Rich people don't pay income taxes. They pay capital gains taxes. They typically don't have income, or very little income compared to capital gains.
People will invest as long as the taxes aren't worse than income taxes. We don't need this much "encouragement" because stock market returns are high enough already.
A salaried person has to bootstrap a company using income-taxed money, whereas a business person can engage in creative accounting whereby an existing business can invest in a new business practically tax free.
If your average income tax is 35%, you're paying a ~50% premium to acquire the same assets as someone who rolls over money from business to business. This includes real estate and everything else.
Since the existing income tax has lower rates for long-term capital gains than earned income, and the rich defer taxes in various ways or use various tax shelters so they're not even paying that, and payroll taxes (~40% of federal revenue) have a flat rate with an income cap, the conclusion then becomes completely the opposite. They don't pay the income tax as it is but they'd have to pay the tariffs like anybody else.
As a percentage of their wealth they will pay a lot less than the middle class or poor do when it comes to any consumption tax or tariff. Because once again, the system is stacked in their favor.
If I were to steelman that argument, I'd say getting rid of income tax takes the wind out of the sails of the "wealth tax" / "tax the billionaires" / "fix the loopholes" argument which seem to be gathering steam.
That it kills or underfunds government social-safety programs is a secondary bonus, and using it as an excuse for decapitating safety/oversight/enforcement agencies who get in the way of higher profits via "overregulation" is a tertiary bonus for those that believe in starving the beast that is central government.
The trouble there is that those arguments are incoherent.
If you invest in something and then sell the investment at a profit, the profit is a capital gain. You know how much it is because there was just a transaction, you can spend the money, it's currently in cash so you're not being forced to sell an illiquid or indivisible asset in order to pay the tax on it, if you're using an income tax then that's income.
If you invest in something and its value goes up, that's not income yet. You only have the asset, not its value in cash with which to buy anything or pay tax. The value could go back down at any time. There may not have been any recent transaction so there is no objective way to value it. How do you tax something of indeterminate value owned by someone who may not have any liquid assets? So it only becomes income when you sell it at a profit, and then never selling appreciating assets is a primary way the rich increase their net worth without having taxable income.
There hasn't been any sane proposal for how to do it otherwise. You have some startup founder -- and this is actually the primary vehicle for billionaires to exist -- who owns a company that is now maybe worth a billion dollars. Or they could go bankrupt next year, nobody knows. She doesn't have a billion dollars in cash, she just owns the company, which itself doesn't even turn a profit yet. The only place for the money to come from is to sell the company. To get from a million dollar valuation to a billion, a company has to double every year for ten years. If there is a 25% tax on the unrealized gain, the owner loses 12.5% of the company every year compounding which means before ten years they no longer control the company. Therefore every large company ends up being controlled by Wall St. or foreign investors. That seems like a bad outcome.
Ownership of the company is the thing the money then going to tax had been buying the taxpayer. It wasn't more yachts or houses, for that they'd have had to sell the shares and pay the tax as it is. So that's the primary thing the proposal would be changing about the economy: Corporate ownership moves from domestic individual founders to corporate investment firms and foreign nationals.
The real problem -- that there is a company the size of a country -- still exists, but now all of those companies are controlled by mercenary investment funds instead of only some of them.
The actual cash that went to the government didn't come from the owners nominally paying the tax, because they didn't have any cash. It came from the people buying the shares being sold, or holding the ones being devalued by increased selling, i.e. those Wall St. investment funds. But that's not their money. They get control of the companies when their fund owns them, but the money is from retail investors. It's everybody's 401(k) and pension fund. So that's who ends up paying the tax, because forcing the founders to sell increases the supply of shares which lowers the price which reduces the returns from everybody's retirement account.
The people making tax laws mostly understand this, which is why proposals like that haven't gone anywhere and hopefully won't. But wanting that to happen is the argument that moving this rake out of the way is bad because it would make it harder for someone careless to step on it and whack themselves in the face.
