Agreed, but I think our conversations around wealth and income are missing a broader point. Concentrating wealth means concentrating decision making power in our economies, which in turn means that the actual productive capacity of our economies artificially gets pulled toward serving needs that do not necessarily serve a broad public interest. Examples of these kinds of industries include the building of mega yachts and mansions, the private jet industry, much of the financial industry, and so on. The people in these industries could be working on things that benefit a larger share of the population, but they don't. Why? Because the existance of wealth inequality inflates wages for industries that serve the needs of the very rich.
It seems very much about concentration of wealth. For multiple reasons - political power, reduced overall spending in the economy, built-up resentment, leverage to create oligopolies, etc....
Now, would a wealth tax change any of that? Hard to say - depends on how it is done, and how it is applied, and how easy it is to get out of it (how many loopholes can the wealthy buy).
I'd be fine with a very small wealth tax (like a fraction of a percent), or, better, some kind of trading tax (aka Tobin tax). But I don't think it's necessary as long as you at least have a steeply progressive income tax (including negative rates at the low end), and count ALL income (including capital gains -- though only _realized_ capital gains, the folks pushing for an unrealized cap gains tax are kind of nuts, IMHO).
The bigger deal to me is that we ought to have a "universal basic wealth" program, so that claims on the productive capacity of the economy are constantly being diffused out to the whole citizenry, rather than left concentrated in a few hands. The obvious way to do that is:
(1) Create a Sovereign Wealth Fund, which is going to over time buy stakes in, basically, everything.
(2) Do something like Cory Booker's Baby Bonds program to help bootstrap people into having a little wealth.
(3) Scrap the entire private account system for defined contribution retirement plans, medical savings accounts, etc, etc. Move all of that into a system of accounts that make claims on the SWF. You can slice the SWF into target date risk tranches, as an accounting mechanism. (This will look quite similar to what Betterment or other roboadvisors do right now. The technology to manage it exists, you'd just have to scale it up to a much larger amount of assets and a larger population.)
(4) Set up postal banking, and use that as an access mechanism for folks SWF investments. (As a fun side benefit, you now have a place to distribute UBI -- everyone with an SSN / ITIN has a postal checking account. And furthermore, you can let the Fed adjust the UBI up and down to a degree, creating a perfect Helicopter Drop channel that they can use as part of monetary policy.)
(5) While you're at it, you could simply process all paychecks through people's postal bank checking accounts, and only tax income when it's withdrawn. If they want to save/invest some of their income, they thus automatically get a tax break for it. This effectively changes the income tax into a consumption tax. You can also just default people into investing, say, 10% of their income (with options to reduce or increase that to some degree), into a target-date slice of the SWF matching when they turn 65. This serves as an add-on defined-contribution retirement benefit. (Rather than the Bushies' private accounts version that they were trying to carve-out from Social Security.)
"The bigger deal to me is that we ought to have a "universal basic wealth" program, so that claims on the productive capacity of the economy are constantly being diffused out to the whole citizenry, rather than left concentrated in a few hands."
This is so accurate it gives me chills.
Why and how are claims on the productive capacity of the economy concentrated in fewer and fewer hands?
There's one underlying reason that supports all the tertiary reasons, IMO. Understand that reason, and you might find a much more streamlined, elegant, and even revolutionary solution that would solve the exact problems your proposals are aimed at.
Yeah, the fact that money fundamentally is pushed into the economy as loans, is also the point Thomas Piketty is making, in the argument about how as long as r>g (the real rate of return is greater than the growth rate), _inevitably_ wealth has to be getting more concentrated.
I'm not optimistic about Bitcoin as an alternative, because I think the built-in limited issuance is _also_ a problem. In the long if you were really trying to use it widely, the limits would put _deflationary_ pressure on the economy, which is also problematic. (And then there's the expanding energy footprint; you can get around that with proof of stake, but that just shifts the problem back, since it allows those who already have large stakes to exercise control and accumulate more.) But I think the combo of UBI (with adjustments to the rate serving as a partial replacement for the Fed's current approach to monetary policy), and continuously diffusing ownership of a sovereign wealth fund through the baby bonds program, really could do the trick.
Deflation is a problem to a debt based monetary system because falling collateral prices expose the insolvency in the system. It's not a problem for the actual economy.
Getting more goods and services with less effort, deflation, is the whole purpose and effect of technology.
The people who are accumulating wealth today already do so by using essentially a limited supply issuance, deflationary, "money" as their store of value. They don't keep cash under the mattress, they buy Apple stock. The fact that Apple stock is deflationary and increases in value over time doesn't hurt anyone. The fact that the dollar decreases is inflationary and decreases in value over time hurts the working class, who have a larger percentage of savings in dollars and who's wages always lag behind the rate of inflation.
Wealth redistribution is the problem, not the solution. Whether it's by banking or taxation or UBI, the central planners will always argue that more of what's failed in the past is the great new solution. If only they could redistribute a little bit more, they'd finally get us to utopia. I'm not buying it.
Luckily there's no need to make a case for Bitcoin. It's a technology, and real world performance is both the proof of concept and the reward for early adoption.
Norway has a sovereign wealth fund.Norges investment bank.They own around 1% of the world's companies,govt and corporate bonds.This funds pension income for retired people basically as a simple explanation.Share price growth and dividend income growth,a money tree forever.
You could view a 401K as your own personal sovereign fund .Share price growth and increasing dividends to fund your retirement .
Australia has had DC contributions to fund retirement since 1986.This is compulsory.The starting figure was 3% of wages increasing to 12% of wages next year.People starting work in 2000 will have the full benefit ( or curse) of this system.A 50 years working life @ 25 years of 9% increasing to 12% contributions,and 25 years of 12% contributions. Taxed at 15% going in rather than marginal rates which would average around 25% for Joe average.
Adjusting for inflation,average growth rates over 50 years etc then they can be expected to retire with 6 to 8 years of average income in say 2050.
Should this have been the case from the start then retire in 2026 with 6 years ( low end ) income. Around $600K.Draw down 10% of that for say 25 to 30 years of retirement and things look good.Plug in an 8% growth rate over that period and you die with quite a lot of that money still intact to pass on to heirs.
This of course depends on long term average growth rates continuing. From inception to retirement will be the transition period from being dependant on govt support to being dependant on your own SWF.Govt support will kick in if you need help as pensions are means tested now ,and have been for a while.So baby boomers are either self funded ( me),or a mix of self funding and govt pension depending on how wealthy you are.
If people start work at 16 then the people born in 2010,that may die in 2100 at the age of 90,will have the full 12% of wages going into stock markets for 50 or 60 years to fund their retirement and ease the burden on younger generations to pay for their pensions ( social security).
This may be a wonderful thing ,a DC pension rather than the now almost disappeared DB pension.This may also be one of the biggest mistakes made.People that are 14 years old now and on the verge of what hopefully will be a wonderful adult life will know when they retire in 2080 approx.
"the folks pushing for an unrealized cap gains tax are kind of nuts, IMHO"
As BusyBusyBee and I are mentioning in these comments, these people are trying to address the "Buy, Borrow, Die" cycle. What's wrong with periodically requiring people to sell extraneous assets?
The problem with taxing unrealized gains is that you then have to account for unrealized _losses_ somehow as well. (Do those create a refundable credit? So the government is paying out welfare to rich folks when asset prices go down?)
I'm 100% in favor of forcing mark-to-market on inherited assets, and rolling back the cuts to the state tax that Republicans have pushed through. Neither of those is anything like actually trying to tax unrealized gains directly.
"The problem with taxing unrealized gains is that you then have to account for unrealized _losses_ somehow as well."
No you don't. If I lost my job tomorrow and lose everything to repossession or what have you it means jack-all on next year's income taxes (everything I own is already covered in the standard deduction, and we aren't talking casualty losses that are additional deductions). Why should this be different for a person who owns stock?
Taxing capital gains in a fractional reserve fiat currency system is extremely perverse. It's horrible because a lot of capital "gains" are nothing more than a measurement of inflation.
Take housing for example. If you buy a brand new house in 1990 for $100,000 and sell it today for $300,000, how much did you gain? Is a 30 year old house worth 3x as much as a brand new house? Of course not! Can you buy a brand new house today for $300,00? No, it costs $500,000 now.
So what's the $200,000 capital "gain"? It's just the loss in value of your denominator, the dollar, after 30 years of inflation.
Inflation is a covert tax levied by the private banking system conspiring with the government to enrich both institutions at the expense of the working class. So instead of putting that $100,000 in your checking account and watching it evaporate over 30 years of inflation tax, you buy a house to at least slow the bleeding. Now 3 decades later, after hopefully treading water in terms of purchasing power on your $100,000 "investment", the government is going to get that inflation tax out of you anyway by taxing your capital "gains"?
I'd also say if you're going to do a wealth tax at all, the only practical way to do it is as a Harberger tax, aka a COST Tax (Common Ownership Self-Assessed Cost).
Basic idea is that you have to declare the value of your assets, and pay tax based on that value. The incentive not to under-declare is that if somebody comes and offers to pay you that value, you _must sell_.
Usual epicycles on this include:
(a) You can decline to sell if you raise the declared value and immediately pay some back taxes and penalties for having under-valued.
(b) You can file a mid-year re-assessment any time you want, and pay the marginal tax on it without any penalty. (Could be necessary in an environment where some kind of assets are appreciating very rapidly.) You also get some kind of grace period if somebody makes an offer on something that you only priced a month or two ago that has appreciated.
(c) Maybe the offer required to force sale has a multiple over the declared value, like 1.2x or something, just to allow people a little room for error.
It would be a real burden if _everyone_ were subject to something like this, but if we're only talking about taxing those with truly large fortunes, like $100M and up, they can afford good accountants to take care of it.
Of course people would _try_ to conceal ownership of certain assets, but that's a thing that happens already, not a new problem. And you'd have an entire new slice of the tax-lawyer world where people are trying to spot undeclared assets (which they can treat as having been declared as zero-value, and hence seize from the current owner, in exchange for just paying the government the back taxes on it, which would only be a fraction of a percent per year that it was hidden), and even with declared assets, keeping an eye on each other to make sure nobody's lowballing.
"The incentive not to under-declare is that if somebody comes and offers to pay you that value, you _must sell_."
Some people are willing to pay more than the market thinks something is worth just to screw with others (or because they have an idea that they think may make the thing more valuable, whether they are right or not. But if they are wrong, then both they and I are harmed in your system).
I, for one, would hate to be forced to sell something that I have sentimental value for for even above market value. And yet if I valued it at more than the market values it for, I'd risk being ruined with taxes and be forced to sell it anyway to cover those taxes.
So how is this supposed to work?
It's far, far better for all involved to have an independent party appraise market value.
If this is just an issue among folks with fortunes over $100M, I sort of feel like, if those folks want to blow enormous amounts of money to spite each other, and it leads to our government collecting more taxes so it doesn't have to charge as much tax to the middle class, then... winning?
Like, what's the scenario you're imagining that's such a big deal? Elon Musk decides he's willing to make an offer on Jeff Bezos' yacht, at 20% over the listed value, and Jeff Bezos has to decide whether to raise the declared value and pay the incremental tax, or sell the yacht? And maybe Elon keeps jacking up his offer even if Jeff raises the value, and at some point Bezos says, "OK, fine, I'll sell it to you at double what I think it's worth, and go buy a new one." Poor, poor Jeff. Pardon me while I fetch the world's tiniest violin.
And as far as people mis-assessing the value, that is exactly how markets work today. People can buy up shares based on a mistaken over-assessment of the worht of the company. Private equity companies can take a company private because they think they'll be able to raise the value, and be wrong about it. If they lose their shirts doing it, I'm a lot more concerned about the little people at the companies that they lay off, than I am about the PE investors.
