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Comment by Pfhreak | Hacker News Reader

This is almost a natural law of wealth. When you have significant capital, you can do things like loan it out with interest, leverage it into getting loans to build more capital, etc.

If one assumes that the wealthy are using their money to buy commodities and selling those commodities with the expectation of getting their initial money back plus some delta, then it becomes fairly trivial to demonstrate that the more money you start with the more money gets concentrated around you.

For example, I could leverage my current house to purchase a rental property in my city and rent it at a profit. Over time I'd pay down my loans and the value of my two homes would increase. I could then leverage two properties to purchase more or larger rental properties. My wealth would increase because I had sufficient wealth to begin with.

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> This is almost a natural law of wealth.

The article is about how the post-1975 period differs from the pre-1975 period. So it's demonstrably not a natural law. Natural laws don't change over time.

From 1960 to 1985 the top marginal tax rate crashed from 90% to 30%. And then of course there's the demise of private sector unions, the effects of computerization, etc.

Arguably, it was always a natural law, but the 1970s were an inflection point after which capital was allowed to accrue advantages at a much faster rate.

It's mostly a myth that there was a 90% marginal tax rate. It's technically true, but when the top tax rate was removed they also removed all the loopholes and deductions that were being used to reduce the effect tax rate on top earners to below 45%. All the while the proportion of tax receipts as a percentage of GDP has remained constant.

Meanwhile, the proportion of taxes paid by the top quintile earners has increased from 55% in 1980 to 70% by 2013.

In 2017 the top 1% of income earners paid 38.5% of all taxes, vs the bottom 90% who paid 29.9% of all taxes. The top 50% of taxpayers paid 97% of all taxes in 2017.

But all this ignores the main fact, which is that actual rich people make most of their money not as income, but as unrealized capital gains. High marginal rates on income taxes affects high-earning professionals. Not the private jet crowd.

> Meanwhile, the proportion of taxes paid by the top quintile earners has increased from 55% in 1980 to 70% by 2013.

Citing the amount collected from the top quintile is moving the goalposts a bit. A typical 20%er is someone like a successful dentist. Sure, they probably have a stock portfolio, but that's for funding their retirement.

It doesn't help that the statistics are always presented in misleading ways. We really need the stats to be stated in terms of tranches that exclude the higher ones (eg. top 0.01%, 0.01-0.1%, 0.1-0.5%, 0.5-1%, 1-5%, 5-10%, 10-20%, 20-40%, 40-60%, etc.). Instead, lumping the 1% in with the 1-20% just co-opts the upper-middle class into defending the interests of the 1% and above.

> But all this ignores the main fact, which is that actual rich people make most of their money not as income, but as unrealized capital gains. High marginal rates on income taxes affects high-earning professionals. Not the private jet crowd.

Of course. That's where discussion of wealth inequality (and the estate tax) takes over from income inequality.

Estate tax won't help you now.

Neither will income or property taxes.

Successful dentists are not much different than fast-food workers compared to multi-billionaires already.

Only taxing commerce can be sustained over the long term, and there need to be tariffs calibrated to insure any currency leaving the land of its fully-backed legal tender is replaced with incoming amounts of the same in a timely way.

Of course nationals need to be taking fair profits in both directions, and everything will eventually work out just fine.

I wouldn't call it a myth. High income earners both then and now have a lot of ways to avoid paying tax, so they don't pay nearly as much as the top marginal rate. It's also true that the top marginal rate used to be much higher.

> Meanwhile, the proportion of taxes paid by the top quintile earners has increased from 55% in 1980 to 70% by 2013.

Isn't this exactly what you would expect with growing income & wealth inequality, so long as your tax system maintains some aspect of progressive taxation.

But the percentage of total tax revenue paid by the top income earners has only grown over time, not decreased.

Which is what you would expect, no? I'm not sure what point you are trying to make here, can you elaborate?

