Wealth and Taxes | Hacker News Reader

Wealth and Taxes

johnhcochrane.blogspot.com

49 pointsdeafcalculus48 comments

This criticism of Saez and Zucman is extremely important. The media has latched onto their studies because it fits certain talking points. But their conclusions are far from universally accepted among economists.

More importantly, regardless of what side of the aisle you are on, you have to appreciate that these measurements are not simple, and are based on choices that are not obvious. Saez and Zucman, for example, exclude transfer income like the earned income tax credit from income. Under their methodology, even a very redistributionist economy, such as one with a high guaranteed minimum income, would look unequal because those transfer payments aren’t included in income.

How you measure things changes the results. Measuring pre-tax income shows inequality growing. Measuring income after taxes and transfers shows it growing slower. Measuring consumption shows it more or less stable since the 1960s: https://voxeu.org/article/consumption-and-income-inequality-.... There are good reasons to consider each of these measures. (Though I’d argue that measuring consumption is the most relevant to every day well being.)

This completely misses the political angle. Someone with 1 billion in liquid assets can affect the political landscape more than 1,000 people with 1,000,000$ in assets. Similarly to how someone making 50 million per year has more than 1000x the disposable income of someone making 50k/year.

That’s what’s corrosive about wealth inequality. It’s why the marginal tax rate declines at very high incomes. It’s not about doctors vs landscapers because doctors don’t have political power relating to wealth.

> This completely misses the political angle.

The political angle that your comment does play to is the reason why many people find the "income inequality" argument rings hollow.

The piss-poor are too caught up trying to survive to have much of a political agenda.

Often the people on the picket lines are in the income classes of the "doctors" in your example.

Sure they don't have near the influence of a robber baron, but they're worlds ahead of a lowly immigrant landscaper.

> The piss-poor are too caught up trying to survive to have much of a political agenda.

With all due respect I don’t think this is true. Besides, as income level goes up, people are more likely to be a blue voter than a red voter[1], a fact people have a hard time believing.

Arguably 2016 was the poor, lower middle class (one of the least represented demographics in America) rising up and rejecting globalism. They affected change, was it not the kind that you expected?

After all, what class do people think the “deplorables” are? A bunch of rich dentists?

1. https://www.people-press.org/2016/09/13/2016-party-identific...

> as income level goes up, people are more likely to be a blue voter than a red voter

That's precisely my point. Income inequality is a Democrat talking point.

Are you mixing up red vs blue? I think most people tend to assume that as ones income increases they’re less in favor of a tax system that decreases income inequality.

What figures are you intending to quote from your link?

I was surprised by your comment as I'd seen data showing that Obama Vs Romney had a clear trend of richer people voting Republican (the crossover point was around 70K).

I knew educated people had swung towards Clinton and away from Trump, but I didn't think it was enough to change that overall result.

Looking at your source, the family income section seems to agree with my assumptions. Am I missing something?

Edit: I see there's a small blip in the detailed family income above 150,000 for combined dem/lean dem (though more identify as republican than democrat)

I haven't looked into it enough to have any clear data, but I have always assumed that the distribution looks more like a layer cake than anything else.

If you are X, then the people in the social groups immediately below and above you are assumed to be Y. Mainly because people compare themselves to the people directly adjacent to them. So if you are different enough to no longer be part of the "in group", then you are likely to be part of the "out group".

Don't have any idea if there is truth to that or not.

> as income level goes up, people are more likely to be a blue voter than a red voter

Could you elaborate on this? I'm having trouble reaching the same conclusion from the link you provided.

Of course he misses the political angle, if he discussed it, soon enough people would clamour for the revolution.

There is William Hinton's book Fanshen, a personal account of the author of the Chinese revolution in a rural village. One of the early chapters describes the struggle for power, and how money is converted into power. It's recommended reading, you don't have to agree with his political opinion, but it does give the backstory.

> That’s what’s corrosive about wealth inequality. It’s why the marginal tax rate declines at very high incomes. It’s not about doctors vs landscapers because doctors don’t have political power relating to wealth.

Tax rates decrease at the very top of the income spectrum because our tax codes make a deliberate choice to preferentially tax investments and capital gains.

You’re assuming that choice is the result of “corrosive” factors, namely the wealthy having more political power. But that’s a loaded assumption. Most economists agree that preferential tax rates on capital gains is better for the economy. That’s why almost every tax code in the developed world has that feature. I don’t think you can just assume the only reason for that is the super wealthy having disproportionate political power.

Already the Brookings Institution (center, center-left, center-right, depending whom you ask) disagrees: https://www.taxpolicycenter.org/briefing-book/what-effect-lo...