Billionaires can offer to buy out a thousand regular people, but those people shouldn't be compelled to sell.
You when buy stock in a company you are often required to agree to clauses that allow a majority vote of shareholders to sell everyone's share to an offerer. This shouldn't be the case with the vast majority of other belongings.
Another example to illustrate my point: if a drunk at a bar told you that they were going to save humanity by putting microchips into people's brains to turn them into super-human cyborgs, you would quietly find someone else to talk to. If that person was Elon Musk, there would be an international team of scientists experimenting with putting chips in pig brains within the year. Isn't Bezos running some project that's trying to figure out how he could live forever?
If you add up these parts of the economy, plus the production of mansions, private jets, mega yachts, passing around financial assets, and so on, it's probably not an enormous percentage of the global economy. But it's also not zero percent! It's a real cost that the rest of us pay.
Are you kidding? If a guy at a bar said he was going to save humanity by putting microchips into peoples brains to turn them into super-human cyborgs, I would buy him a drink, that sounds like an incredible bar conversation.
But more seriously, I get your point, but I think examples like Neuralink are actually evidence against it. Private yachts and jets, though cool to look at, don’t benefit the average person (they are a way to take wealth and distribute it to the workers and manufacturers, though). But the research towards Neuralink has lots of potential benefits for everyone, not least letting paralyzed people to walk again. That’s a pet project that does have benefits for the broader population, or at least potential for it.
A marginal dollar for Elon Musk's experimenting with crazy shit is worth a lot more to humanity then your average marginal dollar of government spending.
"This firm was there before the first transistor was printed, and it will be there after we receive brain implants. One investor funded the computer, the internet, speech recognition, last-mile distribution, mapping the human genome, the core technologies of fracking, and the first horizontal shale drill, and today it’s driving down the cost of solar and wind power below that of coal. Even better news: If you’re a U.S. taxpayer, you’re a limited partner."
It's really rich in data to show how U.S. government subsidies to technology have been key drivers to success -- with 43% of research funding coming from the government.
True, what am I saying? That would be one interesting night!
And I take your point that something like Neuralink has potential benefits, maybe that's a bad example. My point is simply that the guardrails to truly bad ideas are significantly lower for the very wealthy.
I think it's also important to think about how the ratio of CEO/executive pay/dividends/stock gifts were much lower compared to the average worker salary in the past.
At the end of the day/tax year all that money probably *still* accumulates to the top of the tax table, but the difference was it passed through the hands of their employees and their communities first before getting hoovered up to the stratosphere of wealth.
Plus, stock buybacks by companies were *illegal* so there was no temptation or the ability to spend $10 to $100 billion on stock buybacks over a couple of years. That's money that probably rightfully should have been rising wages and employee benefits, and genuine research and development investment. Instead it's just going into a future investment towards more self enrichment by the executive and investor class.
There's a RAND report that says basically "The top 1% took $50 Trillion from the bottom 90% of Americans." That's an awful lot of lost economic productivity and individual income for the rest of us.
Not only did they get to take a shit load of economic growth from the rest of the country, they also benefited from getting favorable tax treatment in the post Reaganomics haze. That made their ill gotten gains all the sweeter, and denied rightful funding of our government and programs that previously benefited the average person.
Yes, but that is a function of how the income of "wealthy" people is taxed. Their consumption rather than their incomes could be taxed lending to more investment.
While a bunch of the profits absorbed by the financial industry are higher than I think make sense, the function they serve in allocating scarce capital is much more valuable than is often given credit. On the margin investment on business fundamentals, basic loan services, or insurance, or commodities futures service very tangible needs. More complex instruments that glue these together in simple or more exotics ways often just are ways to allocate more capital to these services with collective risk hedging (and to get more fees in the process). We are better served on net with robust financial services than not.
It's not up to you or me to tell people what they should be working on, unless you have an authoritarian bent (I'm not saying you do). But, if somehow allocating labor and capital only to those things that you deem to be "things that benefit the larger society", I can think of a whole lot of professions/industries that outright damages society (let alone not benefiting) other than building yachts.
> Concentrating wealth means concentrating decision making power in our economies, which in turn means that the actual productive capacity of our economies artificially gets pulled toward serving needs that do not necessarily serve a broad public interest.
You are not thinking of second and third order effects. Money is societies' debt to someone that has already made their contribution to it. If people can't spend money on things they enjoy, ie jets, they will not work hard past a certain point (that point being the point that is arbitrarily defined by people like you). Why would Jeff Bezos grow Amazon past $1 billion (or whatever arbitrary cutoff point) if there was no reward for it? What you view as inefficiencies in the system I view as incentives. And it's also a mistake to think that the money spent on yachts, mansions, and private jets solely goes into their construction and not into building human capital and research during the construction of these things that can then be applied towards other areas.
> The people in these industries could be working on things that benefit a larger share of the population, but they don't
Using this argument, we should cut all funding towards any entertainment or amenities and the only thing we should be researching is medical technology. Eating at a nice restaurant is waste, birthday party? also waste. Why aren't you eating your bug protein slurry?
Do you seriously think Bezos grew Amazon because he wanted to go from $1B to $2B - beyond some point, wealth becomes useless for spending except as a lever to buy or increase power and more wealth.
Incentives are great for starting to accumulate wealth and take chances, but we are talking about wealth way beyond "incentives".
Yes, money spent on mansions and yachts goes into the economy, but we know that if you put money in the hands of poorer folks, more gets directly spent and there is a higher money velocity. It is simply hard to go out and spend $1B, but 1 million people could easily and usefully spend $1000 each.
> Do you seriously think Bezos grew Amazon because he wanted to go from $1B to $2B - beyond some point, wealth becomes useless for spending except as a lever to buy or increase power and more wealth.
No I don't. That's why I said if you don't have incentives for growth people will stop growing the companies. If there was 0 incentive to grow Amazing past $1 billion valuation he would have stopped growing it.
> Yes, money spent on mansions and yachts goes into the economy, but we know that if you put money in the hands of poorer folks, more gets directly spent and there is a higher money velocity
Ok, so now we are advocating for wealth confiscation? How does that factor into your previous point about incentives and Jeff Bezos' motivation.
And as the article you are literally commenting on states, there is not enough wealth in the world to do it.
Companies always try to keep growing - first because the stock market demands it of any public company or bosses get fired. So, yes, that is an incentive (although a perverse one in terms of focusing on long term success).
Yes, if every profit of Amazon was taxed 100% and it was private (so not killed by the stock market), then it would probably stop growing. But no one is arguing for that kind of taxation. No one has argued for 0 incentive for investment and growth. Seems like a red herring. Now, if you want to argue that if Amazon was going to get 1% less profit and it would just stop - but I don't think that is what you are suggesting.....
All taxes are some form of confiscation - I just get taxed at a much higher rate than poor Amazon or Jeff Bezos....
Yes, because there are incentives to growth. Namely more money.
> first because the stock market demands it of any public company or bosses get fired.
Again, not how it works for founders that have controlling interests in the company. Also, why do you keep assuming it's a public company? In this theoretical world where the incentive to grow for the founder is removed, they would just not make the company public.
You have this belief that company founders will just go through self flagellation because companies *must* grow. There are already many billion dollar companies that choose not to go public because of the increased scrutiny and reporting requirements.
> No one has argued for 0 incentive for investment and growth
I mean, we are going off a throwaway line that private planes are clearly bad for society so nobody should be able to buy them. Typically arbitrary lines like that change arbitrarily. Nobody really needs a pool in their backyard right?
> All taxes are some form of confiscation - I just get taxed at a much higher rate than poor Amazon or Jeff Bezos....
I highly doubt you are taxed less than Jeff but maybe you should advocate for lowering your own taxes?
"Why would Jeff Bezos grow Amazon past $1 billion (or whatever arbitrary cutoff point) if there was no reward for it?"
Because he's required to under the shareholder doctrine.
"Using this argument, we should cut all funding towards any entertainment or amenities and the only thing we should be researching is medical technology."
Entertainment is a requirement for human wellbeing.
> Because he's required to under the shareholder doctrine.
Not when he has a controlling interest in the company.
> Entertainment is a requirement for human wellbeing.
Ok, and yachts and private planes are really good entertainment. So since you are now dictator of the world, where do you draw your arbitrary line for what entertainment is acceptable? Is it 100 inch tvs?
"Not when he has a controlling interest in the company."
Minority owners have rights that the majority owners are legally required to respect. A majority owner can't fail to fulfill their obligations to minority owners.
"So since you are now dictator of the world, where do you draw your arbitrary line for what entertainment is acceptable? "
I just use the legal doctrine of the "reasonable person".
> Minority owners have rights that the majority owners are legally required to respect. A majority owner can't fail to fulfill their obligations to minority owners.
I'm not a lawyer so I'm not going to try to discuss the nuances of shareholder rights. I am someone that owns a company and I would not take my company public in your ideal world and I would also not grow my customer base beyond the point where I stop receiving incentives for it. Since my company is private I'm not subject to any of what you've described.
> I just use the legal doctrine of the "reasonable person".
Yes, relying on people being reasonable has always worked out well. I use the legal doctrine of let people do what they want and try not to be an authoritarian.
I am also not a lawyer. You should also refrain from granting stock to any other person. I'd recommend only raising funds through bonds or loans. I would guess that the duty of care you owe a bond holder or other lender is less than the fiduciary duty of care you owe a minority stock holder.
"Yes, relying on people being reasonable has always worked out well."
Let's say you taxed people. What do you think it would be spent on?
I'm betting government would feed it into the Eds and Meds industry, because that's where it feeds basically every marginal dollar (for a worse case, maybe the defense industry).
I think what we would be doing is mainly transferring assets from one class of wealthy people (entrepreneurs) to another class of pretty wealthy people (doctors, hospital administrators, etc). It's not clear that what the government buys would be that much better than whatever incentive consumption has for entrepreneurs.
If such taxes were more like Alaska's citizen dividend perhaps I could get on board, but that's a rare use of a marginal tax dollar.
Every dollar the Government spends can be put in three buckets: Benefits to me,
benefits to others in their rolls as citizens, benefits to others in their roll as rent-seekers. I prefer to think of Government as representing me when the first bucket is full, when the second bucket is a fair amount relative to what is in my bucket, and the third bucket is empty.
A fair look at our Government suggests that it does not do a very good job of this. Hence, it is hard to think of the Government as "me".
I think a good book for reference is History's Greatest Heist: The Looting of Russia by the Bolsheviks: https://www.amazon.com/Historys-Greatest-Heist-Looting-Bolsheviks/dp/0300135580. In this book, Sean McMeekin pointed out that Lenin actually did try to liquidate all of the Tsar's assets, savings and stocks of companies, even the Church holdings in Russia to fight the Russian Civil War and spread the revolution; but by the time he actually did it, all of these things became worthless due to the Revolution's upheaval (and also due to the effect that you mentioned earlier!). Only the Tsar's gold reserve was actually liquid, and the Bolsheviks nearly ran out of it in just 2 years!
A great documentary you could also look into is World War One - Episode 8 from StarMedia (a Russian movie firm): https://www.youtube.com/watch?v=WzqRtYd911A&list=PLwGzY25TNHPAdEyAB5NwQsNC6ujpW90Pf&index=8&ab_channel=StarMediaEN. In this episode, a lot of Russian people thought that with the Tsar's abdication, now they don't need to work anymore (since it was a social revolution). This led to large-scale famine that Russia had not seen before, even during WW1!