Check the percentage of total income vs. percentage of total taxes paid. The system has become more progressive even ignoring the increase in income.

How can you ignore the increase in income?

I'm not claiming I know what is actually happening in the US, it's complicated and I haven't spent enough time looking at it to be confident.

However, it's true that if there is a) an increase in total income that b) is entirely captured by a small percentage of people, then naturally their share of the total income tax paid will increase and everyone else's will decrease as a fraction unless the system is regressive in some way.

"Progressive" here doesn't mean higher earners pay more in aggregate, it means (by definition) that their marginal rates are higher that people with lower income.

What is means is if you control for income, the top 1% are paying a bigger share of total income tax.

So even if they weren’t earning more, they be paying more taxes.

Even if you taxed them to the bone it wouldn't be enough so you're going to need to tax the bulk of the commerce instead of just the residuals after it falls into their relatively idle hands.

> actual rich people make most of their money not as income, but as unrealized capital gains.

Technically, they make most of their wealth as as unrealized capital gains. It doesn't become money until they realize the gains, at which point it is taxable income.

What's the average effective tax rate for high-net-worth+ individuals if unrealized capital gains are included as income? It seems like people get an increasing level of control over their taxes as their networth increases. Choosing when to exercise options means you have some control over AMT. If you invest in indices, it looks like direct indexing has a lot of tax benefits over an index fund. You can get variable and fixed rate loans against your investment accounts.

It's not a good idea for tax minimization to be the main goal of your investment strategy, but it seems like people can get access to a large portion of their investments without actually realizing capital gains.

> What's the average effective tax rate for high-net-worth+ individuals if unrealized capital gains are included as income?

That's a completely pointless question. If I own 50% of GameStop, my net worth will have gone from $650 million to $12.2 billion to $1.8 billion in like 45 days. Sure, this is an extreme example, but it happens over longer stretches of time to a ton of the richest people.

How exactly do you expect to tax that movement of those unrealized gains?

> You can get variable and fixed rate loans against your investment accounts.

That you eventually have to pay off. The money you pay it off with will be taxed.

Then typically only taxed long term cap gains rates of 20% or less...

That is just the base Federal rate. After NIIT, State, etc it can be >35%, which is actually quite high for a country where the cost basis is not inflation-adjusted. That is higher than most countries in Europe.

Did the effective tax rate change on the top quantile from 1980 to 2013, or did they just earn a lot larger fraction of income?

In 1980 the top quintile earned 44% of the income and in 2013 51%. So the tax structure became much more progressive over that time.

In 2019 it was 52% of the income.

It changed a lot. The marginal rate for someone earning $100,000 in 2020 dollars (so $31,837 in 1980) was 44% then and 24% now.

> From 1960 to 1985 the top marginal tax rate crashed from 90% to 30%

Nobody paid 90%. The tax rate reduction was countered with the closing of loopholes. (There are still a lot.)

Evidence for this is the nearly constant fraction of GDP collected in taxes. The other points are correct. Also, real incomes have both increased at the top end and shifted up for the population.

Don't forget things like the Panama Papers and how companies/super-rich figured out how to create thousands of shell companies to hide wealth, and that the journalist who revealed all of this was then murdered.

Marginal rate is not effective rate. In fact, when Reagan cut the top marginal rate multiple times while also changing loopholes the effective tax rate on the top increased after some of those changes [1].

[1] https://www.cbo.gov/sites/default/files/110th-congress-2007-...

The law might be the same, but the environment can change around the law. From tax rates and economic conditions to the power of labor can all shift how we respond to that natural law.

Wealth can continue to generate wealth, which we can then tax and redistribute. The natural law hasn't changed, but how we work around it has.

The natural law is there, but there was counterbalance from the government taxation and unions. That balance has been lost so the natural law is taking over.

You wouldn't say that gravity doesn't exist because someone is holding up a ball and that it suddenly appears when the person lets go of the ball. This is what happened to monetary policy in the 20th century. The government abdicated its role in the name of unfettered corporate growth and now we have billionaires.