Yes, if you pick silly numbers any policy can be made to look silly. A wealth tax would never use a 25% rate because that would eliminate most of the wealth in a few years. Wealth taxes are always very low rates, i.e., 0.15% in Belgium, 0.5% to 1.5% in France (note: France did see a temporary outflow of billionaires when they first introduced this tax, but as the tax is on global worth, only complete expatriation would eliminate the liability); Italy has a wealth tax on non-Italian wealth of about 0.75%.
Corporate ownership moves from domestic individual founders to corporate investment firms and foreign nationals.
No, the opposite is true, since wealth taxes would penalize ownership through holding companies (greater wealth), and a wealth tax would also apply to foreign nationals owning U.S. assets. The most likely implementation of a wealth tax would be progressive (like it is in France), which would harm greater accumulations of wealth, i.e., corporate holding companies.
The people making tax laws mostly understand this, which is why proposals like that haven't gone anywhere and hopefully won't.
America already has wealth taxes. In many U.S. states (and especially a number of so-called "business friendly" red states), businesses already pay the equivalent of a wealth tax on top of their property taxes (the name varies from state to state; in some states they are called franchise taxes, in others "business privilege taxes", some call them "fees"). The rates are all far below 1%.
But we're talking about a tax on unrealized capital gains.
A wealth tax has entirely different problems. To begin with, there are major asset categories with no objective way to value them, so how do you even calculate it in the absence of a sale, or prevent those assets from being used as a tax shelter?
Then you're creating a large economic distortion because the tax isn't accounting for risk. A low-risk investment might have had an inflation-adjusted return of 0.1%, but now it's -0.4% and an institution that needs to maintain stability and avoid value loss is forced into riskier investments.
A low rate is also self-defeating. If you use 0.5% against typical assets with a 10% annual return, it's equivalent to an income tax rate of only 5%, but you're still incurring all of the administrative complexity and still have non-trivial perverse incentives. But if you raise the rate to the level that "pay their fair share" normally implies, the perverse incentives become exponentially worse.
> No, the opposite is true, since wealth taxes would penalize ownership through holding companies, and a wealth tax would also apply to foreign nationals owning U.S. assets.
So now you're back to applying the tax to everyone's retirement account and not just "billionaires" and have given domestic businesses a competitive disadvantage in attracting foreign investment.
You want foreign investors to give you their money because otherwise they invest in competing companies in other jurisdictions. What you don't want is for them to get a controlling interest in your companies at a discount.
> In many U.S. states (and especially a number of so-called "business friendly" red states), businesses already pay the equivalent of a wealth tax on top of their property taxes.
And those taxes cause existing problems for them, e.g. companies then avoid setting up capital-intensive businesses in those jurisdictions. See also Land Value Tax debate.
This isn't new ground that nobody has thought of before. A number of countries already have wealth taxes. Unrealized capital gains are wealth, not income. They would be subject to a wealth tax until realized, and only subject to a capital gains tax when realized. This is why wealth tax rates are so low.
there are major asset categories with no objective way to value them, so how do you even calculate it in the absence of a sale, or prevent those assets from being used as a tax shelter?
Your paragraph assumes something that isn't true. The problem of how to value assets for taxation is older than electronic computers, and decades ago tax authorities set forth rules/guidelines for valuing difficult-to-value assets. In a nutshell: there are a variety of ways to value such assets, and as long as the valuation of an asset is reasonable within the rules of the governing jurisdiction, the tax authority will accept it (or be forced to accept the valuation by a court).
If you use 0.5% against typical assets with a 10% annual return, it's equivalent to an income tax rate of only 5%, but you're still incurring all of the administrative complexity and still have non-trivial perverse incentives. But if you raise the rate to the level that "pay their fare share" normally implies, the perverse incentives become exponentially worse.
This also isn't true. Again...wealth taxes already exist, and they're administratively easier to implement then income taxes. They're also not intended to replace income taxes; they're intended to supplement income taxes by taxing the people who are wealthy enough that they don't need to earn income.
applying the tax to everyone's retirement account and not just "billionaires" and have given domestic businesses a competitive disadvantage in attracting foreign investment.