If you see someone driving a $200,000 car, the only data point you have about their wealth is that they have $200,000 less than they did before they bought the car. Or they’re leasing the car, which truly offers no indication of wealth.
We tend to judge wealth by what we see. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Vacations. Instagram photos.
But this is America, and one of our cherished industries is helping people fake it until they make it.
Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see.
Wouldn't the above take combined with the stance in your post combine to establish a third kind of wealth? Productive, nonproductive and counterproductive, each dialectical rather than absolute?
The baseline connector here is that money in the bank is only wealth to the degree that the strategy is not saturated and productivity is competing for those dollars "directly." Likewise, the degree to which lending is a nonsaturated strategy and forwarded to productive use can be considered proportionally productive as what is produced/consumed.
Counterproductive wealth, then, would extend beyond the more obvious "political warchest" and influence peddling/laundering where relative wealth equates to change-leverage writ large, selecting for those who buy and protect that leverage. Counterproductive wealth would also include "empty" purchases such as status signaling, because it removes the competition for saved dollars, and places it in the realm of luxury bid pricing. The signal is only so effective as it is rare, and therefore distributively effective and dialectically priced.
The more interesting question would be whether advertising dollars, and worse, advertising pipelines, mirror this same empty dynamic where in order to inform, you must add to the total noise, and it can only be so informative as the strategy is nonsaturated. It doesn't take 5 video ads, 3 "read more" buttons and zero answers to see that it is saturated.
The simplest explanation is that restraints on production (especially of housing) are causing both higher wealth for incumbent asset owners, and lower real incomes for everyone else.
Great article, i remember worrying many years ago, starting in the 70's actually, that America was living off the wealth created by the greatest generation, as if withdrawing from a savings account and not building enough infrastructure and factories, etc. to replace what was aging. This got much worse of course with the emergence of hedge funds in the eighties and the obsession with making a quick buck, buying companies and selling off assets. Now, instead of investing in infrastructure and dealing with climate change we are pouring investment into AI, which we can't eat, sleep in or work for.
I am not an economist, just someone who finds Noah’s observations interesting. I’m curious how you tax people who, instead of drawing an income or selling assets to fund their lifestyle (both taxable), take loans against their wealth and live off of that money? Or those who draw a $1 “salary”, but who are otherwise compensated in stock? Etc. etc. How do you suggest taxing folks like this? It’s not like they’re not living in our society and enjoying the same privileges of that society as the rest of us
"I’m curious how you tax people who, instead of drawing an income or selling assets to fund their lifestyle (both taxable), take loans against their wealth and live off of that money?" <-- You end the tax deduction for interest repayment. Actually, Trump partially did end this.
"Or those who draw a $1 “salary”, but who are otherwise compensated in stock?" <-- Stock compensation is taxed like ordinary income.
“ Actually, Trump partially did end this.” - For corporations they did their weird 3 step thing, but, what about individuals? I know the mortgage deduction was changed and they doubled the estate tax deduction allotment - both expiring next year. But what did they do for billionaires and their loans? I’ve read a bunch of stuff about the TCJA and can’t find anything there. Is it somewhere else (like not in the TCJA)?
"You end the tax deduction for interest repayment."
How does this help if they have no taxable gains in the first place? (Because they haven't sold their capital, they're just chaining loans forever.)
"Stock compensation is taxed like ordinary income."
But the capital gains that accrue to retained stocks from stock buybacks isn't taxed like ordinary income. So they pay a front-loaded ordinary income, but can either fully deduct any losses from the 36% rate in the future, or take future gains under the reduced capital gains rate.
Capital gains rates and income rates should equalize at some threshold.
Likewise we need to cap the step up basis and some of the other mechanisms that limit taxation at death. Perhaps you defer the taxation (at the cost of interest) but not to the point of finding a way to never pay it. We need to close those gaps.
I wonder though, how does the government get visibility into assets if they’re all stuck in tax havens? Whether it’s South Dakota or the Caymans, there are people who are paid a lot of money to keep those assets from ever making it to government coffers. There are ways for people to avoid certain kinds of taxes like the “carried interest loophole” for private equity (which, if there were a group of people less needing of tax breaks than PE bros, I can’t think of it). And then on top of that, there is also the whole philanthropy racket. Unfortunately, correcting the tax code will require a massive amount of political capital that I’m not sure either party can muster in this particular climate.
Can’t wait for the fight over the *Trump tax cuts* next year. That’s going to be a blast. 🤮
The amount 'stuck' in tax havens is rather precarious. We have lots of laws against hiding assets in foreign tax havens. Remember the Panama Papers, scandals out of Switzerland, the Wyly Brothers and others. It is a crime to fail to report overseas holdings and we actually convict people of it.
Your other points are well taken. We nearly eliminated the carried interest loophole but for a single vote by the egregious Kristen Sinema.
I'm not a democrat, and I was glad to see Sinema/Manchin nuke that proposed tax legislation, but for other reasons. The caried interest loophole is total BS and should be gotten rid of, just like SALT deductions. That said, I still do not know why Sinema held out over the caried interest deduction? What was in it for her? Was/Is she getting huge donations from Private Equity and VC types? She's about to be a one and done senator, and likely her political career is also over. Should I expect to see her suddenly working for Goldman Sachs?
I’m sure she has something lucrative lined up that will enable her to continue her pursuits of weird fashion, training for and running marathons, wine and sucking up to rich people.
She is hardly built like a distance runner, IYKWIM. But, good for her if she can do that.
But, even sucking up to rich people does not explain why she would be in favor of the caried interest loophole. The (vast) majority of rich people do not benefit from said loophole: only a very specific subset.
It would just change the calculation to favor dividends instead. Stock owners get the money either way. The main benefit is that capital appreciation (via stock buyback) allows the owners of the stock to choose when to sell and realize their gains and thus taxation.
For one, impute business income to the personal incomes of owners and second Progressively!) tax consumption rather than income, i.e., the unsaved un-reinvested portion of income.
Australia has that system .Dividends are taxed at source at the rate of 30% for fully franked ( dividend imputation) dividends.
Earn $100K in gross dividends and $30K goes to the tax office .You net $70K. When the self assessment form is filled in ( do your tax) you will receive a tax rebate.You have been taxed at 30% from the first dollar of income earned.People that earn income from work are not..They get the tax free allowance.
So dividend income is taxed at exactly the same rate as earned income. The lack of understanding of how the tax system works is the same as how the wealth/ income works. People think that dividend income is tax free because of this imputation.
Consumption taxes would tend to hit poorer people a lot more than wealthy people. Tax is also a difficult concept to grasp.
To clarify further on a $100K annual income tax would be $25K.Dividend income the tax would be $30K ( corporate tax rate of 30% ) so a tax rebate of $5K.
Then further complication comes in pension schemes.In Australia contributions are taxed going in.Then taxed on the growth . Then tax free in drawdown. So a worker will pay $25K tax.Keeping the wealth outside of pension funds then gross yield of 5% ( high compared to the rest of the world,normal here) a shareholding of $2 million would produce $100K in income.Same $25K tax and a $5 K tax rebate.
In pension phase the full $30K would be rebated to the fund so the net income would be $100K.
A consumption tax with a higher rate on higher consumption is not intrinsically unprogressive. The tricky part is how inherit and is treated. We would not want a third generation of a family of misers to own a non-trivial % of the national wealth however "efficient" it would be. OTOH, its not a unique problem.
Eventually they need to pay back the loan. In order to pay back the loan they need to derive income which is taxed. Taking a loan isn't a loophole, it's just deferring taxes by paying interest to the lender.
I believe the euphemism is “Buy, Borrow, Die” and I believe that you can do it in perpetuity from one generation to the next, using one loan to pay off another until infinity all in the service of avoiding taxes. And then if your heirs decide to pay the debts and sell your (now their inherited) assets to do so, they benefit from the step up provision that makes it so the asset is valued when they acquired it, not when it was bought. Not too shabby a deal if you ask me.
Different countries have different rules but the basics are generally the same.The wealth is created,and then can be destroyed across the generations.
Australia has companies that outperform BRK when the dividends have been reinvested. So BRK at $1500 40 years ago and now at $620K.
Company "Y" in Australia has tripled that performance.Reinvesting dividends for that period company "Y" is now worth $1.8 million.
You now live on the ~ 5% dividend yield.Plus whatever else you have ,401K etc for the USA.
20 years later you die.Say the share price has grown slowly over that period and they are worth $3.6 million.This passes on to the next generation .Cost base is inherited by them.No tax is paid.They reinvest the dividends for say 20 years and have ~$10 million? as the wealth/ dividend income to live off.This carries on across the generations until company "Y" goes bust or somebody decides I want to get my hands on the money,sell them.Then CGT is triggered and a large unexpected bill is received from the tax office You owe us $$$$$.Pay this within 3 months .
You can leverage off that wealth across the generations.By doing nothing over the generations then borrowing $1500 to buy 1 share in BRK,or $1500 to buy 1,000 shares in company "Y ". Meeting the interest payments on that $1500 across 40 years would be within the capability of most people.So the $1500 debt would still be there,secured by the $600K or $1.8 million asset value.
Somebody might put it all on red,look how much NVIDIA has risen,look how quick.Leverage to the hilt and put it all on red ( NVIDIA ).
The long term compounding to create the wealth can be quickly destroyed.One correct decision to buy BRK or company "Y" is now resting on how NVIDIA performs in the future. Passing that wealth on can be very difficult.
I think a loan is also an actual problem, in that these loans allow the hugely wealthy to extend their control over the world. E.g. Musk retaining voting control of his Tesla shares while simultaneously using them as collateral to gain majority voting control over Twitter.
It’s worse than that because at most companies, using your stock to back a loan is a no-no, but these guys have their boards by the balls and get them to write in all kinds of special rules for them and them alone, no matter how much stock others might own in the company. *Loans for me, but not for thee*. Here’s a piece from Forbes from back in 2021, before Elon went and leveraged even more Tesla shares to destroy Twitter.
The key here is to be direct and tax consumption. It's a common proposal of tax economists, and beyond the fairness advantages you mention has the advantage that it doesn't disincentivize investment.
A consumption tax discourages consumption. This has a negative effect on the velocity of money and thus on the growth (or even maintenance) of a consumption-driven economy.
As you indicate, the positive effect is that it encourages savings, and thus makes it easier for people to borrow money for investments.
There has to be a balance here. I just don't know how to find it.
You can't find a balance any more than you can govern the tides or dictate gravity.
Think of the economy as an ecosystem, and individuals, firms, et al as organisms. Orders are emergent rather than fixed. There's an economic problem where, if everyone engages in the same behavior at the same time, it imperils the economy as an ecosystem. If consumption and saving trade off, too much saving will hurt consumption through high prices, tight supply, and low money velocity. We're also seeing something like this phenomenon in real estate, globally.
I just mean theoretically, like what's the relation between these factors? We've got equations for tides and gravity. You can treat a composite as a whole through things like average consumption and average savings rate. And while sure, it really does matter who is consuming what and who is saving what, and the socioeconomic context matters, on an aggregate scale you can still figure out certain ranges.
I'm just saying that I'm economically clueless enough that I have no idea how to even approach this question. Even a broken clock Laffer curve would be an improvement on what I've got.
Your idea of a tax is a dues for society, which isn’t how most people or governments see taxes. Taxes are a necessary means to support government spending for the common good. If you think all people should be forced to pay for just living in society, what about all the people on disability or social security or just wealthy retirees living off their saved earnings who don’t pay taxes?
