintended consequences?
To add to this, Paul Graham doesn’t live in California, and would not pay the tax. He’s opposed on principle.
Having a wealth tax doesn't mean the total tax goes up. Normally when discussing the merits of a certain kind of tax it's best to assume another tax is cut, otherwise it invariably becomes a discussion about whether high/low/more/less taxes are good.
> Fourth, this effectively ignores that wealth is a thing that grows and compounds.
You absolutely will not "lose control at some point" so long as the value of your company/stock keeps pace with inflation + wealth tax.
It's the simplest, most straightforward reason this "modeling" is bunk.
He says:
> Even a .5% wealth tax would start to keep founders away from a state or country that imposed it.
Mr Graham doesn't consider the possibility of startup founders leaving / kept away from a place that doesn't impose a wealth tax. I am not a successful startup founder (yet), but I would consider it my duty to live in /start a company in a place with better laws and taxes that are more equitable for everyone.
Money is not the only thing that drives startup founders to do big things. Complaining about a wealth tax and suggesting it will ruin things in the valley / CA due to people leaving completely ignores the societal improvements that could come from those tax dollars.
The idea behind increasing taxes on the wealthy is to build a better society for everyone - including the wealthy! Why would the future prospective wealthy startup founders want to live in a massively unequal society, that is bent on increasing incoming inequality (the topic of another recent PG essay, where he argues that decreasing wealth inequality is a bad idea)? I sure wouldn't.
Mr Graham, a lot of startup founders may leave if large measures to improve society like a wealth tax are not 'imposed'.
You said,
> Taxes are a necessary part of a functioning modern economy. Wealth tax is not.
But you don't back this up. Why should wealth tax not be a part of modern economy? Modern economies are broken right now, obviously, for most people anyway, so keeping the status quo is a red flag and a bad sign.
> Could Mr. Graham not be against this tax because it's an objectively bad tax with many unintended consequences?
If that is his position, he does not explain it very well. Especially with the context of many of his recent essays, he does seem especially concerned with his image and wealth.
What about the unintended consequences of adopting policies that specifically intend to increase wealth inequality? PG doesn't seem to much consider the consequences that his models/opinions/plans would have on other people if implemented.
Paul's modeling of the wealth tax is incredibly naive and simplistic... to the point of either being extraordinarily dumb or intentional misleading. Given how intelligent Paul Graham is, I'm gonna say the later.
I don't even gross 200k USD per year and I could afford a 1-2% wealth tax, no sweat.. wouldn't even miss it. In fact my savings would continue to grow almost unabated.
The wealthy want us to believe that their money is the true wealth of America... that the {insert country} would fall apart if the wealthy left. In reality, our wealth is in our natural resources (food, energy generation, fresh water) and industrious, hardworking people of this country.
I say this clearly... Jeff Bezos, Elon Musk, Bill Gates (etc.) are not responsible for wealth creation in this country. There have been 10's of thousands of people who brought the technology of those respective companies to fruition, and an entire society that made it possible. The idea of the "self made millionaire/billionaire" is ridiculous in its essence.
That we DO NOT have a wealth tax, and high taxes on earning above a wealth threshold, is ridiculous and (dare I say) unethical/immoral. We need to entirely re-frame the argument surrounding taxes on corporations, wealth and sky-high incomes.
... my 0.02.
THIS! Most Americans just don't have many sitting assets, so even if you made the wealth tax apply equally to everyone, and we all had to pay an additional 1% on our net worth each year, for most of us that's either 1% of our house value or 1% of a small amount sitting in a bank account. For a billionaire that's $10M, which is about my city's whole budget. So another framing could be: "billionaires should annually pay for a small city's municipal expenses" -- it seems more than fair.
Even in the case of not-yet-wealthy-startup-folks, assuming shoddy implementation -- "my money isn't liquid -- paying 1% tax on $1M of monopoly money from a startup is going to be hard" it's actually just $10k. And marginal rates and floors can easily make it all work. I'm a spoiled tech employee, I'd pay 1% of my salary a year for the purpose of helping mitigate income and quality-of-life inequality.
It's one thing to pay 2K totally different thing to pay 4 billion.
You could make an argument that for some one with 200 billion, paying 4 billion isn't that much. But they are likely thinking on the lines of some great grandchild inheriting that money.
Your second point isn't really relevant for a founder who can choose between one developed country with a wealth tax and another one without. Unless you think all developed countries are going to implement the wealth tax.
I don't think your third point speaks to the issue. The article didn't mention control of the startup, only finances, and I don't think the successful 28-year-old startup founder who's looking at the impact of a wealth tax 60 years in the future is primarily concerned with control of the company at age 88.
Your fourth point also makes no difference. Suppose you make $1 billion, and you earn zero interest on it. The wealth tax takes away 45.3% of that over 60 years. Suppose you make $1 billion and compounded interest at 4% would increase it to $10.5 billion over the course of 60 years. The 1% wealth tax still takes away 45.3% of that over 60 years, leaving you with 54.7% of the $10.5 billion. Multiplication is commutative.
To your fifth point—well, does anyone leave for tax havens, or arrange for as much as possible of a company to be officially inside a tax haven? I think they do. A wealth tax that ends up making a large difference over the long term might make a large difference in how many people leave.
I don't think you've shown that PG "doesn't model how any sensible wealth tax would be implemented or paid" in any significant way.
Over the medium-long term, I think any countries that don't implement a wealth tax (or some other way of addressing wealth inequality) will not remain developed countries.
PG uses 'stock' throughout the essay as opposed to 'wealth', and I believe he did so on purpose; he's appealing to emotion. Startup founders care a great deal about control and ownership, more so than wealth in the abstract. Look later as well - "And at 5% this threshold is getting asymptotically close to being an upper bound on how much of the company you get to keep." - he's directly talking about ownership/control rather than simple wealth.
Yes, this is obviously true. But again, PG's phrasing here is key; he's making it seem like you'll have only 55% of what you start with, which isn't remotely true. It just means your wealth compounds at a lower rate. Much less impactful, clearly.
Maybe. A wealth tax on its own doesn't solve this, you also need to sort out tax havens. And again, you need to look at the real cost of these people leaving - if a billionaire moves away (instead of paying a wealth tax) what does that cost us?
This is an incredibly simplistic take.
When choosing a USA with a hypothetical wealth tax versus other existing countries, the contrasts are far larger than just a wealth tax. The USA has increasingly bad health/medical costs, university tuition costs, cost of living in affluent areas, deteriorating infrastructure, political strife, etc. It's important to talk about this hypothetical wealth tax as a weighted component of all of the likely decision points.