I interpret Pfhreak's comment to mean un-checked capitalism will naturally result in wealth consolidation. The article describes how we loosened our management of this natural law and witnessed a more rapid wealth shift as a result.

Your intuition here is basically what's formalized by Piketty in "Capital in the 21st Century": that the rate of growth of capital exceeds the rate of economic growth.

What's interesting is that while intuitively this makes sense (for the reasons you gave), the implication (that the rich get richer and inequality grows) is the opposite of what was hypothized by Kuznets (https://en.wikipedia.org/wiki/Kuznets_curve); the latter hypothesis, to my limited understanding (as a non-economist), is fairly mainstream, and has influenced plenty of politics and public policy.

I'm halfway through reading Piketty right now, amusingly.

Watch the Netflix documentary. Basically cuts to the chase.

Please don’t watch entertainment (Netflix documentary) as a substitute for a book and think they are equivalent.

A documentary is more accessible to people and one can come away with the core the arguments

IMO understanding the arguments is useless without understanding how they were built, and what their caveats and assumptions are. Otherwise you end up parroting talking points without actually having thought about it. I’d rather people not hold an opinion on something than hold an unfounded one. A doc is not a good format for grounded understanding.

Nonsense. There are level of abstractions in all walks of life. You mustn’t be a trained economist to understand the points Piketty is making.

> Otherwise you end up parroting talking points without actually having thought about it.

That is quite a leap and a lot of assumptions baked in.

Sounds like a great system for everyone with generational wealth, and a terrible system for literally everyone else.

> This is almost a natural law of wealth. When you have significant capital, you can do things like loan it out with interest

It is a natural law of usury, which is what you describe. This is why we used to ban usury as unjust.

Yes, poor people would be better off without access to loans.

Again, what's the alternative?

Interest-free loans, given as a public good and to hedge against a wealth tax.

Get your name on some newfangled venture and keep Uncle Sam's hands out of your pocket, but you don't get to rent your money.

Democratic control of the economy.

That would be absolutely terrifying. The economy we have now is due to experts tinkering. Allowing the masses, who can't organize their own lives, to attempt to organize the economy will lead to more deaths and misery than the current system.

Would you want a democratically elected airplane pilot with no training?

Not even sure where to start with this level of elitism, but Elon Musk is certainly an expert in batteries, automotive production, rocketry and telemetry, and financial services all at once and not just a brand.

The kind of sentiment you are expressing is directly antithetical to having any kind of real democracy.

If you've ever met the people in power, many of them are quite dumb. It's easy to listen to experts (or not) and give commands. How often do you hear that executives don't know what's happening in their companies but the people on the line know exactly what to do but were not consulted seriously?

To answer your question about airline pilots, I would probably accept (and in fact do, the FAA) a system designed by what is allegedly a democracy. Usually people don't have direct popular elections for technical positions, but design rules in consultation with people familiar with the field. If the voters were in fact other airline personnel, a direct election could be viable though I would require some qualifying criteria (e.g. people with XXXX hours of flight time).

Plenty of people think it's important that airplane pilots be democratically representative[1].

[1] https://www.ksby.com/news/national/new-law-looks-to-attract-...

Plenty of people believe ridiculous things, story at 9.

sure, but i think the focus is on the magnitude and speed at which the wealth gap is widening. And its impact might be something we haven't encountered before

Last few times were "solved" by revolution. I'm expecting something similar.

This proposition, discussed and shown by Piketty in his 2013 book, was not at all obvious before that and even today many people would argue (wrongly) that it isn't true. So if it's a natural law of wealth, it is a very recently proven one.

https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce...

Marx presented this idea back in the 1860s. He phrased it a little differently and built the idea up from the idea of exchanging commodities.