Even if Mr/ Richie Stockbucks has a million inherited shares of Megacorp, if he wants to live without income he can lend some of his stock to a bank as collateral for a loan so that he has money to live off of. The bank will charge interest on this loan, even with the collateral to cover its risk, and this income to the bank is taxed. Furthermore Richie has to actually pay the loan principal as well as interest back to the bank, so he needs to earn money (probably by selling some more of his stock). A loan isn’t free wealth, it just shifts the time frame of some wealth for a fee called interest. Also, whatever he buys with the loaned money, typically has a sales tax, which he has to pay also. This is why consumption or value added taxes are better than taxing income or payrolls.
For one, I wasn’t implying that in order to live in our society, one must pay to do so. That’s foolish. I’m a Democrat, ffs. 😁
For another, you say;
“ If you think all people should be forced to pay for just living in society, what about all the people on disability or social security or just wealthy retirees living off their saved earnings who don’t pay taxes”
You do know that Social Security and SSD are taxable income, right? And that you pay taxes on every asset you sell, your non-Roth IRA withdrawals, your 401k withdrawals, etc etc etc. There's no free ride for the 99% in America.
VATs encourage saving by discouraging consumption. Not a great thing to do if you want GNP to go up.
Meanwhile, for a large expense, a wealthy person can just purchase and use a product in a neighboring country that lacks a VAT. So for them a VAT actually encourages the export of money.
"Furthermore Richie has to actually pay the loan principal as well as interest back to the bank, so he needs to earn money (probably by selling some more of his stock)."
As long as the stock is increasing in value compared to the loan interest rate he can just refinance while pulling out some additional funds to live off of. From what I understand, SBLOC interest rates are relatively low.
If you can keep this up until you die your heirs get a stepped up basis and can sell your stock to pay off the loans without paying capital gains rates. They'll just owe the inheritance taxes, which presumably do not include the loan payoffs. So in this case your estate would actually get an interest payment tax deduction, if I understand it correctly.
I just wrote essentially the same thing in response to another person telling me “well, they’ve got to pay the loans eventually”. I guess they’re thinking that the same rules apply to them as do to the rest of us.
Noah, unless you object, I'm borrowing this to use with my HS econ students this year. Excellent analysis.
By only bone to pick is that many postliberals (whether progressive or national-conservative) tend to view wealth taxes not as a revenue raising tool but as a means to prevent aristocracy. For example, the recently elected Popular Front Leftists have proposed a $EU 12M ceiling on inheritance in France. They would levy a 100% estate tax above that amount. While they do intend to use the revenue, the case they make isn't primarily in those terms.
Note: I think the French proposal is rather like using a grenade to solve your rat infestation. Way overkill and likely to produce really nasty side effects. That being said, I actually like inheritance taxes in principle for the same reason Melechon does: anti-aristocracy. I would also be in favor of a small wealth tax (1% perhaps levied on the minimum value over the last 5 years) to discourage the hoarding of potentially productive assets. While I think the distributists were deluded in many ways, they were correct that the wide dispersion of productive assets is intrinsically valuable.
Great article. There's a massive misunderstanding of the concept of wealth due to lack context when looking at numbers, a poor understanding of how markets work in the real world, or a poor understanding of finance/accounting methods.
This is why I metaphorically bang my head when some Youtubers exclaim, "Congo/Afghanistan has $X trillion in mineral resources! Congo/Afghanistan shouldn't be poor!" What these YouTubers fail to realize is that this figure is derived by summing the estimated undug reserves of each resource and multiplying them by their current market prices.
If all of Congo's cobalt were suddenly available on the market, the supply would far exceed demand, causing cobalt prices to plummet. Consequently, the market value of cobalt would decline sharply, and so would Congo's total market value of resources.
In fact, over production is already causing cobalt prices to fall. Since April 2018, cobalt prices have already dropped over 70% due to overproduction and firms substituting new cobalt with other minerals like manganese or using recycled cobalt (source: https://tradingeconomics.com/commodity/cobalt
Congo right now has 35 years of cobalt left (3.5 million metric tons of cobalt reserves/100,000 metric tons of cobalt produced annually) If the entire cobalt market were flooded right now, the price drop would further diminish Congo's "resource wealth".
This is why I really like the point you just said about valuing from "mark to market" valuation vs. "book value" valuation.
yes, mostly, but Congo has generated a lot of revenue from its mineral resources already - and that is "wealth" that is somewhere - whether in Swiss bank accounts or re-invested in other goods. It doesn't seem to have gone to the infrastructure of the country or the general population. I think that is where the "shouldn't be poor" comes from, not from the potential resources.
For me, who is uneducated in business, this has been the most useful article I’ve read from you. The explanation of GDP, income, and wealth immediately improved my understanding of economics and permanently changed my financial priorities.
Excellent article. I will be sharing a lot. Question: If growth is fueled by investment, and additional increments of investment are the result of additional saving, won’t redistributing income slow growth? If the goal is to primarily tax the wealthy, it seems that the only funds available for redistribution are what the wealthy consume out of their income/dividends—a small fraction of their wealth—and if we attempt to tax/redistribute too much of this portion, they will cease having a reason to produce in the first place.
This is me spitballing but, presumably, if a society has too much income inequality then the % of people who are able to gain new skills (e.g through a college education), create businesses, and grow said businesses will just be too low. To remedy “high” income inequality (which I now realize is sort of vague), redistributing income would insure that the % of people that can do the above would increase and thus growth would somewhat accelerate. Then, the question just comes down to determining what level of redistribution ensures that % of people is high as possible while still making sure the enterprises created by this portion of society can thrive as much as possible.
Take all of this w/ a grain of salt since I’m a 17 year old high school grad that took a year of macro.
"numerous studies show that tax rates have to be much higher than now to significsntly <sic> reduce work. First off most people have to make enough to have a life. Second people who are seriously money motivated work harder when taxes go up, so raising taxes on them can actually be efficient."
If taxes are higher wealthy folks/businesses should also be more motivated to invest in new businesses or upgrading the current system since business expenses are a tax deduction. The high tax rates post WWII in the US were meant to discourage wealth accumulation but probably also to encourage reinvesting profits.
Good, clear explanation of what to many people is a difficult concept to grasp. I used to teach basic economics to high school students, and this was always the most interesting and entertaining subject to cover. Working through the subject and seeing the dawning comprehension in those high school seniors of what wealth actually is was always very satisfying -- and I hope useful to them in their future lives.
I think you're taking a fairly simplistic view of how to denominate wealth. Your view belongs in the old gold standard world mindset where there was a fiction that there was truly a finite amount of wealth which had to be accounted for in the corresponding amount of gold. Of course it didn't really work that neatly but that was the underlying shared fiction which drove financing. In the post gold standard world wealth is distributed in a much wider range of fictions, all of which are driven by the ability to borrow. "Money" is being created by more and more actors, whether that is governments selling bonds that rely on trust in the future stability of governments, cryptocurrencies which rely on trust in the belief that finite denominations of computer code will increase in "value", or credit card companies giving "rewards" that can be moved around balance sheets. It all works because for the moment it works, but it's an increasingly perilous pyramid that will topple at some point in the foreseeable future. So your accountant's notion of "wealth" has some correspondence to "reality" but the financial system complicated far beyond a double-ledger mindset.
I think Noah addressed that point here: https://www.noahpinion.blog/i/146564156/the-worlds-net-wealth-is-pretty-small. The world's total wealth *is* finite, and equal to the sum of all the world's tangible assets (not just the total amount of gold). The examples you mention of money, bonds, credit card rewards, etc. are all examples of debts where one person's asset is another person's equal and opposite liability.
The cryptocurrencies I know aren't a debt, but more like a pure fiat money. The holder only benefits from holding a cryptocurrency if they can persuade someone else to accept it in exchange for something else. However you think of cryptocurrencies, like debts they add nothing to the world's net worth (although their existence allows the service of an alternative payment system to be provided).
What makes fiat money valuable in the end is that people need it to pay their taxes, and the nearest equivalent to "taxes" for cryptocurrency is the payments demanded by ransomware criminals: such criminals invariably demand cryptocurrency because it offers a finality of payment that conventional currencies no longer do.
That's the chartalist (or MMT) position, but many don't agree with it. It makes it sound as though being held in prison is the natural state of affairs, and being allowed out is a valuable service provided to you by government.
So, are stock that someone holds "tangible assets"? Seems more like gambling (much of the time) and betting that someone will buy it. Yes, I am exaggerating to a point, but clearly stock value doesn't correspond very much to "tangible assets" a company has.
BUT, it is definitely wealth in a practical term. You can borrow against it and spend that (now the bank is betting that you can pay it back at some point and that "wealth" won't disappear as collateral).
Stock in the sense of a share of ownership in a limited company is not a tangible asset. You can't touch it. Even if you have a share certificate, it's just *evidence* of partial ownership of the company, not an asset itself. (Except in as much as a piece of paper is an asset).
Agreed, but I think our conversations around wealth and income are missing a broader point. Concentrating wealth means concentrating decision making power in our economies, which in turn means that the actual productive capacity of our economies artificially gets pulled toward serving needs that do not necessarily serve a broad public interest. Examples of these kinds of industries include the building of mega yachts and mansions, the private jet industry, much of the financial industry, and so on. The people in these industries could be working on things that benefit a larger share of the population, but they don't. Why? Because the existance of wealth inequality inflates wages for industries that serve the needs of the very rich.
Is this about concentration of wealth, or concentration of income?
It seems very much about concentration of wealth. For multiple reasons - political power, reduced overall spending in the economy, built-up resentment, leverage to create oligopolies, etc....
Now, would a wealth tax change any of that? Hard to say - depends on how it is done, and how it is applied, and how easy it is to get out of it (how many loopholes can the wealthy buy).
I'd be fine with a very small wealth tax (like a fraction of a percent), or, better, some kind of trading tax (aka Tobin tax). But I don't think it's necessary as long as you at least have a steeply progressive income tax (including negative rates at the low end), and count ALL income (including capital gains -- though only _realized_ capital gains, the folks pushing for an unrealized cap gains tax are kind of nuts, IMHO).
The bigger deal to me is that we ought to have a "universal basic wealth" program, so that claims on the productive capacity of the economy are constantly being diffused out to the whole citizenry, rather than left concentrated in a few hands. The obvious way to do that is:
(1) Create a Sovereign Wealth Fund, which is going to over time buy stakes in, basically, everything.
(2) Do something like Cory Booker's Baby Bonds program to help bootstrap people into having a little wealth.
https://www.vox.com/policy-and-politics/2018/10/22/17999558/cory-booker-baby-bonds
(3) Scrap the entire private account system for defined contribution retirement plans, medical savings accounts, etc, etc. Move all of that into a system of accounts that make claims on the SWF. You can slice the SWF into target date risk tranches, as an accounting mechanism. (This will look quite similar to what Betterment or other roboadvisors do right now. The technology to manage it exists, you'd just have to scale it up to a much larger amount of assets and a larger population.)
(4) Set up postal banking, and use that as an access mechanism for folks SWF investments. (As a fun side benefit, you now have a place to distribute UBI -- everyone with an SSN / ITIN has a postal checking account. And furthermore, you can let the Fed adjust the UBI up and down to a degree, creating a perfect Helicopter Drop channel that they can use as part of monetary policy.)
(5) While you're at it, you could simply process all paychecks through people's postal bank checking accounts, and only tax income when it's withdrawn. If they want to save/invest some of their income, they thus automatically get a tax break for it. This effectively changes the income tax into a consumption tax. You can also just default people into investing, say, 10% of their income (with options to reduce or increase that to some degree), into a target-date slice of the SWF matching when they turn 65. This serves as an add-on defined-contribution retirement benefit. (Rather than the Bushies' private accounts version that they were trying to carve-out from Social Security.)