I can't get why many who advocate against a wealth tax are afraid of raising a single penny on a billionaire amid the fears of scaring him off the country. This is really a bad refuse of Reagan politics that hasn't proved to be true. Moving wealth around while bypassing capital controls is expensive. Relocating a whole business is even more expensive. And if someone really wants to do it to make sure that they don't pay taxes on their billionaire wealth, then they're welcome to go - a developed country has plenty of talent to replace them, and in many cases there will be one less lobbyist to keep inequalities high and politics hostage of his own interests. Lots of taxes have been raised on low-earning classes in the past decades without the blink of an eye, but as soon as someone proposes a tax on the rich some people cry out against the exodus of billionaires.
> Suppose you make $1 billion, and you earn zero interest on it. The wealth tax takes away 45.3% of that over 60 years. Suppose you make $1 billion and compounded interest at 4% would increase it to $10.5 billion over the course of 60 years. The 1% wealth tax still takes away 45.3% of that over 60 years, leaving you with 54.7% of the $10.5 billion. Multiplication is commutative.
Taxation on real estate isn't that different. As an house owner I pay every year a tax that is proportional to the value of my house. Sure, if I look at how much the tax compounds over 60 years I may get scared, but on a yearly basis I can barely feel its impact on my finances. And I consider it a fair tax as well - having a house in the middle of Amsterdam is a privilege, and I feel that it's fair to pay for my privilege and redistribute that money back to society. I don't get how someone sitting on a $1 billion wealth may consider a $10 million tax unsustainable. A large house, a yacht, $1 billion shares in a company or a luxury car are privileges reserved for few, and it's unfair to just let those few sit on such wealth while the government every year has to raise money from those who earn much less. That inevitably ends up with most of the wealth is accumulated in the hands of few, and that's a scenario that society should avoid at all costs.
If the real (ie inflation adjusted) rate of growth of capital is greater than the wealth tax, the wealth tax does not cause _actual loss_ to the wealthy.
The nature of the psychology of loss aversion means the distinction between "loss" and "reduced gain" matters. The loss may sting enough to cause the founder of move, but reduced gain will only matter if it prevents them from achieving a material goal.
CEO's can infamously "work" for $1/year because they do not have to rely on income (labor) to support themselves.
At a certain point, "income tax" becomes a misnomer. Thanks to the value of capital, some people do not actually have to engage in labor. Through work done by well-paid advisors, it is at this point that many of them have also reduced their income tax liability to zero, more or less.
Comparing a wealth tax to an income tax makes little sense.
If Piketty is right, in today's world gains derived from capital always exceed gains from labor (income) over the long term. That excess just keeps accumulating. The wealthy keep getting wealthier. Quite the opposite picture from Graham's, where gains from wealth dissipate over a lifetime.
I will say this, his model looks great in a text-only browser. Wide margins, a basic table; succinct. The simplicity is pleasing to the eye.
Taxing the wealthy is not an effective means of helping people. If you taxed every last billionaire in the US, 100% of all the wealth they earned over the last 50 years and gave it to every member of the US, split evenly, and divided by 50 years, you'd get a pitiful small number of about 200$ per person per head. (2.7 trillion total billionaire net worth in US / 300 million / 50 )
The amount of people I know with millions in assets but think they're poor and will someday be a billionaire is astounding. ("I just bought a nice vacation home in Lake Tahoe and a rental property in Santa Clara but I'm struggling with my little home in Palo Alto, you know? I barely have any money." - real example I've encountered multiple times) They're, of course, against wealth taxes. They are all convinced they're gonna be the next billionaire and that any taxes will absolutely destroy them in their path to ... whatever their destination is. (They don't even know - they all just want recognition)
The floor is adjustable. As more tax money is squander, the floor will be adjusted for greater taxation.
>Second, taxes don't disappear into nothingness
They actually do. The return on your tax dollar in California is abysmal.
>Fifth, the idea that people "will just move to another country" is very silly.
They can move to another state. Schwab is moving to TX. The tax savings will build their new corporate HQ in Westlake. How many Hedge Funds have left Conn, NY, NJ, etc for Florida?
I don't have a dog in this fight. Taxes are necessary but when the State is not held accountable for their spending and continues to squander tax dollars, there is no amount of money that will ever satiate them.
I hope California goes through with their plan. It will be an interesting to see the outcome.
We live in a world where remote work is rapidly becoming not just acceptable, but standard. Post-coronavirus geographic mobility will be high.
Look, we already have a wealth tax. Instead of dinging you every year and guaranteeing plenty of billable hours for accountants, we bundle it up in a big charge at the end. Everyone dies. How about we just enforce inheritance taxes and call it done?
Next, are you really implying that people will magically move to another country entirely because they can work remotely? The portion of workers who are even able to do such a thing, let alone likely to, is vanishingly small for many reasons (including, interestingly, income taxes).
And to your third point... again, you seem to not be aware of how estate planning works specifically to avoid paying taxes via things like trusts and inheriting shares in companies. Fixing inheritance taxation wouldn't come even close to being as effective as a wealth tax in preventing long-term accumulation of wealth with little economic input.
Here's where we're at: we have been trying income tax and the rich keep getting richer. Demonstrably and repeatedly. It isn't working, unless your definition of "working" is robber-baron era levels of economic disparity in America. If your proposed solution is variants of income taxes, well then you know the saying "define insanity". Wealth taxation is the only plan I've seen that logically prevents workarounds and actually serves to balance economic outcomes for Americans in the long term.
Yeah, but it does generally grow for people who have millions of dollars, especially over the course of the 60 year period that the original essay is discussing. In the short term, the stock market fluctuates and has recessions, but in the long term it's only ever gone up.
> How about we just enforce inheritance taxes and call it done?
Because having a semi-predictable tax base is good? It's a lot easier to manage the government budget if you get 2% of the value every year, versus 100% of the value in a lump sum at some unpredictable point in the future. There's only 630 billionaires in the US, so it doesn't seem like statistics helps even this out, either.
I'm on the fence on estate taxes as a general rule I'd say it definitely make sense above some threshold but if you look at the mess with Samsung there definitely needs to be some thought in how illiquid stocks are dealt with. I'd put a bit of cash on Lee Kun-hee sill being 'alive' until after my death or at least until a change in South Korean tax law.