In Marx's text, he discusses the history of commodity exchange, how people usually exchanged Commodities for Money which they exchanged back into other Commodities they needed. (E.g. I'll sell you my wool for coin, which I can use to buy food.) He called this CMC exchange. (Commodity-Money-Commodity).

This gave rise to people who had hoards of money, and could invert the exchange -- Money into Commodities into Money + delta Money. He called this MCM exchange (Money-Commodity-Money), and posited that it could only exist if the second M was larger than the first -- why turn your money into commodities and back into money if you weren't going to get more money as a result? So it must be that if MCM exchange exists, then it must be MC(M+∆M). Once sufficient hoards are accumulated, they will continue to accumulate.

Marx, of course, carries on with his own opinions about what to do with this and how society should be structured. He also bases his ideas not on data like Piketty, but on building up a model of a Capitalist economy from principles.

I think it's interesting to see this line of argument presented historically and compare/contrast that with the more data driven analysis we see in Piketty. (No matter how you feel about the rest of Marx's work.)

Edit: Downvotes? I feel like I'm presenting a factual response to the parent poster. I know it contains the word 'Marx', but I'm not diving into socialism/communism elements of his work, but rather the analytical dialectic of his critique of capitalism as a system.

> why turn your money into commodities and back into money if you weren't going to get more money as a result

I'm guessing this is oversimplified, but I haven't read the book. Otherwise, the simple fact is no trade in business is guaranteed, there will be plenty of such exchanges that lose money due to speculation. At the very least your buyer could pull out or go bankrupt before finalising the sale resulting in a fire sale and a loss.

Of course, by sheer probability if not talent, some people will win more than they lose and get ahead. The real danger is the plays that an excessive force of money can enable, like predatory and monopolistic practices in buying up a market (or legislators), or driving a competitor out of business. That's where money really makes money.

Right, Marx is saying "why would someone do those exchanges unless you broadly believed you'd get a positive return."

I don’t think this should be downvoted.

Did Marx address the notion that collection of rents on capital create an incentive for the creation of more capital?

How did Marx address the case of MCM transactions where the capitalist has erred and lost money?

Marx tended to focus on roles more than persons or transactions. Buyers and sellers, capitalists and workers, etc. Any individual might play any particular role at any given time. (For instance, I personally fill the role of worker with my day job and capitalist with my 401k.)

The reason I mention that is because his thesis was that, in aggregate, the role of capitalist must expect a positive return on MCM transactions, or they wouldn't occur. Individuals may suffer losses, but as a role it just be positive.

He's less data driven than Piketty, and he builds this notion on top of the idea that there is a desire to hold wealth. Or, put another way, it is natural in an economy of commodities and money to prefer holding money over any given commodity. Eg, having a hoard of money is more useful than having a hoard of wool, as it is generally easier to convert money into a commodity you need than to convert between two commodities.

So the natural inclination is to try and increase wealth, and MCM exists commonly, so therefore MCM must be a net engine for increasing wealth. (Even if individual cases are losses.)

I'm less confident in answering your first question. It hasn't come up in my reading, but I'm not a scholar. It could be in there. (One of the things Marx often does is open windows to look at something and then move on without diving deep on them. For instance he acknowledges inflation, and moves on rather quickly.)

Thanks for the reply and that makes sense.

No problem! Again, I'm just some internet person who happened to listen to some lectures and did some reading, so my take might be a bit off. But I find this stuff fascinating. Doubly so for something like Marx who everyone has an opinion on, but I feel very few folks have actually spent much time diving into.

The return on capital is always greater than the return on labor. Piketty does a great data driven analysis on this in his book Capital in the 21st century. This phenomenon was occurring long before the US was even a glimmer.

I've never understood why the capital gains tax is lower than the labor tax. The labor tax is theoretically adding value to the economy while capital gains is basically money you made because you had money. It seems to me it should be the opposite if you want a productive economy, encourage more people to put their money to work instead of playing games in the market.