"The bigger deal to me is that we ought to have a "universal basic wealth" program, so that claims on the productive capacity of the economy are constantly being diffused out to the whole citizenry, rather than left concentrated in a few hands."
This is so accurate it gives me chills.
Why and how are claims on the productive capacity of the economy concentrated in fewer and fewer hands?
There's one underlying reason that supports all the tertiary reasons, IMO. Understand that reason, and you might find a much more streamlined, elegant, and even revolutionary solution that would solve the exact problems your proposals are aimed at.
This is how I understand it.
https://www.f0xr.com/p/money-as-equity?r=3i492j&utm_campaign=post&utm_medium=web
Yeah, the fact that money fundamentally is pushed into the economy as loans, is also the point Thomas Piketty is making, in the argument about how as long as r>g (the real rate of return is greater than the growth rate), _inevitably_ wealth has to be getting more concentrated.
See also the "Cantillon effect": https://www.thebignewsletter.com/p/the-cantillon-effect-why-wall-street
I'm not optimistic about Bitcoin as an alternative, because I think the built-in limited issuance is _also_ a problem. In the long if you were really trying to use it widely, the limits would put _deflationary_ pressure on the economy, which is also problematic. (And then there's the expanding energy footprint; you can get around that with proof of stake, but that just shifts the problem back, since it allows those who already have large stakes to exercise control and accumulate more.) But I think the combo of UBI (with adjustments to the rate serving as a partial replacement for the Fed's current approach to monetary policy), and continuously diffusing ownership of a sovereign wealth fund through the baby bonds program, really could do the trick.
Deflation is a problem to a debt based monetary system because falling collateral prices expose the insolvency in the system. It's not a problem for the actual economy.
Getting more goods and services with less effort, deflation, is the whole purpose and effect of technology.
The people who are accumulating wealth today already do so by using essentially a limited supply issuance, deflationary, "money" as their store of value. They don't keep cash under the mattress, they buy Apple stock. The fact that Apple stock is deflationary and increases in value over time doesn't hurt anyone. The fact that the dollar decreases is inflationary and decreases in value over time hurts the working class, who have a larger percentage of savings in dollars and who's wages always lag behind the rate of inflation.
Wealth redistribution is the problem, not the solution. Whether it's by banking or taxation or UBI, the central planners will always argue that more of what's failed in the past is the great new solution. If only they could redistribute a little bit more, they'd finally get us to utopia. I'm not buying it.
Luckily there's no need to make a case for Bitcoin. It's a technology, and real world performance is both the proof of concept and the reward for early adoption.
Norway has a sovereign wealth fund.Norges investment bank.They own around 1% of the world's companies,govt and corporate bonds.This funds pension income for retired people basically as a simple explanation.Share price growth and dividend income growth,a money tree forever.
You could view a 401K as your own personal sovereign fund .Share price growth and increasing dividends to fund your retirement .
Australia has had DC contributions to fund retirement since 1986.This is compulsory.The starting figure was 3% of wages increasing to 12% of wages next year.People starting work in 2000 will have the full benefit ( or curse) of this system.A 50 years working life @ 25 years of 9% increasing to 12% contributions,and 25 years of 12% contributions. Taxed at 15% going in rather than marginal rates which would average around 25% for Joe average.
Adjusting for inflation,average growth rates over 50 years etc then they can be expected to retire with 6 to 8 years of average income in say 2050.
Should this have been the case from the start then retire in 2026 with 6 years ( low end ) income. Around $600K.Draw down 10% of that for say 25 to 30 years of retirement and things look good.Plug in an 8% growth rate over that period and you die with quite a lot of that money still intact to pass on to heirs.
This of course depends on long term average growth rates continuing. From inception to retirement will be the transition period from being dependant on govt support to being dependant on your own SWF.Govt support will kick in if you need help as pensions are means tested now ,and have been for a while.So baby boomers are either self funded ( me),or a mix of self funding and govt pension depending on how wealthy you are.
If people start work at 16 then the people born in 2010,that may die in 2100 at the age of 90,will have the full 12% of wages going into stock markets for 50 or 60 years to fund their retirement and ease the burden on younger generations to pay for their pensions ( social security).
This may be a wonderful thing ,a DC pension rather than the now almost disappeared DB pension.This may also be one of the biggest mistakes made.People that are 14 years old now and on the verge of what hopefully will be a wonderful adult life will know when they retire in 2080 approx.
"the folks pushing for an unrealized cap gains tax are kind of nuts, IMHO"
As BusyBusyBee and I are mentioning in these comments, these people are trying to address the "Buy, Borrow, Die" cycle. What's wrong with periodically requiring people to sell extraneous assets?
The problem with taxing unrealized gains is that you then have to account for unrealized _losses_ somehow as well. (Do those create a refundable credit? So the government is paying out welfare to rich folks when asset prices go down?)
I'm 100% in favor of forcing mark-to-market on inherited assets, and rolling back the cuts to the state tax that Republicans have pushed through. Neither of those is anything like actually trying to tax unrealized gains directly.
"The problem with taxing unrealized gains is that you then have to account for unrealized _losses_ somehow as well."
No you don't. If I lost my job tomorrow and lose everything to repossession or what have you it means jack-all on next year's income taxes (everything I own is already covered in the standard deduction, and we aren't talking casualty losses that are additional deductions). Why should this be different for a person who owns stock?
Taxing capital gains in a fractional reserve fiat currency system is extremely perverse. It's horrible because a lot of capital "gains" are nothing more than a measurement of inflation.
Take housing for example. If you buy a brand new house in 1990 for $100,000 and sell it today for $300,000, how much did you gain? Is a 30 year old house worth 3x as much as a brand new house? Of course not! Can you buy a brand new house today for $300,00? No, it costs $500,000 now.
So what's the $200,000 capital "gain"? It's just the loss in value of your denominator, the dollar, after 30 years of inflation.
Inflation is a covert tax levied by the private banking system conspiring with the government to enrich both institutions at the expense of the working class. So instead of putting that $100,000 in your checking account and watching it evaporate over 30 years of inflation tax, you buy a house to at least slow the bleeding. Now 3 decades later, after hopefully treading water in terms of purchasing power on your $100,000 "investment", the government is going to get that inflation tax out of you anyway by taxing your capital "gains"?
It borders on diabolical in my opinion.
I have read that inflation itself is a tax that the government uses to fund itself.
It's better than having the money stuffed in a mattress.
I'd also say if you're going to do a wealth tax at all, the only practical way to do it is as a Harberger tax, aka a COST Tax (Common Ownership Self-Assessed Cost).
Basic idea is that you have to declare the value of your assets, and pay tax based on that value. The incentive not to under-declare is that if somebody comes and offers to pay you that value, you _must sell_.
Usual epicycles on this include:
(a) You can decline to sell if you raise the declared value and immediately pay some back taxes and penalties for having under-valued.
(b) You can file a mid-year re-assessment any time you want, and pay the marginal tax on it without any penalty. (Could be necessary in an environment where some kind of assets are appreciating very rapidly.) You also get some kind of grace period if somebody makes an offer on something that you only priced a month or two ago that has appreciated.
(c) Maybe the offer required to force sale has a multiple over the declared value, like 1.2x or something, just to allow people a little room for error.
It would be a real burden if _everyone_ were subject to something like this, but if we're only talking about taxing those with truly large fortunes, like $100M and up, they can afford good accountants to take care of it.
Of course people would _try_ to conceal ownership of certain assets, but that's a thing that happens already, not a new problem. And you'd have an entire new slice of the tax-lawyer world where people are trying to spot undeclared assets (which they can treat as having been declared as zero-value, and hence seize from the current owner, in exchange for just paying the government the back taxes on it, which would only be a fraction of a percent per year that it was hidden), and even with declared assets, keeping an eye on each other to make sure nobody's lowballing.
"The incentive not to under-declare is that if somebody comes and offers to pay you that value, you _must sell_."
Some people are willing to pay more than the market thinks something is worth just to screw with others (or because they have an idea that they think may make the thing more valuable, whether they are right or not. But if they are wrong, then both they and I are harmed in your system).
I, for one, would hate to be forced to sell something that I have sentimental value for for even above market value. And yet if I valued it at more than the market values it for, I'd risk being ruined with taxes and be forced to sell it anyway to cover those taxes.
So how is this supposed to work?
It's far, far better for all involved to have an independent party appraise market value.
If this is just an issue among folks with fortunes over $100M, I sort of feel like, if those folks want to blow enormous amounts of money to spite each other, and it leads to our government collecting more taxes so it doesn't have to charge as much tax to the middle class, then... winning?
Like, what's the scenario you're imagining that's such a big deal? Elon Musk decides he's willing to make an offer on Jeff Bezos' yacht, at 20% over the listed value, and Jeff Bezos has to decide whether to raise the declared value and pay the incremental tax, or sell the yacht? And maybe Elon keeps jacking up his offer even if Jeff raises the value, and at some point Bezos says, "OK, fine, I'll sell it to you at double what I think it's worth, and go buy a new one." Poor, poor Jeff. Pardon me while I fetch the world's tiniest violin.
And as far as people mis-assessing the value, that is exactly how markets work today. People can buy up shares based on a mistaken over-assessment of the worht of the company. Private equity companies can take a company private because they think they'll be able to raise the value, and be wrong about it. If they lose their shirts doing it, I'm a lot more concerned about the little people at the companies that they lay off, than I am about the PE investors.
"Like, what's the scenario you're imagining that's such a big deal?"
Things such as this: https://www.youtube.com/watch?v=8tzYMusZXqY
Billionaires can offer to buy out a thousand regular people, but those people shouldn't be compelled to sell.
You when buy stock in a company you are often required to agree to clauses that allow a majority vote of shareholders to sell everyone's share to an offerer. This shouldn't be the case with the vast majority of other belongings.
Def have a wealth tax over taxing salary income. Why do I get taxed on revenue but companies get taxed on profit?
You're also ignoring all the unpaid jobs that get done that improve society, why are they not counted?
Another example to illustrate my point: if a drunk at a bar told you that they were going to save humanity by putting microchips into people's brains to turn them into super-human cyborgs, you would quietly find someone else to talk to. If that person was Elon Musk, there would be an international team of scientists experimenting with putting chips in pig brains within the year. Isn't Bezos running some project that's trying to figure out how he could live forever?
If you add up these parts of the economy, plus the production of mansions, private jets, mega yachts, passing around financial assets, and so on, it's probably not an enormous percentage of the global economy. But it's also not zero percent! It's a real cost that the rest of us pay.
Are you kidding? If a guy at a bar said he was going to save humanity by putting microchips into peoples brains to turn them into super-human cyborgs, I would buy him a drink, that sounds like an incredible bar conversation.
But more seriously, I get your point, but I think examples like Neuralink are actually evidence against it. Private yachts and jets, though cool to look at, don’t benefit the average person (they are a way to take wealth and distribute it to the workers and manufacturers, though). But the research towards Neuralink has lots of potential benefits for everyone, not least letting paralyzed people to walk again. That’s a pet project that does have benefits for the broader population, or at least potential for it.
A marginal dollar for Elon Musk's experimenting with crazy shit is worth a lot more to humanity then your average marginal dollar of government spending.
First, Musk doesn't actually experiment with crazy shit - he just invests in it - despite his claims, he has never actually done any of this...
Second, government spending on pure research has paid for itself many times over - and has been heavily used by Pharma, semiconductors, etc...
Yes, most of the government spending isn't on any of this, but neither is most of Musks (ex. Twitter)...
Elon Musk's $44 billion Nazi Bar Remodel of Twitter caused him to destroy anywhere from 66% to 90% of the social media network's value.