How about we just enforce an inheritance tax in your family alone, and donate everything you have to a local charity and see if it makes a difference in your community? Your goal is to give away your wealth, as far as your comment goes, so it sounds like a legit plan of action. Just don't impose the same goal on everyone else.
Modern monetary theory disputes this commonly held idea that governments need to collect tax before they can spend it on public works. On the contrary, government creates money to pay for public works, which leads to money in circulation, and in turn allows tax to be paid. The purpose of tax is to redistribute wealth and lead to harmonious society.
Or, and that's another possibility we should consider, taxes disappear into the pockets of bureaucrats and a handful of rent seekers with very little effect on civilization.
Before arguing for additional taxes, one must first show some evidence that we're getting reasonable ROI on what we're already paying, and https://transparentcalifornia.com/ shows exactly the opposite.
I am 100% in support for public healthcare, for example, but it will continue to look like a financial absurd as long as a knee MRI is 3x of any other country. Same thing with the higher education, public housing, etc.
Here's my thinking: as a society, we should decide on what needs to be handled by the government. Defense, roads, pandemic response, scientific research, welfare, healthcare, whatever. Make your own list, we can all hash that out. Then we figure out how much that costs, then we figure out the best taxation method to pay for all of it. I think the goals of that tax system should be to encourage beneficial habits, support economic growth, lower people's standard of living as little as possible, and generally maximize utility. It seems pretty clear that in this kind of system, a progressive system that taxes the wealthy more is a clear winner.
You've never worked in government it sounds like. It's a bonfire of money.
Definitely. After a certain point, increasing wealth isn't about wealth, it's about power. I would wager that most of the uber-wealthy would rather have slightly less power in a place that they want to have power in, rather than have marginally more power in a place that's not their home.
Now that it's an elected government instead of an opaque non-profit providing social services, they've become unpopular with the wealthy. I suppose the government can't assure you a place in God's Kingdom :-)
https://en.wikipedia.org/wiki/Tithe
Edit: certain of these are based on land, not income; see the article.
I think you misunderstand this in two different ways.
First, retirees on fixed incomes are acutely, almost comically attuned to state income tax rates, property taxes, etc., and many of them plan their entire retirement and residency around it.
Second, although I agree with you that it is very difficult to just arbitrarily uproot and move your family, etc., because of a tax code change, it's not that difficult for wealthy people - especially those expecting a liquidity event - to buy a house on Lake Tahoe on the Nevada side and take the kids out of school for (365/2) days. "Remember that time we spent the ski season on the lake ?"
Wealth advisors and family office managers, etc., speak of this casually. Further, if you live in a wealthy community in the Bay Area (Ross ? Los Gatos ?) you'll see third or fourth cars with Nevada plates. Not an accident.
So, yes - I think you're right - nobody is going to stop living in California if we continue to increase the top end tax rate ... but define "living".
Seems it make more sense to tax when the shares are sold, but with a percentage based not on your taxed income, but your whole asset holding. Or just to tax the companies themselves more heavily.
And, yes, it is often possible to take dividends from an established, profitable business - but it is horrible for the way the startup (and investment in distant future) economy works, which is likely pg's frame of reference -
I start a company, a very promising one, but it needs 20 years and billions of capital to get there. I raise $30M, still keeping 50% of my company at this point; Oops; on paper, I'm worth $30M, and have to pay (at e.g. 1%) $300K wealth tax in the first year. I cannot get any dividend; I usually can't even sell my shares or borrow against them. And it gets worse each time the company valuation grows (whether I raise more money or not). Seems far fetched? That's Amazon. Okay, Amazon is one in a million you say - but notice that the bad parts apply to ALL founded companies, whether or not they were as successful as Amazon.
So, in addition to the wealth tax, something's got to give.
Either you exclude non-liquid assets (which is a huge hole that will render wealth tax moot). Or you accept wealth-tax-payment-in-kind (that is, you put 1% of your shares into government custodianship every year, and then can convert them to tax money whenever this becomes a possibility).
Or, the entire investment world changes - either investors will have to get used to paying an extra 1.5% to cover the founder's tax liability; or valuations will drop an order of magnitude to let founders pay out of their own pocket. Or investment will be diverted to places that don't have this tax. Or it will just drop significantly.
But the assumption that wealth tax will have minor (if any) effect is ridiculous. Somewhat comparably, Israel put a very small turnover tax on stock exchange trading (which is not wealth tax, but is close enough for practical purposes) and as a result, the Tel-Aviv Stock Exchange volumes went down by an order of magnitude.
The wealth tax does apply once it's cash, so dividends you received, or proceeds from selling (part of) the company. I would imagine a wealth tax in the US could do the same thing.
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Paying for civilization creates the conditions for even more elites to emerge. From an inequality perspective, you probably should disappear it into nothingness.
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Let's go through each:
>>There's a reason failed states and unstable/developing countries generally aren't where people are looking to startup the next big tech company.
There's a negative correlation between government spending levels as a percentage of GDP, and economic growth rates. Your implication, that society is better off with high levels of taxation, is not supported by the science on the matter.
>>Third, any smart founder isn't going to just sell 1% of their stock every year and pay the wealth tax with that. They'll take dividends, or take out a loan against the value of the stock, or use some cash from other investments, or whatever, and maintain control of their company. Yes, over the long term they'll lose some wealth, but not necessarily control of their company, unless that's the decision they make.
Completely irrelevant to the point. The point is that you lose much of the wealth you would have otherwise gained, in the absence of the wealth tax. Whether that's because you have to pay out more dividends, that would otherwise have been reinvested, to transfer to the IRS, or take on loans, that have to be paid back with revenue that would have otherwise been reinvested, is incidental.
>>Fourth, this effectively ignores that wealth is a thing that grows and compounds. If your wealth is increasing at 4% a year (very attainable for the class of people a wealth tax would affect) a 1% wealth tax really doesn't have as big an impact on your long term wealth as this makes it seem.
Wrong. The losses also have to be compounded. That 1%, had it remained invested, would have grown at a compounding rate as well. So you lose the 1% and all compounded gains on it.
>>Fifth, the idea that people "will just move to another country" is very silly. If some people do leave, or start companies only in other jurisdictions, that just means there's a market opportunity for the many people who remain.
This is a misunderstanding of the factors behind an investment. Investment does not automatically emerge to fill every market opportunity. It emerges when the ROI on potential investments meets the demands of the available investable financial capital. Investment decreases when the expected ROI decreases, and when the available investable financial capital decreases. A wealth tax decreases both the expected ROI, and the available investable financial capital.