Yes, if you choose to implement a wealth tax on everything that would be true. It's a good thing that policymakers in the countries where wealth taxes already exist used their brains and decided to have minimum wealth thresholds for their wealth taxes.
There have been proposals to tax unrealized capital gains as income. Those proposals are what the comment you replied to is arguing against.
> The problem of how to value assets for taxation is older than electronic computers, and decades ago tax authorities set forth rules/guidelines for valuing difficult-to-value assets.
"The places that attempt this have rules" is not actually a solution. The typical solution is to only apply such taxes to asset classes that are relatively easy to value, like real estate.
But that in itself creates a lot of nasty distortions, like exacerbating the housing crisis. Local government gets tax revenue from real estate, so they get more if real estate is expensive, so they're on board with raising the cost of construction to drive up scarcity. The higher taxes reduce investment (i.e. construction) until rents increase to cover the new higher construction costs in addition to the taxes, and now people are homeless and unable to afford housing. Meanwhile capital moves from local real estate construction and other local businesses that would have to pay the higher real estate costs into global capital markets, reducing local jobs.
And it still doesn't answer the question. How do you value a closely held startup that may grow or fail? How do you value bespoke art? How do you value a contract to pay $100,000 from a foreign company at risk of default? If it's subjective then it's a tax shelter. "Have the courts decide" doesn't explain how you expect them to make their decision.
> wealth taxes already exist, and they're administratively easier to implement then income taxes.
That's not saying much, income taxes are some of the most administratively expensive taxes to implement, and your argument is to use them in addition to rather than instead of income taxes, so the costs are cumulative.
> It's a good thing that policymakers in the countries where wealth taxes already exist used their brains and decided to have minimum wealth thresholds for their wealth taxes.
Your claim was that it would be paid by investment funds. Investment funds easily have enough assets to meet any plausible threshold, but they're owned by middle income people, so are you taxing them or not?
How is "progressive wealth tax" supposed to work for corporate entities? If a massive foreign conglomerate owns a minority of the shares of a tiny foreign company which owns shares of a domestic company, is the tiny entity subject to the tax? What if the foreign country doesn't make ownership structures public? What if the conglomerate doesn't own any part the tiny entity or the entity is a human but the conglomerate has a long-term options contract to buy the shares for a fixed price?
"There are rules for what to do" isn't an explanation. If the rules create tax shelters, you have problems. If the rules create perverse incentives in order to prevent tax shelters, you have different problems. There doesn't appear to be a sensible implementation.
What you've suggested for getting around the wealth tax amounts to various forms of tax fraud. That's a crime punishable by many years in jail on top of having to pay the tax avoided, plus penalties, plus interest. Most people aren't Wesley Snipes, and they're not going to risk their freedom to pay taxes. If they really don't want to pay taxes, they'll do what a number of French people did when the wealth tax was first introduced: they'll move to a country without a wealth tax.
(Also: courts can issue withholding orders, stop payments, etc., to domestic counterparties under their jurisdiction. This is a tried and true remedy that's been around longer than either of us has been alive.)
Which of course, they do.
Poor people are people like us (or sometimes are us), some are quite prudent and would love to make an investment that pays, even if it's small.
And yet the US is pretty unique amongst countries in treating capital gains as wholly different from earned income, and taxed significantly less if at all.
Even as someone who benefits from it, I've yet to see a good argument as to why a working stiff should pay more taxes than someone who makes their income from investments. That's inherently regressive.
consider all of these VCs throwing away money on things like uber. would it be better if they just kept it in a savings account (because of no financial benefit of investing)? most investments don't pay off, so you need a push, the push is that long term capital investments are taxed less.
Also pretty sure savings interest is taxed as capital gains.
We have observed close to two decades of rapid asset price inflation that can very reasonably be argued outstripped actual productive activity. Rent seeking isn’t something that should be incentivized either and is ultimately a very corrosive behavior in our economy, politics and society.
The people who don't are the billionaires or nearly billionaires, but they also don't pay the existing income tax because they have teams of tax lawyers and deploy international shenanigans. And then an "income tax" which they pay on $20,000 of declared income is not actually taxing them more than a consumption tax at the same nominal rate on all the cars and boats the billionaire buys the same as the cardiologist does.