Brookings tends to be mainstream American Democrat, which on tax issues is solidly to the left of the developed world consensus. (The US is the highest in the OECD for how much of tax revenue it derives from progressive taxes. Democrats are seriously proposing wealth taxes, which are unusual in Europe and were recently eliminated in France and Sweden.)

Here is an interesting article on NPR on a politically diverse set of economists agreeing that corporate and income taxes should be eliminated: https://www.npr.org/sections/money/2012/07/19/157047211/six-....

That NPR article is a very strange collection.

# 2: End the tax deduction companies get for providing health-care to employees.

Right now, large employers receive a group discount from whatever insurance provider they choose. So to bring down healthcare costs in the US, which are 4 times that of the civilized world, this motley crew of economists suggests to eliminate the group discount. That'll work.

# 3: Eliminate the corporate income tax.

Yes, Joe Plumber's firm pays corporate tax in PA, but any multinational with a decent lawyer pays no tax anywhere. Incorporate in Bermuda, license the IP. In the interest of fairness one could abolish corporate tax, but one could also come down on tax oases. Why isn't that even suggested?

# 4: Eliminate all income and payroll taxes

We are supposed to have a consumption tax instead. The wealthier you are, the more likely are to invest. Less wealthy people do not have that luxury, what comes in goes out that month. It seems to be an attempt to shift the tax burden away form the politically connected class.

It's not convincing at all, there's too many aspects missing from the discussion to be taken seriously.

For all of these it's important to remember that the federal government doesn't have to charge taxes to anyone. It can just print more money to pay its bills, inflating the currency somewhat. All taxes therefore are social policy, without exception.

So, as a social policy... when Joe Plumber is considering going out on his own, how much advantage do you want to give Mega-Plumber-Co against him? Right now Mega-Plumber-Co gets the advantages of cheaper health insurance, no corporate tax, and can easily amortize the cost of certification/licensing taxes.

With regards to #4 specifically, consumption taxes are the most economically efficient. This is a social policy that encourages thrift, which is bad for mega-corps but good for the individual. If the regressive nature of consumption taxes concerns you, you can just partner them with a dividend check paid to all citizens.

> 2: End the tax deduction companies get for providing health-care to employees. Right now, large employers receive a group discount from whatever insurance provider they choose. So to bring down healthcare costs in the US, which are 4 times that of the civilized world, this motley crew of economists suggests to eliminate the group discount. That'll work.

That’s not what they’re talking about. They’re talking about the fact that when your employer pays premiums for your health insurance, that a not considered taxable income. That is regressive (higher income people get more health insurance benefits).

> Yes, Joe Plumber's firm pays corporate tax in PA, but any multinational with a decent lawyer pays no tax anywhere. Incorporate in Bermuda, license the IP. In the interest of fairness one could abolish corporate tax, but one could also come down on tax oases. Why isn't that even suggested?

The idea of licensing IP from Bermuda captures the media’s imagination, so there is a lot of coverage of such efforts, but it actually doesn’t add up to much. Most companies simply can’t take advantage of such tricks because they don’t deal with intangible products. Wal-Mart’s effective tax rate is 25% for example. The average effective tax rate for the S&P 500 was about 18% in Q4 2018. That’s higher than the average effective corporate tax rates in say the Netherlands.

Corporate tax avoidance just isn’t a very big deal. Estimates are that legal corporate tax avoidance costs $100-240 billion in revenue across the entire OECD: https://fortune.com/2019/10/16/corporate-taxes-unpaid-g20-su.... That’s just 1.7% of the $15.6 trillion those countries raise in taxes each year. Why does so much media ink get spilled about such a small issue?

> We are supposed to have a consumption tax instead. The wealthier you are, the more likely are to invest. Less wealthy people do not have that luxury, what comes in goes out that month. It seems to be an attempt to shift the tax burden away form the politically connected class.

It’s an attempt to shift to consumption taxes, which economists broadly agree are the most efficient kind of taxes. Which circles back to my original point. You perceive the policy in terms of its effect on the “politically connected class.” But there is a rational, economic reason to favor such a tax regime even if the wealthy didn’t have greater political connections.

The “political connections” reasoning doesn’t hold water to me. We’ve always had rich people. But over the last 50 years, pretty much every developed country has dramatically reduced corporate and investment taxes. Are the rich more politically connected than in 1970? I don’t see any reason to believe that’s true. What has changed over that period is economic theory on taxes. That seems to be the real cause.

