Modelling a Wealth Tax: A Response to Paul Graham
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It would have been a fine article without the childish attacks.
But probably wouldn't have got the same number of readers ;)
Edit: I thought the <sarcasm> tag was not necessary, but apparently it is.
This on the other hand is uncalled for and unnecessary. The analysis stands on its own by just saying "Paul Graham is wrong about this."
He does a fine job in rebutting that PG post which made no sense and painted a very bleak picture of wealth tax. IMO this shouldn't have been flagged.
[1] http://web.archive.org/web/20200818133017/http://paulgraham....
As a result, you have to gross up the cash liquidation amount to cover the income taxes that will be owed, and this can substantially increase the amount you need to liquidate. For example, if you need $100,000 to pay for your wealth tax, you might need to liquidate $181,000 to end up with this amount after taxes (assuming a 45% combined rate). You can get lower rates with qualified dividends or capital gains, but I imagine if there is the political will to enact a wealth tax, the capital gains rates will rise up to be the same as wage rates.
As you can see, accounting for income taxes can nearly double the required liquidation. Perhaps I missed it, but it would be interesting to see how this affects the model.
(BTW it seems there've been some changes made to pg's post[1][2])
[1] http://web.archive.org/web/20200818133017/http://paulgraham....
Well, that would be a red flag in PG's argument already. Who said it's bad for your wealth to go to the govenment (assuming you still have wealth to spare and take care of all your needs and even your grandchildren up to 3-4 generations, as this is about big wealth)?
In a normal country, the governmnet is not some enemy, it's the public pool of resources and planning public goods/policy/infrastructure/protection/etc for a country.
If on the other hand live somewhere where the government is an enemy, then you have bigger problems than part of your wealth going to them, and you should fix those first, not the tax.
PG didn't say it was bad. That was a motive imputed erroneously by this author. He simply provided a model of how much it would cost, and what people might do in response to that cost.
I'm not sure what the latest numbers are, but if 90% of startups are near 0 return for founders, and 1% are the home run swings which made it worth starting the company to begin with - then when do proposals affect the expected value for starting a company. This notebook doesn't show anything other than 'if you were going to make a bunch, you'll still have more than zero' which isn't useful.
Startups are in the land of "fat tails" - so talking about a policy saying it's fine for for most people since the people at the extreme in the fat tail are doing fine seems to be thinking under-critically.
Yes, if your startup is growing by 10% YoY your wealth is still going up even under the tax. However instead of you owning A% at the end, you only own <<A% because you've been selling equity every year to pay the government. Just look at your first plot between 1% and 3% tax. A delta of 2% tax results in losing 70% of your value.
Your post seems to suggest the idea "Since you're making so much anyway it's ok to take away most of it." Though of course there is a balance, I think this kind of trade would greatly reduce risk-taking and entrepreneurship.
Let's say the business generates $1M/year in free cash flows.
Give me a number: What's my net worth? How much wealth tax should I be asked to pay?
(With income tax it's relatively straightforward: you're taxing actual transfers of cash or cash-equivalents from account A to account B that happened in time period Y. If the societal goal is to achieve more progressive redistribution of wealth, isn't it much simpler to just modify the income tax brackets and rates?)
I do think the implementation is difficult with privately owned businesses. I agree - it seems very difficult to do so but not impossible to do if we figure that the wealth tax would only be implemented for those individuals holding stakes in companies worth more than 10M (or whatever)
The idea that PG "modeled" a wealth tax without factoring in that investments grow (not just due to increasing their success - but many investments grow slowly and surely due to boring factors like inflation and population growth) is intentionally obfuscating the truth.
That's why its called cost/BENEFIT analysis...
So while you can exceed your specific benefits in local government, the reality is that the pooling of resources does in fact provide you with much more than you could afford alone.
If we are clear-eyed, we have to incorporate that into any risk-adjusted evaluation of "benefits" that we enjoy in exchange for our taxes. That is the price of freedom, and unless we wish to slide back to the serfdom/slavery the feudal past (and all the horrors that entails), we'd be wise not to ignore that our shared sense of security rests on the contributions we make to society.
What if I think many of the policies actually do great harm? What if I'm in jail for a nonviolent drug offense?
I'd say it's irrelevant what you or I think. What's relevant is what a politically viable legislation can achieve. That does not include UBI in the US today (unless you are an Alaska resident receiving money from their oil fund), but there is plenty that is achievable short of a UBI today that will put a floor under people, like a federal jobs guarantee, and universal healthcare and pre-K education.