NYU professor and entrepreneur Scott Galloway argues that the U.S. government is the world's most successful venture capitalist.
https://www.profgalloway.com/welfare-queens/
"This firm was there before the first transistor was printed, and it will be there after we receive brain implants. One investor funded the computer, the internet, speech recognition, last-mile distribution, mapping the human genome, the core technologies of fracking, and the first horizontal shale drill, and today it’s driving down the cost of solar and wind power below that of coal. Even better news: If you’re a U.S. taxpayer, you’re a limited partner."
It's really rich in data to show how U.S. government subsidies to technology have been key drivers to success -- with 43% of research funding coming from the government.
I take your point is the government should experiment with crazy shit.
No, I think the government is really dumb. They should have fewer resources to waste.
True, what am I saying? That would be one interesting night!
And I take your point that something like Neuralink has potential benefits, maybe that's a bad example. My point is simply that the guardrails to truly bad ideas are significantly lower for the very wealthy.
The key element is this: the workers on the yachts and jets make shit money. The stock and the CEO make most of the money.
Would you then say that a wealth tax is an attempt to nationalize/socialize the investment and consumption of the wealthy?
I think it's also important to think about how the ratio of CEO/executive pay/dividends/stock gifts were much lower compared to the average worker salary in the past.
At the end of the day/tax year all that money probably *still* accumulates to the top of the tax table, but the difference was it passed through the hands of their employees and their communities first before getting hoovered up to the stratosphere of wealth.
Plus, stock buybacks by companies were *illegal* so there was no temptation or the ability to spend $10 to $100 billion on stock buybacks over a couple of years. That's money that probably rightfully should have been rising wages and employee benefits, and genuine research and development investment. Instead it's just going into a future investment towards more self enrichment by the executive and investor class.
There's a RAND report that says basically "The top 1% took $50 Trillion from the bottom 90% of Americans." That's an awful lot of lost economic productivity and individual income for the rest of us.
https://time.com/5888024/50-trillion-income-inequality-america/
Not only did they get to take a shit load of economic growth from the rest of the country, they also benefited from getting favorable tax treatment in the post Reaganomics haze. That made their ill gotten gains all the sweeter, and denied rightful funding of our government and programs that previously benefited the average person.
Excellently said. Predicted by the bad guys - like the communist manifesto.
Yes, but that is a function of how the income of "wealthy" people is taxed. Their consumption rather than their incomes could be taxed lending to more investment.
Yes. USA needs a VAT, not wealth tax
While a bunch of the profits absorbed by the financial industry are higher than I think make sense, the function they serve in allocating scarce capital is much more valuable than is often given credit. On the margin investment on business fundamentals, basic loan services, or insurance, or commodities futures service very tangible needs. More complex instruments that glue these together in simple or more exotics ways often just are ways to allocate more capital to these services with collective risk hedging (and to get more fees in the process). We are better served on net with robust financial services than not.
It's not up to you or me to tell people what they should be working on, unless you have an authoritarian bent (I'm not saying you do). But, if somehow allocating labor and capital only to those things that you deem to be "things that benefit the larger society", I can think of a whole lot of professions/industries that outright damages society (let alone not benefiting) other than building yachts.
> Concentrating wealth means concentrating decision making power in our economies, which in turn means that the actual productive capacity of our economies artificially gets pulled toward serving needs that do not necessarily serve a broad public interest.
You are not thinking of second and third order effects. Money is societies' debt to someone that has already made their contribution to it. If people can't spend money on things they enjoy, ie jets, they will not work hard past a certain point (that point being the point that is arbitrarily defined by people like you). Why would Jeff Bezos grow Amazon past $1 billion (or whatever arbitrary cutoff point) if there was no reward for it? What you view as inefficiencies in the system I view as incentives. And it's also a mistake to think that the money spent on yachts, mansions, and private jets solely goes into their construction and not into building human capital and research during the construction of these things that can then be applied towards other areas.
> The people in these industries could be working on things that benefit a larger share of the population, but they don't
Using this argument, we should cut all funding towards any entertainment or amenities and the only thing we should be researching is medical technology. Eating at a nice restaurant is waste, birthday party? also waste. Why aren't you eating your bug protein slurry?
Do you seriously think Bezos grew Amazon because he wanted to go from $1B to $2B - beyond some point, wealth becomes useless for spending except as a lever to buy or increase power and more wealth.
Incentives are great for starting to accumulate wealth and take chances, but we are talking about wealth way beyond "incentives".
Yes, money spent on mansions and yachts goes into the economy, but we know that if you put money in the hands of poorer folks, more gets directly spent and there is a higher money velocity. It is simply hard to go out and spend $1B, but 1 million people could easily and usefully spend $1000 each.
> Do you seriously think Bezos grew Amazon because he wanted to go from $1B to $2B - beyond some point, wealth becomes useless for spending except as a lever to buy or increase power and more wealth.
No I don't. That's why I said if you don't have incentives for growth people will stop growing the companies. If there was 0 incentive to grow Amazing past $1 billion valuation he would have stopped growing it.
> Yes, money spent on mansions and yachts goes into the economy, but we know that if you put money in the hands of poorer folks, more gets directly spent and there is a higher money velocity
Ok, so now we are advocating for wealth confiscation? How does that factor into your previous point about incentives and Jeff Bezos' motivation.
And as the article you are literally commenting on states, there is not enough wealth in the world to do it.
Companies always try to keep growing - first because the stock market demands it of any public company or bosses get fired. So, yes, that is an incentive (although a perverse one in terms of focusing on long term success).
Yes, if every profit of Amazon was taxed 100% and it was private (so not killed by the stock market), then it would probably stop growing. But no one is arguing for that kind of taxation. No one has argued for 0 incentive for investment and growth. Seems like a red herring. Now, if you want to argue that if Amazon was going to get 1% less profit and it would just stop - but I don't think that is what you are suggesting.....
All taxes are some form of confiscation - I just get taxed at a much higher rate than poor Amazon or Jeff Bezos....
> Companies always try to keep growing
Yes, because there are incentives to growth. Namely more money.
> first because the stock market demands it of any public company or bosses get fired.
Again, not how it works for founders that have controlling interests in the company. Also, why do you keep assuming it's a public company? In this theoretical world where the incentive to grow for the founder is removed, they would just not make the company public.
You have this belief that company founders will just go through self flagellation because companies *must* grow. There are already many billion dollar companies that choose not to go public because of the increased scrutiny and reporting requirements.
> No one has argued for 0 incentive for investment and growth
I mean, we are going off a throwaway line that private planes are clearly bad for society so nobody should be able to buy them. Typically arbitrary lines like that change arbitrarily. Nobody really needs a pool in their backyard right?
> All taxes are some form of confiscation - I just get taxed at a much higher rate than poor Amazon or Jeff Bezos....
I highly doubt you are taxed less than Jeff but maybe you should advocate for lowering your own taxes?
"Again, not how it works for founders that have controlling interests in the company. Also, why do you keep assuming it's a public company?"
Minority shareholders (including employees who have stock grants) have rights even in private companies.
https://montague.law/blog/minority-shareholder-rights/
David Cay Johnston wrote something pertinent at Econ Log a decade ago: https://www.econlib.org/archives/2011/04/david_cay_johns.html/#comment-88892
"Second people who are seriously money motivated work harder when taxes go up, so raising taxes on them can actually be efficient."
"I highly doubt you are taxed less than Jeff but maybe you should advocate for lowering your own taxes?"
Proportionate to income the typical top 400 highest income earners in the US pay less than a typical person anywhere else on the income distribution. This is *typical*, exceptions will exist. See the bottom graphic on the top answer here: https://politics.stackexchange.com/questions/80552/total-tax-burden-on-the-average-american-and-how-has-it-changed-over-the-years
"Why would Jeff Bezos grow Amazon past $1 billion (or whatever arbitrary cutoff point) if there was no reward for it?"
Because he's required to under the shareholder doctrine.
"Using this argument, we should cut all funding towards any entertainment or amenities and the only thing we should be researching is medical technology."
Entertainment is a requirement for human wellbeing.
> Because he's required to under the shareholder doctrine.
Not when he has a controlling interest in the company.
> Entertainment is a requirement for human wellbeing.
Ok, and yachts and private planes are really good entertainment. So since you are now dictator of the world, where do you draw your arbitrary line for what entertainment is acceptable? Is it 100 inch tvs?
"Not when he has a controlling interest in the company."
Minority owners have rights that the majority owners are legally required to respect. A majority owner can't fail to fulfill their obligations to minority owners.
"So since you are now dictator of the world, where do you draw your arbitrary line for what entertainment is acceptable? "
I just use the legal doctrine of the "reasonable person".
> Minority owners have rights that the majority owners are legally required to respect. A majority owner can't fail to fulfill their obligations to minority owners.
I'm not a lawyer so I'm not going to try to discuss the nuances of shareholder rights. I am someone that owns a company and I would not take my company public in your ideal world and I would also not grow my customer base beyond the point where I stop receiving incentives for it. Since my company is private I'm not subject to any of what you've described.
> I just use the legal doctrine of the "reasonable person".
Yes, relying on people being reasonable has always worked out well. I use the legal doctrine of let people do what they want and try not to be an authoritarian.
I am also not a lawyer. You should also refrain from granting stock to any other person. I'd recommend only raising funds through bonds or loans. I would guess that the duty of care you owe a bond holder or other lender is less than the fiduciary duty of care you owe a minority stock holder.
"Yes, relying on people being reasonable has always worked out well."
It's a legal standard, not an expectation of any random person. https://en.wikipedia.org/wiki/Reasonable_person
Here's my problem with this.
Let's say you taxed people. What do you think it would be spent on?
I'm betting government would feed it into the Eds and Meds industry, because that's where it feeds basically every marginal dollar (for a worse case, maybe the defense industry).
I think what we would be doing is mainly transferring assets from one class of wealthy people (entrepreneurs) to another class of pretty wealthy people (doctors, hospital administrators, etc). It's not clear that what the government buys would be that much better than whatever incentive consumption has for entrepreneurs.
If such taxes were more like Alaska's citizen dividend perhaps I could get on board, but that's a rare use of a marginal tax dollar.
The government is you.
Every dollar the Government spends can be put in three buckets: Benefits to me,
benefits to others in their rolls as citizens, benefits to others in their roll as rent-seekers. I prefer to think of Government as representing me when the first bucket is full, when the second bucket is a fair amount relative to what is in my bucket, and the third bucket is empty.
A fair look at our Government suggests that it does not do a very good job of this. Hence, it is hard to think of the Government as "me".
The problem is your bucket view of how taxes are used.
This is not true even in theory.
Like UBI
This is a conundrum https://aeon.co/essays/what-can-we-learn-from-john-rawlss-critique-of-capitalism
This is a really great article Noah!
I think a good book for reference is History's Greatest Heist: The Looting of Russia by the Bolsheviks: https://www.amazon.com/Historys-Greatest-Heist-Looting-Bolsheviks/dp/0300135580. In this book, Sean McMeekin pointed out that Lenin actually did try to liquidate all of the Tsar's assets, savings and stocks of companies, even the Church holdings in Russia to fight the Russian Civil War and spread the revolution; but by the time he actually did it, all of these things became worthless due to the Revolution's upheaval (and also due to the effect that you mentioned earlier!). Only the Tsar's gold reserve was actually liquid, and the Bolsheviks nearly ran out of it in just 2 years!
A great documentary you could also look into is World War One - Episode 8 from StarMedia (a Russian movie firm): https://www.youtube.com/watch?v=WzqRtYd911A&list=PLwGzY25TNHPAdEyAB5NwQsNC6ujpW90Pf&index=8&ab_channel=StarMediaEN. In this episode, a lot of Russian people thought that with the Tsar's abdication, now they don't need to work anymore (since it was a social revolution). This led to large-scale famine that Russia had not seen before, even during WW1!