It's not that they didn't evade taxes in Europe. You can incorporate in Luxembourg, the Netherlands and Ireland are popular tax paradises as well. Easier when you deal in non-tangible goods, which is probably why until recently corporate tax evasion wasn't such a big deal.

It may well be that labour lost its negotiating power since the 1980s. The wealthy are as well connected as ever, but labour hasn't got a seat at the table any longer.

> Tax rates decrease at the very top of the income spectrum because our tax codes make a deliberate choice to preferentially tax investments and capital gains.

Why don't we make some more tax brackets up top and tax dividend + capital gain income more like income?

Three reasons.

1) Economists generally believe that it is inefficient to tax capital gains. (Dividend income is already mostly treated as ordinary income.) That is to say, raising the same amount of money through capital gains reduces economic activity more than doing so via say consumption taxes.

2) We are already on the high side of the OECD when you combine capital gains rates + corporate tax rates. (Corporate profits are taxed at both steps.) Here in Maryland, the combined state and federal capital gains rate is 28.25%, a hair below Sweden’s 30%. Sweden’s corporate tax rate is also about the same as the current post-Trump tax law. Personally, I’m uncomfortable being to the left of Sweden on anything.

3) As to adding more tax brackets, it just doesn’t raise enough money. Our tax brackets already go well into the top 1%. So you’re talking about targeting the top 0.1%. The total income of that group is about $1 trillion, or 10% of all income: https://inequality.org/facts/income-inequality. Even confiscatory taxes in that group aren’t going to raise very much money. According to 2014 data, those people paid an average of 27% in federal income taxes alone. (Excluding state income or other taxes). Doubling that, which would take their total taxes to levels far beyond what is typical in Western Europe, would raise maybe $250-300 billion. That’s assuming those people don’t head to Sweden to lower their taxes.

At all levels, the United States spends $7 trillion+ annually. Another $250 billion is a drop in the bucket. It’s a fraction of the $3 trillion per year or so that Medicare for All will cost, for example.

Quality post + discussion, thank you.

Unbiased question: What’s your advice for the 50% of Americans who make less than $30k/yr? How are they supposed to afford health care + housing + transportation (let alone preparing for retirement)?

Get married, have kids, and move to a low cost state. The median married couple with children in Iowa makes $79,000 a year, and in Minnesota it’s $91,000. As to health care, the large majority of Americans who aren’t eligible for Medicare get their health care through their employer. Median out of pocket costs for a family with employer provided insurance are around $7,700, which is affordable on those salaries, especially since it’s pre-tax. Also, on average, Americans’ social security and 401ks cover 70% of pre-retirement income, one of the higher figures in the OECD.

The real issue are the 15% or so of Americans who make much less than the median, don’t have employer provided health insurance, etc. I think there should be a strong safety net for those people, particularly subsidized or free health insurance. But we should pay for that safety net the same way every other OECD country does: through consumption taxes and income taxes where the top rates kick in around $70,000.

The whole “tax the rich” thing is a distraction. The rich don’t actually make enough money to pay for all the things people want to pay for. If you want European style welfare, you have to tax the 80% of income earned by the bottom 99% more heavily. Note that even under Warren’s Medicare for All Plan, the vast majority of the cost will be paid for with middle class taxes. The wealth tax will pay for less than 10% of the extra spending. But the amount of time spent talking about wealth taxes and 70% rates on super millionaires is much more than the time spent in talking about the new payroll taxes that will actually pay for the bulk of Medicare for All.

the 1% only earns 20% of the US taxable income yearly? I didn’t know that.

When you say consumption tax, do you mean a VAT? What else? What percentage VAT do you see working in America? 10%? 15%?

Somebody making $200k/yr pays ~$41k/yr in federal income taxes. To be more in line with European rates, how much more should they pay? Another $20k/yr? Double?

Nominal tax rates are meaningless, total federal corporate taxes where $205 billion in fiscal year 2018. That’s a long way from the nominal 21% federal tax rate.

$205b on how much income?

Several ways to calculate that, but ignoring international profits you’re talking something like:

https://fred.stlouisfed.org/release/tables?rid=53&eid=18673&...

Corporate profits with inventory valuation and capital consumption adjustments: 2018

Q1: 1544b + Q2: 1561b + Q3: 1592b + Q4: 1593b

6290B giving an effective tax rate of 3.3% minus whatever they paid on foreign profits.

You've misinterpreted the data in that link. That isn't showing per quarter profits, but instead the annualized rate sampled by quarter.