The argument used to be that low tariffs enabled shifting work to where labor and environmental laws were weaker, reducing demand for American labor. Effectively subsidizing pollution and human suffering.
But then someone came along and agreed. Can't believe something that he agrees with.
The opposition to tariffs doesn't stem from a kneejerk reaction to a certain someone wanting them. It comes from economic consensus.
Implementing targeted tariffs in a way that spurs domestic labor and secures vital industries is common practice.
What's not common practice or beneficial are the broad tariffs we're levying, which come from a place of ignorance. The implementers literally didn't think retaliation would happen, but it is/will. All these are accomplishing is increasing the cost of goods.
Democrats think lots of things that are "economic consensus" do not accurately describe how the world works in practice, or fails to capture important values. "Economic consensus" also is that VAT is the most efficient form of taxation and that capital gains taxes are harmful.
People love cheap shit. They absolutely love it.
Walmart and globalism didn't put Benny's General Store underwater, consumers choosing cheap shit did.
I don't know on what scale your clock runs on, but Bill Clinton's "Third Way" campaign was 35 years ago. China's admission into the WTO was under the Clinton administration. If 5 minutes is a generation, America isn't 2 hours old yet on your clock.
I thought the support was bipartisan? For instance: https://en.wikipedia.org/wiki/United_States%E2%80%93China_Re...
Maybe we should be questioning a system that demands a house double in value in a few years.
There is ofc the loan loophole, but it doesn't mean that they don't get any other income, on which they are taxed on. It is just that, if you calculate their total package, compare to an average worker they pay significantly less taxes *proportionally* because a disproportionate amount of their "income" (some of which could hardly be called income but that is another subject) are in some form that are taxed less.
In 2022 Google's CEO made $2 million in salary and $218 million in stock awards.
so what - the loan has to be paid off, and the stock will inevitably be sold and taxed. there is no scheme to get away from paying taxes forever without dying, and that scheme (that one that involves dying), is the same one that benefits an average person w.r.t estate tax.
No, it's not. 2 points:
1. Average people don't pay estate tax, because only a teeny portion of estates make over the exemption amount.
2. I realize point one is a separate issue from what you're referring to, which is the step-up in basis at death. But that tax strategy of taking out loans to cover your lifestyle so you can pass on appreciated assets with a low basis is only possible for people with a huge amount of assets to begin with (i.e. people who already have enough to completely love off their assets without working).
Haha, good one. Good luck with that, you’re up against the most powerful and influential people and their lobbyists. Others have already tried. Maybe if the U.S. were a democracy instead of a plutocracy.
I only think it fails because Democrats have horrible messaging. Republicans branded it a "death tax", when I think it should be called the "aristocracy prevention tax".
Your average person has no idea how the estate tax works (i.e. they think it applies to them). In the late 1800s/early 1900s the UK implemented what is perhaps the largest nonviolent transfer of wealth by instituting large estate taxes on their aristocracy and landed gentry.
Over time, though, the lions share of Sundar's increase in wealth will come from appreciation of his stock, which will be in the form of capital gains. "Average" people don't have this luxury because they simply need to spend much more of their money to live, and thus most of their income (or increase in wealth) comes from a job.
FWIW I think a much fairer system would be to tax capital gains at income tax rates, but index the basis to inflation.
[1]: https://www.healio.com/news/hematology-oncology/20220928/avo...
https://www.ntu.org/library/doclib/2024/02/2021-who-pays-2-....
But given that the organization who published that was founded by a Newsmax board member, I'm sure they're trying to paint a clear and unbiased picture of things.
If you mean top 0.5%, then sure, nearly all of their money typically does not come from regular income.
If you mean top 10% then not really, most people in that bracket will be paying substantial income tax.
Edit: Uh oh, downvoted by people who apparently think either people who earn $300k - $1MM+ aren't "rich" or that they don't pay income taxes. Lol.
Let’s say you make $1 million per year and your net worth is $20 million.