> The labor tax is theoretically adding value to the economy while capital gains is basically money you made because you had money.

Capital adds value to the economy too, thats why people will pay to rent it.

> I've never understood why the capital gains tax is lower than the labor tax.

One good reason is that if the capital gains tax is higher than the marginal profit, then that business doesn’t exist. If we taxed capital at the rate that we tax labor, there would be one or two ultra-hyper-wealthy people who employed everyone, and the rest of us would be serfs working for bezos or the government, or on public assistance.

> It seems to me it should be the opposite if you want a productive economy, encourage more people to put their money to work instead of playing games in the market.

Investing your money is putting it to work, that is precisely why it earns a return.

It's not because "you had money" simply having money results in 0 taxes. The capital gain comes when you lend your money to some other entity and they use the money to do work: produce a good, provide a service. Although there is a sect in the US government that wants to tax your money simply because you have it.

yeah but eventually home prices/rent can go down and you can get wiped out (see 2008)

but the fed and treasury wont allow that to happen i guess because they prefer inequality as long as it produces a wealth effect

It's called the power law (https://en.wikipedia.org/wiki/Power_law)

Your example is contrived. Assets don't have to go up in value. You could also end up holding the bag in a place like Detroit. You may not end up being able to rent out your second property at a profit. You may end up with a deadbeat tenant, unforeseen expenses, or simply falling rents. These decisions involve risk and they have accordingly, an associated reward. Claiming that there's a "natural law of wealth" doesn't seem as obvious as you're making it out to be.

https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

> "These decisions involve risk"

The Federal Reserve increased its balance sheet by about 6 trillion USD since March 2020.

There is no risk when you have the US Gov't backing you!

Edit: https://www.cnbc.com/2020/06/15/the-fed-says-it-is-going-to-...

Federal Reserve literally backing individual corporations at this point. Where's the risk?

My example is not contrived, it represents an understanding of the market over the long term. Are there bubbles? Yes. Are there dips? Yes.

You are making the inverse mistake of someone who looks at a large jackpot win in Vegas and thinks it's a good investment, when in reality the expected value of a bet is negative.

The rate of return on capital has held relatively steady at ~4% for hundreds of years. Stop thinking about individual winners and losers, and look at the broader picture. If you have sufficient capital, you can expect to return capital + n% over time, where n is approximately 4%.

No it hasn't remained "steady". You're quoting an average and claiming it is steady but there are periods where your savings would have not seen that growth and even seen negative return. Example analysis: http://archive.nytimes.com/www.nytimes.com/interactive/2011/...

I'm also not sure what you mean by "sufficient capital". You can by shares one at a time. You don't have to be wealthy to have access to growth in assets.

> You don't have to be wealthy to have access to growth in assets

You have to be wealthy to see an appreciable growth in assets. Both the absolute and percentage amounts matter. Yes, anyone can get a 3% return on their investments over time, but that doesn't really matter when you can only invest $1.

Living has a certain minimum set of fixed costs, those with sufficient capital can pay for those fixed costs through the growth of their capital and still see a net increase in wealth . Someone making $30k a year in wages will never achieve that, even if they see some growth in assets.

> You're quoting an average and claiming it is steady but there are periods where your savings would have not seen that growth and even seen negative return.

You are making a pedantic semantic argument. I acknowledged the presence of dips and bubbles. But on "average" you will see a return on capital, especially a diversified market.

That analysis only looked at the S&P 500, which is a tiny share of the economy and not at all representative of the growth of capital over time. What about housing, bonds, precious metals, commodities, short positions, international funds, etc.

Move up one level of abstraction and look at the forest, not the trees.

> You have to be wealthy to see an appreciable growth in assets. Both the absolute and percentage amounts matter. Yes, anyone can get a 3% return on their investments over time, but that doesn't really matter when you can only invest $1.

This is an excellent example of how low interest rates prevent anyone but the wealthy from making money on investments.

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