Thanks that’s much more reasonable 13% then. That’s what I get for posting before going to sleep, I kept thinking that’s to low and posted it anyway,

> Tax rates decrease at the very top of the income spectrum because our tax codes make a deliberate choice to preferentially tax investments and capital gains.

Our tax codes were written by people working for the wealthy. Our tax codes make a deliberate choice for a reason.

> That's why almost every tax code in the developed world has that feature.

You mean the wealthy in the developed countries like preferential tax treatment?

> I don’t think you can just assume the only reason for that is the super wealthy having disproportionate political power.

They may not be the only reason, but they are the major reason. In a capitalistic society, political power is subservient to and works for those who have and control capital.

The tax code didn't write itself. Who do you think the tax code was created by? Who do you think the tax code was created for? The janitors and street vendors?

The article is definitely not "missing" the political angle; that part is addressed. The point is that it's indeed a question about politics, not economics. By advocating that people having 1 billion in assets should have some of their assets taxed away, you're essentially saying that our political processes are so screwy that on average, someone with say, 1 billion in assets can be expected to use the flaws of our political processes to inflict real, actual damages on the order of, say, $100M on third parties (compared to the most feasible alternative outcome) and that they should be paying restitution for those expected damages. While this may be in fact an appropriate description of a number of countries outside the highly-developed West, it definitely doesn't describe, say, Western Europe, or even the U.S.! Our current President is an exceptional case, he's nowhere close to the norm of all billionaires, and policy should not be set as if he was.

Why does a tax have to be proportional to "real, actual damages"?

I'm not saying that all taxes have to be like this. There are other possible arguments for taxing assets, despite the fact that, prima facie, any tax on assets is double taxation and quite highly distortionary of the economy (far more than, e.g. taxes on pure rents, consumption taxes or taxes on labor income). But our existing taxes tend to account for these arguments reasonably well. So if you want to propose some extra tax on wealth, it had better be based on something tangible. And it just doesn't seem to me that this is true of what's being proposed wrt. the U.S.

First, Art and collectibles are also given preferential tax treatment and have no kinds of double taxation.

Anyway, unrealized capital gains are untaxed as they compound, which might be ok except inheritance and gifts under 10m for couples are also untaxed creating a giant loophole allowing for very low lifetime tax rates.

It’s the same issues as companies keeping giant piles of cash offshore rather than issuing dividends. Tax loopholes create economic issues which a low AMT actually helps smooth out without creating excessive burdens. Another solution is to tax all capital gains and have an investment tax break of some kind, which allows earned income to be invested without excessive taxation relative to capital gains.

PS: Couples being assumed as people have 2 parents.

They're going to be taxed when the gain is realized. An asset is a durable good anyway, pretty much by definition so how can it matter when the tax is levied?!

Not if it’s inherited. Buy stock at 10$ have it raise to 10,000$ and after death your children can sell it and keep the full 10,000$. Assuming your estate is worth only worth a few million.

Or if they maintain ownership and sell it in 10 years when it’s worth 20,000$ they are paying 15% of 10k gains which is 7.5% of the total gains from your purchase.

PS: For the ultra wealthily there are other games to be played. ‘No forgiven debt is taxable if it was discharged in any type of bankruptcy.’ Play the game correctly and a loss can be deducted from both your and your parents future incomes. While gains are taxed normally.

1. Changing how campaign contributions/PACs function seems like a more reasonable way to change this than simply pursing a quasi-communist means of dragging wealthy people down, in the hopes that with less money they'll have less influence over the political system. I'm kind of sympathetic to 'wealth taxes will give us more income for programs to better society', but when it turns out to outright retributive 'taking money away from some people is an aim in and of itself', I get pretty concerned. No societies that are explicitly & punitively about punishing the wealthy seem to function particularly well

2. If wealthy people like the Koch brothers are going to be taxed anyways, they may spend more of their wealth on campaign contributions simply because they'll lose the money either way. If it's 'use it or lose it', why not keep spending more on dark money PACs or whatever?

So should we tax people based on their political power? A heavily-read blogger might have thousands of times more ability to affect the political landscape than an eccentric billionaire. If you were to do a scatter plot between wealth and ability to affect the political landscape I believe you’d find they were correlated but not that heavily; the things that give you political pull include charisma, eloquence, and gregariousness.

If we are concerned with cancelling out the ability of the wealthy to influence politics should we not also be doing something about charismatic individuals?