Elon Musk spending $1 million dollars is equivalent to you spending $50.80.
That would be equivalent to the median earner ($42,000) spending 10 cents.
Someone who earns $1 million a year would have to be alive for 393,000 years to earn Elon Musk’s net worth as salary.
The difference between the 1% and the 0.5% is massive. The difference between the 0.5% and the 0.1% is even bigger.
Don’t forget that a billionaire is a millionaire 1000 times over, and the richest billionaires are hundreds of billionaires.
Then you are unambiguously extremely rich.
Yes there are people orders of magnitude richer, but yes you are orders of magnitude richer than the median American. Money is no longer a daily consideration to live a 100% comfortable and healthy (to the extent money can pay for it) life.
I am well aware of how much more obscenely wealthy the ultrawealthy are. That doesn’t make a $20MM net worth or $1MM/yr household middle class.
They could retire immediately and live on that net worth but their standard of living would be greatly impacted by doing so rather than continuing their income-generating activities.
They could face major financial consequences by spending their money frivolously or losing it in a lawsuit. They have a low enough amount of money that they could gamble it away or lose it all in a bad business investment.
I think that makes them much closer to the middle class than the truly wealthy who cannot lose their fortune even if they tried their hardest and have essentially no feasible way to have their standard of living lowered. For example, if Twitter shut down after Elon bought it, there would be no detectable difference to his lifestyle or buying power. There is no amount he could gamble at a casino where he would lose his fortune.
No they don't
> They can’t get their names on institutional buildings.
This has never been the purview of the "merely rich."
> I think that makes them much closer to the middle class than the truly wealthy
Sure they are closer to the middle class than the ultrawealthy, but that does not make them either not-rich or middle class.
I take rich/wealthy to mean a much higher social class than $1 million in annual income. That type of income would be like a husband and wife who are doctors working as employees with a boss bossing them around and working long hours.
If you’re a W2 employee like that I don’t think you are rich/wealthy.
it's sad that HN is privy to propaganda and misinformation as well. ask anyone on the street if 500K income is rich, and they will say yes.
"*Only*" That is a lot of money for most people. How the other half live!
> The threshold to enter top 10% is only 180K
Yes. I was doing it when I was earning less than that as a contractor in the UK. I can tell you how it generally works in the UK:
* You set up a LTD company.
* You pay yourself a minimum salary where you pay the bare minimum tax this is approximately £13000 the last time I checked. I think you can pay any other "directors" this as well, you basically make your significant other one.
* Anything related to work becomes an expense e.g. parking tickets, mileage on your vehicle, laptop, computer software etc. So you don't pay this, the company does and thus you get a tax relief.
* You pay yourself dividends from your LTD company. You pay yourself the bare minimum and leave as much as possible in the company. These were taxed at a far lower rate that the equivalent money if you worked perm.
* You pay your pension via the company (this is tax free upto £60,000 IIRC).
In the US how it is exactly done will be of course different as the taxes are structured differently but I know for a fact that people are doing similar in the US.
A person paid on a W2 can’t do these things no matter how big their salary is.
I give an example of how you would do it in the UK. Similar restructuring can be done in the US.
The tax system really favors two groups: private equity and founders, both of whom make their money primary through capital appreciation.
Umm. Tim was taxed there for selling his shares. Not a salary. His Salary I don't think is mentioned in the article you linked. As of 2022 it was $3,000,000, he was getting ~$47 million that year in stock compensation, which I doubt he gets taxed on unless he sells it.
https://9to5mac.com/2024/01/11/tim-cook-total-pay-compensati...
He is definitely restructuring his income to be tax efficient.
> The tax system really favors two groups: private equity and founders, both of whom make their money primary through capital appreciation.
Maybe. But that is irrelevant to the original question.
He can then leverage those stocks BTW to receive loans, which he won't pay taxes on as they are a debt. Then he can make use of the stock without selling it, and then use that extra income to invest in other things that will generate him additional income/capital or whatever.
There are even more tricks you can do at that point, where on paper you are technically making a loss and never pay a cent in tax.