The modern ones are in South Florida.
What is the context of this?
In his book "The psychology of money", Morgan Housel says (summarized in this blog post https://collabfund.com/blog/the-psychology-of-money/ ):
If you see someone driving a $200,000 car, the only data point you have about their wealth is that they have $200,000 less than they did before they bought the car. Or they’re leasing the car, which truly offers no indication of wealth.
We tend to judge wealth by what we see. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Vacations. Instagram photos.
But this is America, and one of our cherished industries is helping people fake it until they make it.
Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see.
Brilliant.
Wouldn't the above take combined with the stance in your post combine to establish a third kind of wealth? Productive, nonproductive and counterproductive, each dialectical rather than absolute?
The baseline connector here is that money in the bank is only wealth to the degree that the strategy is not saturated and productivity is competing for those dollars "directly." Likewise, the degree to which lending is a nonsaturated strategy and forwarded to productive use can be considered proportionally productive as what is produced/consumed.
Counterproductive wealth, then, would extend beyond the more obvious "political warchest" and influence peddling/laundering where relative wealth equates to change-leverage writ large, selecting for those who buy and protect that leverage. Counterproductive wealth would also include "empty" purchases such as status signaling, because it removes the competition for saved dollars, and places it in the realm of luxury bid pricing. The signal is only so effective as it is rare, and therefore distributively effective and dialectically priced.
The more interesting question would be whether advertising dollars, and worse, advertising pipelines, mirror this same empty dynamic where in order to inform, you must add to the total noise, and it can only be so informative as the strategy is nonsaturated. It doesn't take 5 video ads, 3 "read more" buttons and zero answers to see that it is saturated.
Brilliant?😵💫
All valid points, but I think that there are reasons to believe that when the wealth/income ratio grows too high, at least in places like the UK, the effect is to suppress income growth: https://medium.com/genus-specious/rachel-reeves-on-wealth-creation-8a245071c97f
The simplest explanation is that restraints on production (especially of housing) are causing both higher wealth for incumbent asset owners, and lower real incomes for everyone else.
Land value tax + deregulating construction would fix this.
So simple it might even be a fallacy
Great article, i remember worrying many years ago, starting in the 70's actually, that America was living off the wealth created by the greatest generation, as if withdrawing from a savings account and not building enough infrastructure and factories, etc. to replace what was aging. This got much worse of course with the emergence of hedge funds in the eighties and the obsession with making a quick buck, buying companies and selling off assets. Now, instead of investing in infrastructure and dealing with climate change we are pouring investment into AI, which we can't eat, sleep in or work for.
Hypothetically AI could unlock ways for us to eat, sleep, and work more
I am not an economist, just someone who finds Noah’s observations interesting. I’m curious how you tax people who, instead of drawing an income or selling assets to fund their lifestyle (both taxable), take loans against their wealth and live off of that money? Or those who draw a $1 “salary”, but who are otherwise compensated in stock? Etc. etc. How do you suggest taxing folks like this? It’s not like they’re not living in our society and enjoying the same privileges of that society as the rest of us
"I’m curious how you tax people who, instead of drawing an income or selling assets to fund their lifestyle (both taxable), take loans against their wealth and live off of that money?" <-- You end the tax deduction for interest repayment. Actually, Trump partially did end this.
"Or those who draw a $1 “salary”, but who are otherwise compensated in stock?" <-- Stock compensation is taxed like ordinary income.
https://pro.bloombergtax.com/insights/corporate-tax-planning/tax-implications-for-stock-based-compensation/
“ Actually, Trump partially did end this.” - For corporations they did their weird 3 step thing, but, what about individuals? I know the mortgage deduction was changed and they doubled the estate tax deduction allotment - both expiring next year. But what did they do for billionaires and their loans? I’ve read a bunch of stuff about the TCJA and can’t find anything there. Is it somewhere else (like not in the TCJA)?
Thanks!
"You end the tax deduction for interest repayment."
How does this help if they have no taxable gains in the first place? (Because they haven't sold their capital, they're just chaining loans forever.)
"Stock compensation is taxed like ordinary income."
But the capital gains that accrue to retained stocks from stock buybacks isn't taxed like ordinary income. So they pay a front-loaded ordinary income, but can either fully deduct any losses from the 36% rate in the future, or take future gains under the reduced capital gains rate.
Capital gains rates and income rates should equalize at some threshold.
Likewise we need to cap the step up basis and some of the other mechanisms that limit taxation at death. Perhaps you defer the taxation (at the cost of interest) but not to the point of finding a way to never pay it. We need to close those gaps.
Yes. I do wonder what the effect of postponing these taxes until death is though, in light of the following axiom:
https://www.econlib.org/archives/2011/04/david_cay_johns.html/#comment-88894
"Tax Planning 101 teaches this: a tax deferred for 30 years is the functional equivalent of not paying it."
Maybe we'd need extraordinary tax rates for deferred taxation (minus some carveouts for actual deferred tax retirement accounts)?
Not quite ideal, but drastically raising inheritance taxes and closing inheritance loopholes could help.
Good ideas.
I wonder though, how does the government get visibility into assets if they’re all stuck in tax havens? Whether it’s South Dakota or the Caymans, there are people who are paid a lot of money to keep those assets from ever making it to government coffers. There are ways for people to avoid certain kinds of taxes like the “carried interest loophole” for private equity (which, if there were a group of people less needing of tax breaks than PE bros, I can’t think of it). And then on top of that, there is also the whole philanthropy racket. Unfortunately, correcting the tax code will require a massive amount of political capital that I’m not sure either party can muster in this particular climate.
Can’t wait for the fight over the *Trump tax cuts* next year. That’s going to be a blast. 🤮
The amount 'stuck' in tax havens is rather precarious. We have lots of laws against hiding assets in foreign tax havens. Remember the Panama Papers, scandals out of Switzerland, the Wyly Brothers and others. It is a crime to fail to report overseas holdings and we actually convict people of it.
Your other points are well taken. We nearly eliminated the carried interest loophole but for a single vote by the egregious Kristen Sinema.
Pessimism isn't a plan.
I'm not a democrat, and I was glad to see Sinema/Manchin nuke that proposed tax legislation, but for other reasons. The caried interest loophole is total BS and should be gotten rid of, just like SALT deductions. That said, I still do not know why Sinema held out over the caried interest deduction? What was in it for her? Was/Is she getting huge donations from Private Equity and VC types? She's about to be a one and done senator, and likely her political career is also over. Should I expect to see her suddenly working for Goldman Sachs?
I’m sure she has something lucrative lined up that will enable her to continue her pursuits of weird fashion, training for and running marathons, wine and sucking up to rich people.
She is hardly built like a distance runner, IYKWIM. But, good for her if she can do that.
But, even sucking up to rich people does not explain why she would be in favor of the caried interest loophole. The (vast) majority of rich people do not benefit from said loophole: only a very specific subset.
Those questions are exactly the reasons that if make more sense to focus on taxing "income" (consumption, actually) rather than "wealth."
Raising the tax on stock buybacks to 10% or more would help as well.
It would just change the calculation to favor dividends instead. Stock owners get the money either way. The main benefit is that capital appreciation (via stock buyback) allows the owners of the stock to choose when to sell and realize their gains and thus taxation.
A lot of stock is passed on as inheritance and the basis is stepped up. As a result, a lot of the value of the stock escapes taxation when it is sold.
?
For one, impute business income to the personal incomes of owners and second Progressively!) tax consumption rather than income, i.e., the unsaved un-reinvested portion of income.
Australia has that system .Dividends are taxed at source at the rate of 30% for fully franked ( dividend imputation) dividends.
Earn $100K in gross dividends and $30K goes to the tax office .You net $70K. When the self assessment form is filled in ( do your tax) you will receive a tax rebate.You have been taxed at 30% from the first dollar of income earned.People that earn income from work are not..They get the tax free allowance.
So dividend income is taxed at exactly the same rate as earned income. The lack of understanding of how the tax system works is the same as how the wealth/ income works. People think that dividend income is tax free because of this imputation.
Consumption taxes would tend to hit poorer people a lot more than wealthy people. Tax is also a difficult concept to grasp.
To clarify further on a $100K annual income tax would be $25K.Dividend income the tax would be $30K ( corporate tax rate of 30% ) so a tax rebate of $5K.
Then further complication comes in pension schemes.In Australia contributions are taxed going in.Then taxed on the growth . Then tax free in drawdown. So a worker will pay $25K tax.Keeping the wealth outside of pension funds then gross yield of 5% ( high compared to the rest of the world,normal here) a shareholding of $2 million would produce $100K in income.Same $25K tax and a $5 K tax rebate.
In pension phase the full $30K would be rebated to the fund so the net income would be $100K.
Good for the Aussies. I did not know that! :)
A consumption tax with a higher rate on higher consumption is not intrinsically unprogressive. The tricky part is how inherit and is treated. We would not want a third generation of a family of misers to own a non-trivial % of the national wealth however "efficient" it would be. OTOH, its not a unique problem.
Eventually they need to pay back the loan. In order to pay back the loan they need to derive income which is taxed. Taking a loan isn't a loophole, it's just deferring taxes by paying interest to the lender.
I believe the euphemism is “Buy, Borrow, Die” and I believe that you can do it in perpetuity from one generation to the next, using one loan to pay off another until infinity all in the service of avoiding taxes. And then if your heirs decide to pay the debts and sell your (now their inherited) assets to do so, they benefit from the step up provision that makes it so the asset is valued when they acquired it, not when it was bought. Not too shabby a deal if you ask me.
Different countries have different rules but the basics are generally the same.The wealth is created,and then can be destroyed across the generations.
Australia has companies that outperform BRK when the dividends have been reinvested. So BRK at $1500 40 years ago and now at $620K.
Company "Y" in Australia has tripled that performance.Reinvesting dividends for that period company "Y" is now worth $1.8 million.
You now live on the ~ 5% dividend yield.Plus whatever else you have ,401K etc for the USA.
20 years later you die.Say the share price has grown slowly over that period and they are worth $3.6 million.This passes on to the next generation .Cost base is inherited by them.No tax is paid.They reinvest the dividends for say 20 years and have ~$10 million? as the wealth/ dividend income to live off.This carries on across the generations until company "Y" goes bust or somebody decides I want to get my hands on the money,sell them.Then CGT is triggered and a large unexpected bill is received from the tax office You owe us $$$$$.Pay this within 3 months .
You can leverage off that wealth across the generations.By doing nothing over the generations then borrowing $1500 to buy 1 share in BRK,or $1500 to buy 1,000 shares in company "Y ". Meeting the interest payments on that $1500 across 40 years would be within the capability of most people.So the $1500 debt would still be there,secured by the $600K or $1.8 million asset value.
Somebody might put it all on red,look how much NVIDIA has risen,look how quick.Leverage to the hilt and put it all on red ( NVIDIA ).
The long term compounding to create the wealth can be quickly destroyed.One correct decision to buy BRK or company "Y" is now resting on how NVIDIA performs in the future. Passing that wealth on can be very difficult.
> I believe that you can do it in perpetuity from one generation to the next
Do you believe or do you know? Either way, it seems pretty clear if this loop hole exists, this is the actual problem, not taking a loan.
I think a loan is also an actual problem, in that these loans allow the hugely wealthy to extend their control over the world. E.g. Musk retaining voting control of his Tesla shares while simultaneously using them as collateral to gain majority voting control over Twitter.
