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Comment by tnr23 | Hacker News Reader

A problem that is usually not noticed with a wealth tax is that you have to pay the wealth tax from money which already has been taxed with some sort of income tax.

Means a 2% wealth tax combined with a 50% income tax, dividend tax, capital gains tax or whatever ends up being a 4% wealth tax effectively.

Example: You own stock worth $1,000,000 and the government wants 2% wealth tax from you which means $20,000. But to get that $20,000 you have to sell $40,000 worth of stock and pay 50% income tax for that sale and the government ends up taking 40,000$ effectively.

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>tax combined with a 50% income tax

Properly managed capital gains are taxed at ~15% or less. One should hope that by the time you accrue $50 million your capital gains are properly managed.

How do you get to your 15%? Long term capital gains in the US are taxed at 20% + 3.8% net income tax + state tax. In a city like New York, you're talking close to 40% depending on your tax bracket.

That was just an example to make the point clear which varies from jurisdiction to jurisdiction. But even in your 15% example the long term effects are very significant.

Your point has been noticed time and time again. It's called "a nice problem to have." A man who is living paycheck to paycheck would love to be able to just dip into his investments and toss away $20K without at all affecting his lifestyle.

Money is power. I can't request a sit-down meeting with my own senator or local representative and expect my request fulfilled. Paul Graham can, and so can everyone in his wealth class. This is a problem, because Graham is not a constituent of either of them.

You'd borrow against it, giving a bank the shares as collateral.

Now you're paying interest.

(If you're planning to wink at the bank, pay nothing, and let them keep the stock, that's the kind of thing that won't work if it becomes common. At that point, people will point out that you sold stock to the bank and didn't pay the income tax.)

Interest rates are so low that your income from your job at the startup is probably enough, right? Granted it won't work if rates go back up, and the current environment is a bit special.

Plus you might have some dividends on the whole amount.

You're paying interest on top of the loan amount, which you still also have to pay. You may not get the income to pay the loan by selling stock, but you have to get it somehow, and you'll pay income taxes on it.

The point is by borrowing the money you avoid paying the same amount of tax, because the income tax on whatever you're servicing the loan with is not the same amount as what you'd pay if you sold the shares?

Depends on the numbers of course.

In a general debt-vs-immediate-payment question that could work, I guess, because you can e.g. pay the debt off over such a long period that the total income you need divided by the number of years you take falls into a lower tax bracket than otherwise.

I have trouble seeing how it would work in the example under discussion, where we know that the person is extremely wealthy -- and thus should hit the maximum income tax bracket no matter what -- and that capital gains taxes are likely to be the least heavily taxed income source available, so that it would be difficult to beat selling stock.

Depends a lot on what country we mean. Also, the debt never had to be repaid. You can keep rolling it as an interest-only loan, so long as the collateral is enough to satisfy the lender.

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