Moreover, you're completley ignoring competitiveness. Firms in low tax tax jurisdictions will outcompete firms in high tax ones, ceteris paribus. Opportunities are not distributed across the world evenly, and one factor that affects opportunity is tax rates.
>>I'd much rather we have well funded schools and welfare for those who need it.
Government spending as a percentage of GDP has increased from 25% in the 1950s to 40% today. Social welfare spending increased by an average of 4.8%, EVERY YEAR, between 1972 and 2010.
How much more do you think government spending should increase? What share of private economic output should be non-consensually redistributed for social welfare programs in your mind? Will there ever reach a stage where you think the negative effects on capital formation, from further tax hikes, will outweigh the positive effects of a greater share of economic output being available to the poor in the form of cash payments and social services?
I don't think your correlation suggests what you think it does - look closer at which countries have the highest GDP growth rates. Economic growth rates are not a good indication of countries where people would generally choose to live. I'd generally use HDI, happiness, life satisfaction, or similar, all of which correlate to higher government spending.
>>>Wrong. The losses also have to be compounded. That 1%, had it remained invested, would have grown at a compounding rate as well. So you lose the 1% and all compounded gains on it.
Yes, of course. So your wealth (above the threshold) grows at an effective 3% instead of 4% (or whatever). PG's essay makes it seem like your fortune will dwindle away to nothing, which isn't true. It'll just grow more slowly than it could.
>>>Firms in low tax tax jurisdictions will outcompete firms in high tax ones, ceteris paribus
But this misses the point - other things aren't equal! California already has a higher tax burden than many other states, the US already has higher taxes than many other nations, and still they are among the richest places on earth. Higher taxes can create a society much more beneficial to all of its members, including the rich ones.
>>>How much more do you think government spending should increase? What share of private economic output should be non-consensually redistributed for social welfare programs in your mind?
Enough to make sure every person has enough to eat, somewhere to live, universal healthcare, access to education, and the opportunity to succeed.
>>>Will there ever reach a stage where you think the negative effects on capital formation, from further tax hikes, will outweigh the positive effects of a greater share of economic output being available to the poor in the form of cash payments and social services?
Unlikely. If there is such a stage, I suggest to you it's well below ~5% on all wealth above ~$10 million (which is at the top range of what is discussed in these kind of wealth tax proposals).
Your own comment is considerably more condescending. As for speciousness...
> There's a negative correlation between government spending levels as a percentage of GDP, and economic growth rates. Your implication, that society is better off with high levels of taxation, is not supported by the science on the matter.
That correlation is disputed, to say the least. Even if it weren't, economic growth rates, while important, are not the be-all and end-all of society being "better", especially when a large amount of the wealth is concentrated in a few hands.
>>Fourth, this effectively ignores that wealth is a thing that grows and compounds. If your wealth is increasing at 4% a year (very attainable for the class of people a wealth tax would affect) a 1% wealth tax really doesn't have as big an impact on your long term wealth as this makes it seem. > Wrong. The losses also have to be compounded. That 1%, had it remained invested, would have grown at a compounding rate as well. So you lose the 1% and all compounded gains on it.
Perhaps. But a 4% rate of increase would still belie the contention in pg's post that "by 5% [the threshold at which the tax starts] is getting close to being an upper bound on how much of the company you get to keep". It seems probable that pg simply did not take interest into account.
> Government spending as a percentage of GDP has increased from 25% in the 1950s to 40% today. Social welfare spending increased by an average of 4.8%, EVERY YEAR, between 1972 and 2010.
Over the same period, the share of income going to the top 1% doubled.
> How much more do you think government spending should increase? What share of private economic output should be non-consensually redistributed for social welfare programs in your mind? > Will there ever reach a stage where you think the negative effects on capital formation, from further tax hikes, will outweigh the positive effects of a greater share of economic output being available to the poor in the form of cash payments and social services?
Ever? Certainly, if you keep cranking up the number. But the United States isn't necessarily at or even near that stage, considering that several large European countries have strong economies despite much higher government spending as a percentage of GDP.
You're just name-calling here, it's not "silly" just because you don't like the fact. If they leave, they actually leave, period. Sweden's left-wing majority abolished the inheritance tax(!) because so many wealthy people left because of it (among them, the famous IKEA founder).
It's sad that your non-arguments and whinging are being upvoted by people who "feel" the rich ought to be taxed but refuse to think about the consequences.
And the US is not Sweden. If the US blocks your company's access to its market for leaving or not paying taxes, you'll most likely lose more money than the tax.
Not saying I'm pro wealth tax, I'm still having to think about it, but I do feel the US is in a position to be able to protect itself from founders leaving.
Why have them control health? They've shown they are incompetent with Medicare (look at the waste, fraud, abuse, and anger by doctors due to red tape).
Why not have the States set the wealth tax? Be like Switzerland. The cantons and municipals set the wealth tax.
Ultimately, for me, this entire topic throws into stark relief the fact that the Federal government needs to be brought to heel. It is too large. Too incompetent. Too impossible. Look at the EU (the closest thing in the West to the US by population and economic scope). The EU doesn't set an EU wealth tax. They do not set an EU health service. They set regulatory requirements that the individual countries (from a GDP perspective equal to US States) implement.
Other features of the tax system more than offset the 0.3% wealth tax.
Personally, I am a bit disappointed by the lack of depth of the discourse: Wealth taxes and their effect have been studied quite a bit in economics literature, and there are various peer-reviewed papers that attempt to measure the effects, but the Silicon Valley crowd is strangely avoidant of examining evidence or explaining their opposition with real-world data. It's all 101ism and polemics.
See also https://twitter.com/halvarflake/status/1295283922117566464?s... - I tried to ask @rabois for the source of a claim, and got crickets in return.
I'd like to see a more nuanced and thorough discussion, to be honest. Perhaps that's a bit much to ask.
First, most european wealth taxes (including recently defunct ones) have much lower floors than US proposals. $1m instead of $100m. That changes a lot. France did experience "capital flight," famously Gerard Depardieu.
Second, "capital flight" has always been present in Europe. There's a long history of it, and practical realities make it relevant.
I do agree about depth though. One point that PG does address which is often skipped over is that a wealth tax is a "deplete billionaires" policy... or a "curb billionaire growth" policy. The premise is that the very wealthy are too wealthy and that this is bad.