We do, however, have plenty of actual evidence that shows the historical correlation between higher top marginal income tax rates, the building of infrastructure, and the growth of middle class prosperity in the US - at least for a particular subset of the population.
> What if I think many of the policies actually do great harm? > What if I'm in jail for a nonviolent drug offense?
I would agree that non violent drug offenders shouldn't be in jail - and that drugs should be treated as an economic and health problem, not a criminal issue. We can lower incarceration costs in the process. But we must also put a floor under people so they are less likely to turn to drug dealing or illicit behavior so readily.
Roads
Available utilities due to regulatory planning with normally private companies
Your food supply is generally trustworthy
Social security.
Social safety net hospitals.
Generally clean and monitored environment to avoid carcinogens (less more recently).
Well defended.
I wonder if taxes are so high that anyone's income taxes, capital gains taxes, and consumption taxes are higher than the mulitipicative benefits from the above.
The problem with most libertarian arguments is that they love to point out all of the negative externalities of taxes, but none of the positive externalities of a well educated, healthy, fed, sheltered, happy society and a clean environment.
People and the environment are treated as cost free infinite sinks and sources.
Markets may be the most efficient mechanism for allocating goods and services using price signals, but that assumes your price signals aren't garbage. Garbage in/Garbage out, and if you have uncounted for costs your externalizing from your inputs or outputs, then you're effectively freeloading off of everyone else who will pay those costs down the line.
Thus when someone makes billions of dollars and starts to whine about paying a chunk of it, what I hear is an ungrateful douchebag who participated in a game whose rules were set up before his birth, won big, and wants to loot the corpse and run off without paying it forward. (I'm looking at you Eduardo Saverin)
There are some assumptions built it to this - that if the US government didn't do it, it wouldn't get done.
But some areas:
1. Extremely high housing costs due to zoning restrictions and government subsidized mortgages. 2. Extremely high medical costs due to regulation and central planning 3. Extremely high educational costs due to subsidized student loans. 4. Over 1 million people in jail 5. Involved in military actions and destabilizing actions around the world. 6. The war on drugs
But even with that, based on the things above - is there any point at which taxes are too high? Why not make them 100% and then the government can provide food, shelter, and spending money?
https://en.wikipedia.org/wiki/United_States_federal_budget#/...
Fair point about others, however with regards to themselves, I believe you missed the point of PGs article. Without the extra wealth tax they would have almost certainty been better off because they can choose how to benefit from that money.
Regarding others, I believe the onus should lie on the government before implementing the tax to show that everyone - including people paying the tax - will be better off because of the benefits from the wealth tax to others. Given how (in) efficient government can be in spending tax money, it's not an unfair expectation to have.
- Taxes are guaranteed, but growth isn't. It also doesn't come for free, it takes work. You can't just say "hey S&P returned 10% last year, I'll assume that for a given". Also wealth is often non-diversifiable - Elon Musk's or Jeff Bezos' wealth are tied to their companies. They could feasibly take a 50% tumble in a year (can't see how but it's totally possible). Of course these two will still be very rich even then, but what about 'minor' millionaires?
- People with these levels of wealth already pay, or should pay, high taxes on other things: CGT, VAT, income tax, corporation tax, land / real estate taxes. If they don't, then this is the real problem, you shouldn't fix it by just adding another patch on top of a stack of leaky patches. Already, in all developed economies I know of, a huge chunk of income tax comes from the top earners.
- And further to that, taxation isn't simply about maximal resource extraction from a productive population. Tax is a societal commitment to fund things we all care about. It is generally widely understood and accepted that wealthier people pay more, because the poor can't. But when the rhetoric becomes "let's extract as much as we can from the rich, look here's a notebook that shows we can", I'm not surprised people start looking at tax avoidance. As the rich person, you become dissociated from the society - they are only there to shear you, so why should you make an effort to give back?
- And it's not inherently wrong to be rich, also. Sure, some people are rich and abuse other people, possibly with some strong ties between one and the other. But the solution isn't a punitive tax. In a way, that makes it worse - makes it feel like you paid your dues and now you're really above the law.
- The point of wealth is that it should be productive. So the business of being rich is to have money, have it return an interest higher than inflation (on which you already pay CGT usually), and consuming the excess. It's not enough for the tax to be below average growth rates.
Perhaps I should explain, that I write this from (a) outside US where there doesn't seem to be such a toxic inequality in the society (and not simply because of wealth taxes...), and (b) I'm not rich, but hey, I'm working hard to maybe be there one day. I don't want my hard work to then turn around on someone's misguided notebook.
Example: he doesn't take into account the fact that investments can and do go down in value, and you have to sell to pay taxes, even when the value drops.