There are definitely problems with most wealth tax proposals, but I think the author understates the generational differences in opportunity that emerge from massive wealth inequality. As I stated in another thread, perhaps the best solution would be to combine the two for a wealth-based income tax. If you're already worth 20M, should you be paying a higher rate on your 500k in interest than if you just sold your first company for 500k and previously had nothing? I think that's a reasonable way to address income inequality in the long run without forcing people to liquidate assets, especially those like Elon Musk who have most of their wealth tied into companies they actively manage or people whose entire net worth is tied up in historical family properties.

The current system is broken, but mostly because the income/capital gains tax/AMT need to be graduated on a far different system than today. Right now, making 510k places a single person in the top federal tax bracket, while there are people making 10,000 times that some years. If there isn't a high bracket that is rarely achieved in practice (10B+/year for example), then the brackets are probably broken. Right now we have a sharp cliff where it is very difficult to become a millionaire, but once you get a few million it becomes far easier to multiply wealth.

Until we address the monetary system I don't see how much else matters in restraining the elites. Generational wealth will just move even more so into non-taxable things like art, favors, interlocking directorships, foundations and so forth.

I'd like to see a georgist tax regime[1] and monetary expansion managed via a citizens dividend. But the current monetary system will only be pried from the cold-dead hands of our elites, so I'm not optimistic.

[1] - https://en.wikipedia.org/wiki/Georgism

Georgism is an interesting approach to what could be handled by externality taxes in capitalism, but it seems like it would have challenges attaining accurate price discovery of naturally derived resources.

Regardless, I think the obvious flaws in our current system make a very big difference and should be addressed, rather than holding out for a utopian pipe dream.

Say I own a business that has $250k in assets but does $10m/yr in revenue. Does that add to my wealth? How do you value owning a business?

Anything based on wealth will have the challenging task of valuing assets, which is why the cutoff for where current wealth becomes a factor should be pretty high, so you only have to look at areas generating significant economic activity. One solution could be to limit wealth measurement to liquid assets and real estate -- any real world implementation will only be a heuristic. Better to have false negatives than false positives.

I still maintain the easiest solution is to fix and improve graduated income brackets. They are so ridiculously broken and most likely the main driver of increased wealth inequality in the US over the last few decades, and yet somehow are not the focus of the issue. We also already have the infrastructure to measure economic income activity -- it's just tweaking rates and thresholds.

Can you expand on why you think income brackets are broken?

John Cochrane makes some very good points on measurement errors by Saez and Zucman and how much of what they're measuring is actually reduced interest rates.

I wish that progressives used a similar framework that they did 100 years ago--to tax unearned income (land rents, monopolies, windfalls) while encouraging earned income. If you care about unearned vs earned income, then it does make sense to try to tax the asset holders whose assets ballooned in value due to reduced interest rates over the past decade.

Question for the group.

Working backwards, what percent of GDP do you think should be taxed by the local+state+federal government? Relatedly, what % of GDP should be spent by the government each year?

Right now the US spends 36% and taxes 32%. That.. seems pretty reasonable to me? Maybe a little high tbh. I definitely don't think the government should be spending more than 50%.

I'm curious what other folks think. Working backwards, what should total spending/taxes look like? Then how do you get there?

Tax income over a longer time window, and you get closer to a wealth tax without all the problems.

The longer the time window, the more it is a wealth tax.

If you're going to do that, why not tax consumption instead? And do note, you can have a progressive consumption tax. It doesn't have to be a burden on the worst off.

Is there a tl;dr or any context whatsoever?

There's absolutely no introduction or conclusion to this article that tells me what the author is trying to explain, or what angle he's taking or why.

Also this is "part II" of a 3-part article... I'm curious if there's a reason I'm missing as to why this is being submitted instead of parts I or III?

I'm just 100% lost here... :S If anyone could help explain the context for this submission, it would be much appreciated.

Option one. $400,000 retirement. Purchase BTC, claim a loss after it moves down even 0.03% in most places of the world, move to bermuda, convert BTC to Bermudian dollar, pay 0% income and 0% federal tax. Purchase property, enjoy golf courses and beaches all day.

Option two. $350,000 retirement. Go to Thailand, get a beach house, and live off the currency conversion rate, enjoy the beach.

Option three. Personal favorite. $900,000 Leverage XAU/USD based on fundumentals alone at 70x leverage in week long swing trades, averages per trend about $10k a week per $100k on 70x leverage. (PrimeXBT is a great low fee place)

Other fantastic investments are buying vending machines and putting them in laundromats, cost $3,200 for one and to stock it and they average $600 a month. Buy a functional AirBNB with a loan.

Sources to look at, Robert Kiyosaki's 4 business quadrants.

Remember, wealth does not have to be a number, its not all about money, its about freedom. Best of luck from a BTC millionaire, ~wolf

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