A wealth tax is not like a VAT, corporate or personal income tax. The tax revenue is secondary, and relatively small. It's more like a tariff, tax as an economic policy tool.
I agree that considering a 2% wealth tax as a 70% depletion of wealth over 60 years is... not nuanced. The most important nuance being that you control most of this wealth for most of this time and will be paying your taxes out of interest. If you apply the model to actual examples (say Bezos or Buffet), you'll find that their wealth will still have increased... just at a reduced rate.
But, to be nuanced we also need to address the core question: "are billionaires bad for the rest of us?" That is the premise of a wealth tax, at least the currently popular one.
I find it ironic that the US which was largely founded by people who left their home because of entrenched economics and limited opportunities and who used to have some of the highest taxes for the top brackets and strong eversion to the development of a new aristocracy have after Reagan developed into a nation of defenders log the superrich.
There's another problem which I'm surprised PG didn't address. Liquidity. A wealth tax means valuing property before it's even perhaps practical to sell it, and while the government might take your last 409a valuation as the means to valuing your net worth, they aren't accepting your shares as payment, only cold hard cash.
If you have a large private holding, now you are forced to find ways to throw off cash against that notional value, e.g. by arranging loans against your holdings to pay the tax man. Shares that ultimately never sell could end up being taxed for more then they are ever even worth.
It has long been my impression that eliminating or reducing billionaires is the primary goal of wealth tax advocates other than those whose advocacy primarily consists of sharing memes on social media. Raising revenue is largely a red herring.
Then a wealth tax boils down to a punitive tax on interest income. Which means billionaires will be incented to save or invest a lot less, and consume a lot more of their wealth since they're going to lose it either way. (See, e.g. Larry Ellison's yachts as an especially obvious example of billionaires' consumption.) That's an "economic policy tool", alright. It's not as clear that it's a sensible one.
Their reputation shattered.
In seriousness, I did have a number of French clients fleeing to California after France proposed a wealth tax. One of them famously said (of California): "I love it here! Your taxes are so low!"
The downside of a wealth tax compared to other taxes is that it drains a corpus every year. It creates "financial anxiety" in the people it would target, similar to range anxiety in EVs. Even if the target could afford to pay the wealth tax and live comfortably for the rest of their lives of their children's lives, they are suddenly terrified that they will be taxed into the poorhouse if they misspend their money, and that anxiety drives them toward places without a wealth tax.
Switzerland isn't a good example of why a wealth tax would work, since it's openly acknowledged that nobody actually pays the correct tax on their wealth; it is the same reason that Swiss banks were the financial institutions of choice for criminals and dictators for decades. (If I was being too subtle: the Swiss are notorious for under-reporting financial assets, and their banks are even more notorious for hiding the assets of account holders.)
Capital flight in the US is logistically much more difficult than in europe I would imagine.
>"are billionaires bad for the rest of us?" That is the premise of a wealth tax, at least the currently popular one.
I don't think that's very accurate.. the wealth tax is saying "billionaires have so much excess money that they should be contributing on another layer than the rest of the population". While you can ALSO say "there should be no billionaires / they are bad", that is not what the wealth tax does.
Perhaps the core question is, "do billionaires owe a larger portion of their success to society at large than regular people do?"
Suppose we impose such a tax. How will that affect wealth formation and accumulation by not-yet-billionaires, and how will it affect existing billionaires? As you say, Bezos and Buffet would continue being billionaires, but if new billionaires became an impossibility, then such a tax will essentially be creating barriers to competition with existing billionaires! That would be a billionaire protectionist measure disguised as a populist measure!!
If we see existing billionaires support such a measure, then we'll know they likely don't see it hurting them. Kinda like when Buffet advocated for higher income taxes knowing full well he has no taxable income (all his "income" as most people imagine it is just unrealized -and therefore untaxed- capital gains).
Also, the biggest problem with any new tax is that without a hard cap on rates it's difficult to predict what it will be in the future. When the income tax was proposed in the U.S. it was said it would never rise above 5%, but marginal income tax rates in the U.S. have been north of 90% (yet, of course, these never reach the super rich as explained earlier). A wealth tax might come with "it will never be higher than 0.2%!" claims, then rise to 5% anyways. If it comes with such a claim, that limit needs to be baked into the Constitution.
Besides the intended political and economic effects of a tax, its unintended economic impact, there's the question of how much revenue it will raise and what that shall be used for. Leviathan never shrinks, so a decision to enlarge it should not be made lightly.
The US is also the only major country to demand citizens file US income taxes even though they may never visit or earn in the US for the entire year.
Taking ever more capital from the most effective/productive allocators and giving it to one of the least effective doesn't strike me as a good strategy.
A case like the Walton heirs is another story. I suspect we'd be better off taxing most of that wealth.
This sounds like a funny inside joke, but I don't get it. We are talking about the French actor, right?
"At least 10,000 wealthy people left the country to avoid paying the tax; most moved to neighboring Belgium"
https://www.bloomberg.com/opinion/articles/2019-11-14/france...
2. France is part of the EU, there are dozens of countries that French millionaires can move to with almost zero friction.
Moving to neighboring Belgium is like moving from New York to New Jersey.
So this is actually where the discussion should go: What properties does the Swiss wealth tax have (particularly in the wider taxation system) that the French wealth tax did not have?
What is needed for a wealth tax to have no negative effects? What about income and capital gains tax at the same time? Etc. etc.
I am not trying to make an argument pro wealth taxes, I am trying to make an argument against shallow and non-empirical arguments.
[1] https://www.businessinsider.com/4-european-countries-wealth-...
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For one, it pushes people towards riskier investments. At a 1% annual return, a 0.3% wealth tax is equivalent to a 30% income tax. At a 5% annual return, it's equivalent to a 6% income tax. This has various consequences, but a big one of note is that it makes it much less desirable to own government debt, which has a low rate of return, which means the government could end up having to pay significantly higher interest on the debt. It could also incentivize excessive risk taking.
Another concern is that it requires investments to be liquidated in order to pay the tax. Generally we defer taxes on investment income until the investment is sold in order to avoid this, because it can be quite problematic, e.g. you own 51% of your company but over time you're forced to become a minority shareholder just in order to pay the tax, or you owned 100% of it and are required to take on external investment over time just to stay in business. This also costs the government money because the government pays lower interest on borrowing than average investment returns, so paying 0.7% to borrow money in the interim while the investor is earning 5% returns on the money you'd have collected as tax means that when the tax is ultimately paid, the government ends up with more additional revenue than they paid in interest in the meantime.