It’s worse than that because at most companies, using your stock to back a loan is a no-no, but these guys have their boards by the balls and get them to write in all kinds of special rules for them and them alone, no matter how much stock others might own in the company. *Loans for me, but not for thee*. Here’s a piece from Forbes from back in 2021, before Elon went and leveraged even more Tesla shares to destroy Twitter.
https://www.forbes.com/sites/johnhyatt/2021/11/11/how-americas-richest-people-larry-ellison-elon-musk-can-access-billions-without-selling-their-stock/
Yes, you absolutely can.
The key here is to be direct and tax consumption. It's a common proposal of tax economists, and beyond the fairness advantages you mention has the advantage that it doesn't disincentivize investment.
A consumption tax discourages consumption. This has a negative effect on the velocity of money and thus on the growth (or even maintenance) of a consumption-driven economy.
As you indicate, the positive effect is that it encourages savings, and thus makes it easier for people to borrow money for investments.
There has to be a balance here. I just don't know how to find it.
You can't find a balance any more than you can govern the tides or dictate gravity.
Think of the economy as an ecosystem, and individuals, firms, et al as organisms. Orders are emergent rather than fixed. There's an economic problem where, if everyone engages in the same behavior at the same time, it imperils the economy as an ecosystem. If consumption and saving trade off, too much saving will hurt consumption through high prices, tight supply, and low money velocity. We're also seeing something like this phenomenon in real estate, globally.
I just mean theoretically, like what's the relation between these factors? We've got equations for tides and gravity. You can treat a composite as a whole through things like average consumption and average savings rate. And while sure, it really does matter who is consuming what and who is saving what, and the socioeconomic context matters, on an aggregate scale you can still figure out certain ranges.
I'm just saying that I'm economically clueless enough that I have no idea how to even approach this question. Even a broken clock Laffer curve would be an improvement on what I've got.
Consumption by whom? Individuals? Talk about regressive….
Your idea of a tax is a dues for society, which isn’t how most people or governments see taxes. Taxes are a necessary means to support government spending for the common good. If you think all people should be forced to pay for just living in society, what about all the people on disability or social security or just wealthy retirees living off their saved earnings who don’t pay taxes?
Even if Mr/ Richie Stockbucks has a million inherited shares of Megacorp, if he wants to live without income he can lend some of his stock to a bank as collateral for a loan so that he has money to live off of. The bank will charge interest on this loan, even with the collateral to cover its risk, and this income to the bank is taxed. Furthermore Richie has to actually pay the loan principal as well as interest back to the bank, so he needs to earn money (probably by selling some more of his stock). A loan isn’t free wealth, it just shifts the time frame of some wealth for a fee called interest. Also, whatever he buys with the loaned money, typically has a sales tax, which he has to pay also. This is why consumption or value added taxes are better than taxing income or payrolls.
For one, I wasn’t implying that in order to live in our society, one must pay to do so. That’s foolish. I’m a Democrat, ffs. 😁
For another, you say;
“ If you think all people should be forced to pay for just living in society, what about all the people on disability or social security or just wealthy retirees living off their saved earnings who don’t pay taxes”
You do know that Social Security and SSD are taxable income, right? And that you pay taxes on every asset you sell, your non-Roth IRA withdrawals, your 401k withdrawals, etc etc etc. There's no free ride for the 99% in America.
VATs encourage saving by discouraging consumption. Not a great thing to do if you want GNP to go up.
Meanwhile, for a large expense, a wealthy person can just purchase and use a product in a neighboring country that lacks a VAT. So for them a VAT actually encourages the export of money.
"Furthermore Richie has to actually pay the loan principal as well as interest back to the bank, so he needs to earn money (probably by selling some more of his stock)."
As long as the stock is increasing in value compared to the loan interest rate he can just refinance while pulling out some additional funds to live off of. From what I understand, SBLOC interest rates are relatively low.
If you can keep this up until you die your heirs get a stepped up basis and can sell your stock to pay off the loans without paying capital gains rates. They'll just owe the inheritance taxes, which presumably do not include the loan payoffs. So in this case your estate would actually get an interest payment tax deduction, if I understand it correctly.
*buy, borrow, die, inherit, repeat*.
I just wrote essentially the same thing in response to another person telling me “well, they’ve got to pay the loans eventually”. I guess they’re thinking that the same rules apply to them as do to the rest of us.
Taxes as dues for belonging to society is not a bad idea.
Noah, unless you object, I'm borrowing this to use with my HS econ students this year. Excellent analysis.
By only bone to pick is that many postliberals (whether progressive or national-conservative) tend to view wealth taxes not as a revenue raising tool but as a means to prevent aristocracy. For example, the recently elected Popular Front Leftists have proposed a $EU 12M ceiling on inheritance in France. They would levy a 100% estate tax above that amount. While they do intend to use the revenue, the case they make isn't primarily in those terms.
Note: I think the French proposal is rather like using a grenade to solve your rat infestation. Way overkill and likely to produce really nasty side effects. That being said, I actually like inheritance taxes in principle for the same reason Melechon does: anti-aristocracy. I would also be in favor of a small wealth tax (1% perhaps levied on the minimum value over the last 5 years) to discourage the hoarding of potentially productive assets. While I think the distributists were deluded in many ways, they were correct that the wide dispersion of productive assets is intrinsically valuable.
Great article. There's a massive misunderstanding of the concept of wealth due to lack context when looking at numbers, a poor understanding of how markets work in the real world, or a poor understanding of finance/accounting methods.
This is why I metaphorically bang my head when some Youtubers exclaim, "Congo/Afghanistan has $X trillion in mineral resources! Congo/Afghanistan shouldn't be poor!" What these YouTubers fail to realize is that this figure is derived by summing the estimated undug reserves of each resource and multiplying them by their current market prices.
If all of Congo's cobalt were suddenly available on the market, the supply would far exceed demand, causing cobalt prices to plummet. Consequently, the market value of cobalt would decline sharply, and so would Congo's total market value of resources.
In fact, over production is already causing cobalt prices to fall. Since April 2018, cobalt prices have already dropped over 70% due to overproduction and firms substituting new cobalt with other minerals like manganese or using recycled cobalt (source: https://tradingeconomics.com/commodity/cobalt
Congo right now has 35 years of cobalt left (3.5 million metric tons of cobalt reserves/100,000 metric tons of cobalt produced annually) If the entire cobalt market were flooded right now, the price drop would further diminish Congo's "resource wealth".
This is why I really like the point you just said about valuing from "mark to market" valuation vs. "book value" valuation.
yes, mostly, but Congo has generated a lot of revenue from its mineral resources already - and that is "wealth" that is somewhere - whether in Swiss bank accounts or re-invested in other goods. It doesn't seem to have gone to the infrastructure of the country or the general population. I think that is where the "shouldn't be poor" comes from, not from the potential resources.
Articles like this are why I subscribe.
For me, who is uneducated in business, this has been the most useful article I’ve read from you. The explanation of GDP, income, and wealth immediately improved my understanding of economics and permanently changed my financial priorities.
That was really good and should be taught as broadly as possible
All the points are indeed valid
I think it's better way to look into much wealth because wealth comes in after income .which means can also contribute much to country
Excellent article. I will be sharing a lot. Question: If growth is fueled by investment, and additional increments of investment are the result of additional saving, won’t redistributing income slow growth? If the goal is to primarily tax the wealthy, it seems that the only funds available for redistribution are what the wealthy consume out of their income/dividends—a small fraction of their wealth—and if we attempt to tax/redistribute too much of this portion, they will cease having a reason to produce in the first place.
Redistributing income does slow down growth if you do a lot of it, but a little can actually speed up growth.
How so?
This is me spitballing but, presumably, if a society has too much income inequality then the % of people who are able to gain new skills (e.g through a college education), create businesses, and grow said businesses will just be too low. To remedy “high” income inequality (which I now realize is sort of vague), redistributing income would insure that the % of people that can do the above would increase and thus growth would somewhat accelerate. Then, the question just comes down to determining what level of redistribution ensures that % of people is high as possible while still making sure the enterprises created by this portion of society can thrive as much as possible.
Take all of this w/ a grain of salt since I’m a 17 year old high school grad that took a year of macro.
?
"if we attempt to tax/redistribute too much of this portion, they will cease having a reason to produce in the first place. "
https://www.econlib.org/archives/2011/04/david_cay_johns.html/#comment-88892
"numerous studies show that tax rates have to be much higher than now to significsntly <sic> reduce work. First off most people have to make enough to have a life. Second people who are seriously money motivated work harder when taxes go up, so raising taxes on them can actually be efficient."
If taxes are higher wealthy folks/businesses should also be more motivated to invest in new businesses or upgrading the current system since business expenses are a tax deduction. The high tax rates post WWII in the US were meant to discourage wealth accumulation but probably also to encourage reinvesting profits.
This was really neat! I had not heard a number for total global wealth or known that it was so small relative to income.
Good, clear explanation of what to many people is a difficult concept to grasp. I used to teach basic economics to high school students, and this was always the most interesting and entertaining subject to cover. Working through the subject and seeing the dawning comprehension in those high school seniors of what wealth actually is was always very satisfying -- and I hope useful to them in their future lives.
I think you're taking a fairly simplistic view of how to denominate wealth. Your view belongs in the old gold standard world mindset where there was a fiction that there was truly a finite amount of wealth which had to be accounted for in the corresponding amount of gold. Of course it didn't really work that neatly but that was the underlying shared fiction which drove financing. In the post gold standard world wealth is distributed in a much wider range of fictions, all of which are driven by the ability to borrow. "Money" is being created by more and more actors, whether that is governments selling bonds that rely on trust in the future stability of governments, cryptocurrencies which rely on trust in the belief that finite denominations of computer code will increase in "value", or credit card companies giving "rewards" that can be moved around balance sheets. It all works because for the moment it works, but it's an increasingly perilous pyramid that will topple at some point in the foreseeable future. So your accountant's notion of "wealth" has some correspondence to "reality" but the financial system complicated far beyond a double-ledger mindset.
I think Noah addressed that point here: https://www.noahpinion.blog/i/146564156/the-worlds-net-wealth-is-pretty-small. The world's total wealth *is* finite, and equal to the sum of all the world's tangible assets (not just the total amount of gold). The examples you mention of money, bonds, credit card rewards, etc. are all examples of debts where one person's asset is another person's equal and opposite liability.
The cryptocurrencies I know aren't a debt, but more like a pure fiat money. The holder only benefits from holding a cryptocurrency if they can persuade someone else to accept it in exchange for something else. However you think of cryptocurrencies, like debts they add nothing to the world's net worth (although their existence allows the service of an alternative payment system to be provided).
What makes fiat money valuable in the end is that people need it to pay their taxes, and the nearest equivalent to "taxes" for cryptocurrency is the payments demanded by ransomware criminals: such criminals invariably demand cryptocurrency because it offers a finality of payment that conventional currencies no longer do.
That's the chartalist (or MMT) position, but many don't agree with it. It makes it sound as though being held in prison is the natural state of affairs, and being allowed out is a valuable service provided to you by government.
So, are stock that someone holds "tangible assets"? Seems more like gambling (much of the time) and betting that someone will buy it. Yes, I am exaggerating to a point, but clearly stock value doesn't correspond very much to "tangible assets" a company has.
BUT, it is definitely wealth in a practical term. You can borrow against it and spend that (now the bank is betting that you can pay it back at some point and that "wealth" won't disappear as collateral).
Stock in the sense of a share of ownership in a limited company is not a tangible asset. You can't touch it. Even if you have a share certificate, it's just *evidence* of partial ownership of the company, not an asset itself. (Except in as much as a piece of paper is an asset).
Did you get hacked or are you having a meltdown?