It also increases foreign ownership of domestic resources, because domestic owners are forced to liquidate in order to pay the tax and domestic buyers are in the same boat so the liquidated securities go primarily to foreign buyers.
Another problem is that a lot of forms of wealth are hard to value. If you had a wealth tax and someone owned a piece of art, or some intellectual property, or shares in a privately held company, what are they worth? It's inherently subjective and estimates can very wildly. But then you're creating an opportunity for accountants to do their thing and avoid the tax. Waiting until the property is sold and then taxing the gain solves this neatly because then you have the sale price to go on.
Doesn't this assume the owner receives no other income? I assume owners either receive a salary from the company, or are paid a dividend with which they could use to pay the monetary-valued tax.
Or especially in the case of 100% owned company, the owner pays themselves a "bonus" equal to the tax. The company now is worth less, reduced by the amount of that bonus, so the owner's wealth has decrease and the tax has been paid.
Source: https://www.20min.ch/story/so-wenig-steuern-zahlte-der-ikea-...)
The family owned https://en.wikipedia.org/wiki/Interogo_Foundation which was valued at 15B in 2011 which controls IP and collects 3% of revenue from each store.
It's not strange at all. It's self-interest.
Although sometimes self interest is also a factor.
It looks like Keith did in fact reply to that tweet with a source, yesterday: https://twitter.com/rabois/status/1295357875187904512
Switzerland has no wealth tax. Individual cantons and municipalities in Switzerland have wealth taxes, and set the rates and exemptions.
The rates actually go much higher than 0.3%, up to 0.7% - 0.8% in some places.
> there is zero evidence that this has any deterrent effect on wealthy people settling in Switzerland or startups being created in Switzerland.
There is evidence that wealth moves between cantons to minimize the amount paid in wealth taxes (cf. https://voxeu.org/article/wealth-taxation-swiss-experience).
Not strictly contradicting what you said, but I take the implication of your statement to be "the wealth tax actually doesn't change people's behavior", but it seems to in some cases.
Literally, it is a demonstration by mathematics of the effect of a tax on capital.
Polemically, it is an argument by induction that a higher level of such a tax will discourage junior entrepreneurs from attempting to create start-ups in a jurisdiction.
What's clever about the polemic strategy is how it appeals to the hopes and fears of young entrepreneurs who have not yet accumulated great wealth, to recruit them to support the interests of older entrepreneurs who may have done so in the absence of the tax.
"Suppose you start a successful startup in your twenties" gets you hooked. You readily identify and strap yourself in for the ride.
"if you live for 60 years after acquiring some asset" appeals to your fears by tapping in to your understanding that once you are older, you will not have boundless energy, and unbridled understanding of the zeitgeist. You'll need protection then.
The young entrepreneur, with little wealth accumulated, consults the table, reads linearly down from the top to the lower right, building understanding, until bang 95%! At this point, he or she viscerally feels the pain of losing 95% of his or her capital, which, at this point, still being meagre, is unbuttressed by the psychological accoutrements that great wealth affords its owners.
The conclusion is genius.
"Even a .5% wealth tax would start to keep founders away from a state or country that imposed it. That's more than a quarter of your stock." Ouch! The budding entrepreneur must now pack up and move to have any chance at a decent life. The tax must be resisted!
My twitter client shows a reply from him yesterday, mentioning you, that points to an NPR link, which in turn cites this article: https://www.france24.com/en/20150808-france-wealthy-flee-hig...
Imagine I moved to Germany and kept stating “Germany should be more like America because X Y and Z.” Can you imagine how offensive that would be?
That would mean that the farmers would often have to sell off their land to cover a wealth tax on the land. Severing farmland is rarely permitted, so it would have to be entire parcels.
It seems like soon you'll find yourself without any land on which to farm. Which means that we'll start to carve out exemptions, like we already do with existing wealth taxes, and then the race to find loopholes begins.
We gladly support this idea, because it affects "the billionaires" but not when it comes to everyone else and for good reason. Repeated taxation on an asset can erode your wealth really quickly. Here in California, your house gets taxed on the purchase price, but not the current valuation. Therefore you have people sitting on more than one multi million dollar houses that they bought for low 6 figures 3 decades ago. (Ironically this is one of the main contributor to sky high real estate prices and housing crisis) But we don't tax people on those unrealized gains, that too again and again, because if we do, most people would lose all their wealth in a matter of couple of years.
Why is it so hard to understand the concept of a floor? If we only tax wealth above $10m or $100m, it will literally never result in "all of your wealth" disappearing.
> We gladly support this idea, because it affects "the billionaires" but not when it comes to everyone else and for good reason.
> Ironically this is one of the main contributor to sky high real estate prices and housing crisis
Right. We support it, but we don't do anything about it, even though it causes one of the most obvious policy problems in the state.
> if we do, most people would lose all their wealth in a matter of couple of years.
Like literally every other state? I'm sorry, no. This comment is internally logically inconsistent, ignores obvious examples to the contrary, and asserts itself as its own proof.
Maybe you missed it but he replied to you with this NPR article on Europe's wealth taxes, from which he sourced his comment:
https://www.npr.org/sections/money/2019/02/26/698057356/if-a...
An example would be the South African originated company Compagnie Financière Richemont SA. Apart from economy of scale reasons, the reason why they moved to Switzerland is absolutely the stability of that country. South African citizens, many pensioners, now pay tax in Switzerland on dividends. (Yes, you have a DT treaty that allows you to go from 35% dividends tax to 15%, but still paid in Switzerland. And yes, probably they spend tax money much better than the SA government.)
LVMH by contrast doesn't have to move around, but in theory could have moved to Switzerland if it were the only stable country around.
So, to be Devil's advocate, is Switzerland a well performing country when considered critically or do they get a lot of money that in practical terms is or was historically generated in other geographic areas?
Conversely, if you don't have any stable countries at all, and you're left only with an option like South Africa, then there are countless examples of companies that simply could not survive. By the way, South Africa's taxes are getting quite high and there is absolutely no correlation between tax rates and service delivery. My personal opinion is somewhat more focused on practical terms. My first question about a country is not about taxes, but about the poverty line and buying power; and then about environmental issues. South African's don't have much hope for governments making any kind of sensible decisions.
So it's not 0.3%, but a mostly constant yearly amount that may be much lower.
But when one person owns such a large percentage it really tips the scales.
I don't know how you'd solve this. Forced pay out to the owners when a stock goes public? There are probably negatives I am not thinking of. But it just seems like public markets let companies grow to levels so large that having an individual have such a large share doesn't make sense anymore.
Wealth taxes are one solution for what? For the anger people feel when they realize billionaires exist, absolutely. To improve the lot of the very poor, maybe (but an argument needs to be made here).
These discussions assume too much about the end goal of society.
vs. the article
"Even a .5% wealth tax would start to keep founders away from a state or country that imposed it."
> I'd like to see a more nuanced and thorough discussion, to be honest. Perhaps that's a bit much to ask.
Well, here you missed all the nuance, so...
It’s pretty easy to google. This article quotes the source as a report. (Though the link is broke ): https://www.france24.com/en/20150808-france-wealthy-flee-hig...
Someone not replying to you isn’t an argument when an answer is trivially found. That too me ten seconds to find. (Finding the report would take longer but should be doable)
I'm personally interested in reading the papers you mentioned, could I get the link(s)?
Do you have a source?
Maybe they changed recently, but from what I've read [0] it can be much higher. For example in Geneva that source shows up to 0.94%.
[0] https://www.expatica.com/ch/finance/taxes/switzerland-tax-ra...
Though the parts of Switzerland where the billionaire class settles have lower wealth taxes - they don't have their main residence in Geneva or Basel, but in canton Zug, ore even Obwalden/Nidwalden where the maximum wealth tax rate is 0.13% (and capital gains taxes are laughably low too).
There is no capital gains tax for private long-term investments in Switzerland (with the exception of real estate). However, dividends are normally taxed the same as income from employment.
wondering if 0.3% a good tradeoff for secrecy?
https://en.wikipedia.org/wiki/Banking_in_Switzerland#Banking...
2) The Swiss wealth tax is only charged on Swiss tax residents, so corrupt politicians who stash their money there won't be paying it unless they are Swiss resident (which is pretty unlikely).
Assuming an absurdly high 25% savings rate on your pre-tax income and a 25% tax rate on that income, boom, there's your 50% wealth tax. So the 45% wealth loss over 60 years in PG's toy example that ignores asset growth sounds totally fair to me in this light.
And with this "absurd" wealth tax on the middle class, why do we still have educated people from all over the world pounding at the door to get into the US? I would posit that it's for the same reasons that a wealth tax wouldn't suppress startups in this country.
As in, you can reside where it is nice to reside, and park your wealth where it is nice to park your wealth?
The truly rich don't reside in any specific place; they summer here, winter there ...
The model in PG's post appears to predict around a 12% "lifetime" (60-year) rate from an 0.3% wealth tax and thus suggests (at least to me) that this would be at most a minor concern for most wealthy people. So this does not seem like contrary evidence.
Got a peer-reviewed citation that there is zero evidence? Or is that your opinion?
Here's some evidence on Swiss rich mobility [1]: ".. tax records of two cantons with quasi-randomly assigned differential tax reforms suggest that 24% of the effect arise from taxpayer mobility .." [4]
Taxpayer mobility.... means rich people moving for tax reasons, correct?
Many countries had a wealth tax; almost all of them dropped it because it did cause capital flight and didn't generate much revenue compared to the costs. Switzerland was late to that party, and will likely drop theirs for the same reasons.
Here's but one paper on the actual effects of the Switzerland wealth tax:
[1] "We estimate that a 0.1 percentage-point rise in wealth taxation lowers reported wealth by 3.5% in aggregate. Expressed relative to taxable capital income flows, this implies a net-of-tax elasticity of roughly 1.2, which is large compared to the elasticities typically estimated in the income literature. The elasticity of tax revenues with respect to tax rates is only -0.2"
So you see it's already pushing wealth out of the tax base.
As to where wealthy people settle, look for the papers on wealthy moving between Swiss cantons to get the best tax advantage (the tax rates are by canton). So there is absolutely evidence of rich moving to take better tax advantage.
>Wealth taxes and their effect have been studied quite a bit in economics literature, and there are various peer-reviewed papers that attempt to measure the effects, but the Silicon Valley crowd is strangely avoidant of examining evidence or explaining their opposition with real-world data
Yes, there is ample economic evidence. It's odd that those pushing for one in the US ignore the past case evidence.
For example, [2] shows that a wealth tax does lower entrepreneurship, in [3] Stiglitz shows that a wealth tax does have a negative effect on investment and increased risk-aversion.....
Google scholar has lots of papers on what happened to countries that implemented such taxes, and why those taxes got dropped.
[1] https://www.nber.org/papers/w22376
[2] https://journals.sagepub.com/doi/abs/10.1177/097135570801700...
[3] https://www.sciencedirect.com/science/article/pii/B978012780...
[4] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3471248
For example, one of my partners literally hired ex-minister of finance to do taxes and even then they wasn't able to avoid various taxation penalties.
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I've seen this pattern from PG and other people in tech over and over. They assume their expertise in one domain translates into other fields in which they have no special knowledge. Underlying a post like this is the arrogant assumption that nobody smart has ever thought of calculating .99^60, and that PG knows what's best.
Paul Graham is hopelessly out of touch.
In other words, you can have a wealth tax without detrimental effects, as long as you keep taxes low otherwise? What's the point then?
Wealth tax proposals I've seen don't kick in until $50 million or $100 million. This means that there is a floor on how "poor" the government can make you via a wealth tax.
This has two implications:
1. Most "successful" startup founders don't break that threshold of personal wealth.
2. For most startup founders, the startup is the only way to get to $50 million. The practical lifestyle difference between $50 million and $1 million is a lot larger than the difference between $50 million and the unicorn-founder $ billion.
Furthermore, as noted by glutamate: money earns money. A conservative drawdown of 3% pay the most commonly proposed wealth tax while still leaving you wealthier at the end of the year.
I can't see many people that have already accrued personal wealth of $50M but choose to keep working suddenly being turned off because of a wealth tax.
That's not the argument. If you accrue a wealth of $50M because you own half of your $100M company (or 100% of your $50M company), then a wealth tax will — over time — force you to give up ownership in your own company.
An income tax or a capital gains tax on the other hand, has the effect that you describe: if you already have $50M, then any tax on more money than could possibly have close to 0 negative impact on productivity.
ACME startup raises Series C @500M. Founder equity is worth 100M on paper. Founder needs to borrow money every year to pay 'wealth' tax. After 10 years of struggles, company sells for $100M, VCs get money back, founder makes no money. But now founder is millions in debt for past 'wealth' tax payments. Founders will be declaring bankruptcy in those cases. And interest rates for wealth tax loans will skyrocket as a result, making effective wealth tax rate much higher.
Problem is startup founder 'millionaires' and 'billionaires' are only that on paper. Any asset that is volatile (like startups) will become impossible to own long term even with a small wealth tax.
Maybe you could pay it in shares, so no borrowing required.
Or maybe for illiquid assets including non-public stock it could be warrants that you only have to settle at a liquidity event.
It's a strawman to assume a wealth tax will be set up in a broken way when non-broken ways are possible.
Some places the rules have changed a bit to avoid some of these cases where people owe more tax that they can pay, but it can still happen.
That’s just the starting point. Once people begin to figure out how to avoid it or have been tapped then the qualifier will be lowered to 40m. And then eventually 30m and do on until anyone above average is paying it. And then anyone above median.
The state will, as always, become reliant on it and find ways to expand it to wield more power and pay debts that were taken on to “collect/spend in advance” as they’ve done countless times.
This is why people that will likely never meet today’s threshold are against these schemes. These things always get a wider, and wider net until anyone just starting to get ahead is caught in it.
This hasn't been true for the income tax [0], nor the capital gains tax [1], nor (at least in Silicon Valley) for real estate taxes[2], which are closest to a wealth tax. It's a reasonable thing to consider, but given the evidence we have, should not be a driving consideration.
[0] https://bradfordtaxinstitute.com/Free_Resources/Federal-Inco...
[1] https://en.wikipedia.org/wiki/File:Federal_Capital_Gains_Tax...
[2] https://www.boe.ca.gov/proptaxes/decline-in-value/
edit: I was misinformed re: income tax, tracking only the top rate.
You can see this on a variety of topics. Gun control legislation, immigration reform, healthcare reform, etc. Reasonable laws are perpetually overshadowed by the boogeyman on the horizon.
The avoidance issue is a big one and the mechanism of making sure people pay is at least as important as where one sets the floor. Cross border capital flows can be pernicious.
Piketty gets into how different rates of capital accumulation create huge rifts between people who own appreciating assets like land and equities and people who don’t who primarily earn wages. The idea behind the wealth tax is to try and narrow the rift.
The problem with wealth taxes is not slippery slope, but rather that wealth can be obfuscated and moved around much more easily. Transactions are easy to tax; wealth worth taxing is about what you control, rather than stuff you have.
There's good reasons the most successful wealth taxes are land taxes. You can't easily move land.
I think it's arguable that taxes only ever go up. Income taxes on the rich used to be near 90% in the top bracket, so it's not a one way ratchet. That said, I agree government tends to expand and needs to fund that growth somehow. But I think it's much more likely that need manifests as an increase in the wealth tax rate rather than a lowering of the wealth threshold. The billionaires have so much more money than everyone else (and so much more than they need) that it will be much more politically popular to raise the wealth tax on them than it would to expand the pool. Not to mention, there are more of us.
I'm not advocating a wealth tax, and I think it's problematic for other reasons, but I don't think the slippery slope argument is much more than fearmongering in this case.
[0] https://en.m.wikipedia.org/wiki/Slippery_slope
No, they don't. You only have to go back a couple years in the US for an example where tax rates for the wealthy were massively cut.
Dead Comment
Personally, this and income tax increases make me seriously consider moving out of CA (where I’ve been a resident for a very long time)
That is only true if your wealth is in diversified ETFs or funds. That is not where most of the wealth of super-rich founders is. If 90+% of your wealth is in a single company (I.e. the one you founded), then there's no guarantee that this wealth will necessarily appreciate on its own (esp relative to inflation).
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S&P 500 has a long term annualized return of 10%. If you have a 5% wealth tax on stock you have in S&P 500 then you are still earning 5% returns (well above long term average inflation) without actually lifting a finger.
There is no guarantee that the single individual super-wealthy founder whose wealth derives from the ownership of their own company will appreciate at an annualized rate of 10%.
The two most pervasive myths about wealth among the super-rich appear to be:
1. They are sitting entirely on liquid cash
2. They are sitting entirely on highly diversified funds that enjoy 5+% annualized appreciation.
Dead Comment
B) I know people who were bankrupted by existing tax laws - had shares in internet companies during the dot com boom; company IPOd making them paper millionaires, thus owing millions in taxes, but had 6 months lockup. By the time the lockup expired, company went bust, nothing to sell to cover the tax bill. Any law that takes valuations into account (as a wealth tax law is bound to) is likely to wrong some people in a similar way, especially entrepreneurs and early employees.
I personally think there are too few of the big, risky ventures these days, and too many low value-at-risk software-only startups (aiming to be bought up by a FAANG), but that is just an opinion.
Discourage starting a company at all? Probably not, but the article does not suggest that. Do you think it might influence where they start it? Looks reasonable to me, at least qualitatively.
This has always been the argument, and I've never bought it.
Now, more than ever, is the time to start a company remotely, thanks to Mr./Mrs. Covid. Have we seen a massive move away from SV and other tech centers? Have we seen a massive wave of startups in 'flyover' country?
It'd discourage the people who pay the bills (VCs, wealthy, etc.) from living in those states. Founders would simply follow the money to other states as they have done in the past.
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Nevertheless, I’m now at risk of having a six figure tax bill every year for paper wealth that is 100% illiquid.
If this passes I would be leaving the state and guarantee you I would NEVER found a startup in California again.
The very first U.S. income tax, imposed during the Civil War (the nation's bloodiest conflict), was 3% on income over $12,720, rising all the way to 5% on income over $159,000 (in 2020 dollars). This was unconstitutional at the time, and was eventually repealed.
The first income tax imposed after the ratification of the 16th Amendment was 1% on income over $78,510, with an additional 6% on income over $26,170,000 (2020 dollars).
The current U.S. income tax ranges from 10% to 37%, with a standard deduction of at least $12,200. There are also payroll taxes under FICA, which are even more.
I recount all this riveting history as evidence for my contention that there is absolutely no way that a wealth tax would remain at 1% for anything above $50 million. I guarantee that within a few years to decades most citizens would be required to pay wealth taxes, and that they would amount to a considerable amount even before taking into account their compounding nature.
> This means that there is a floor on how "poor" the government can make you via a wealth tax.
The only floor is zero: a government can, if it chooses, take everything from its subjects — or just from some of them.