alt Hacker NewsHow to convert between wealth and income tax
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I think the assumption that we're looking for an equivalence here is fundamentally flawed and with it the entire post.
For most people income is tied to selling their time. It doesn't scale at all. Unless the income comes from wealth.
The societal problem here is a group with self-reinforcing run-away levels of wealth. And to counter that you do need something more extreme than this nonsensical equivalency of income tax
It's funny, because even though he got the math right, PG got the reasoning completely wrong.
> Each 1% of wealth tax is equivalent to 20% of income tax.
Yes, this is the right part. Taxing wealth at 1% is equivalent to taxing income at 20-25% (depending on which return you count as baseline)
> It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate
On the opposite, they understand it right, and PG is completely wrong here: it's not about adding income tax rate to someone that already pay income taxes, it's about making wealthy people, who don't currently pay this tax rate, pay the same rate as people living from their income.
> So in the median case, a state adding an additional 20% in income tax would have a total marginal tax rate of 37% + 4.75% + 20%, or 61.75%.
Bezos, Musk, Zuck and the likes (or even PG himself, likely) don't pay 40℅ tax on their wealth growth, they currently pays 0%.
In fact, to make them pay as much tax as their employees, there should be a 2% wealth tax, not 1%. Hence, a “mere 1%” is in fact a very generous proposal by leftists politicians and economists, as it would still mean the wealthy only get half the rate of working people.
> In fact the conversion rate between them is about 20. A wealth tax of 1% is equivalent to an income tax of 20%.
Sure, but you actually have to work for continued income. Wealth accumulates with no input once established.
Wealth has the ability to increase (capital gains) without having to pay tax until it changes hands, whereas when income increases it is immediately taxed at a higher rate. Additionally, wealthy people can use securities as collateral for near zero interest lifetime loans which also bypass having to pay income tax.
This is simultaneously incredibly condescending and hopelessly naive. Politicians understand perfectly well that a 1% wealth tax is not a small tax on wealthy individuals. That's the whole point. They are engaging in basic political rhetoric when they say things like "a mere 1% tax".
There's a way to levy a wealth tax that requires no asset liquidation whatsoever. Allow paying taxes with assets. The assets go into a sovereign wealth fund. At scale the fund effectively holds a percentage of the entire economy. Its returns should only be used to reduce income tax.
I'm not an expert in this, but I thought one of the biggest arguments for why a wealth tax is needed the whole "buy, borrow, die" thing where the ultra rich can use their assets as collateral to take out a never ending series of ultra low interest loans until they die and then have most of the tax burden of selling assets to pay off those loans wiped out because the tax code is much more favorable to selling assets to pay off the debt of someone's estate.
If (big if) I'm remembering that correctly, I don't get why we just go after the problem directly and do something like treat putting down collateral for these type of loans as a taxable event. I'm sure it's not as straight forward as it sounds, but I can't imagine it'd be more convoluted that needing to track the wealth of every high net worth individual.
Maybe I'm in the minority on this, but I actually don't care if Jeff Bezos' net worth went up by $5 billion because Amazon had a good day in the market. If the shares are just sitting in an account doing nothing other than proving ownership it's all kind of just numbers in a computer, IMO. A painting is probably a better example than stock, but if I have a painting on my wall that was worth $1 million dollars yesterday and today it's worth $10 million that change in valuation is essentially meaningless as long as the only thing the painting is doing is hanging on my wall.
What I do care about is when he's able to access the cash value of that $5 billion of Amazon stock without paying the taxes that would come along with selling the stock. If he wants to leave $5 billion in Amazon stock just sitting in his account doing nothing until the day he dies, that's totally fine, but the second he puts it up for collateral we should tax that. I think this has the added benefit of simplifying things by avoiding a lot of questions around fair valuation of assets. If I have a $10 million dollar one of a kind painting on my wall that I'm never planning on selling, it's kind of hard to put a valuation on that and it can be easily manipulated by finding the right appraiser. If I put a painting up as collateral for a $10 million loan it becomes a lot harder for the owner to argue that it's actually worthless or the IRS to argue that it's actually worth $1 billion.
There is a bit more to the story than a 1% wealth being "equivalent" to a 20% income tax. The primary difference is that unrealized gains are taxed by a wealth tax. We need a mechanism for assets to be sold by the richest in society. If those with assets keep accruing more assets the median person will suffer. When we're talking about real assets (housing, retail shops, warehouses, land) we don't need to be concerned about capital flight. The assets are still there on the ground. Reducing the cost of those assets is exactly what we need to help a local economy.
That being said, the richest are effectively _not_ paying the highest marginal tax rate considering all the tax structuring they do. Claiming that they would be paying the highest income tax in the world is misleading, for one. Secondly, the richest in the world _should be_ paying the highest income tax.
I would love, LOVE to pay 20% in taxes! Goes without saying, I work for a living and have far less wealth and power compared to PG.
I think there is kind of a breakdown in social order here. If society allows you to become the chief, it ought to also impose upon you a burden, an obligation, to wield your power over the tribe fairly, generously. To care for the weak, to make sure that everyone benefits, to ensure that things stay stable and safe under your leadership... The standard is higher, not lower. The sacrifice is greater, not lesser.
It is absolutely bizarre and you can see exactly thew way PG, and other like him, are thinking. They all want to have this immense power (and it truly is immense, more immense than ever in modern history!) but they want none of the obligation, none of the responsibility.
Even asking for 20 percent is too much, apparently.
It's really sick.
I don’t follow the debate and situation in the US that closely but isn’t (part of) the point of wealth tax to offset the fact that rich people are routinely avoiding paying income tax and taxes in general? Thus even if we assume the simplistic conversion here, it’s not that they’re moved from 40->60 bracket but more like <10 -> <30 ?
If you are wealthy enough, you can live off of untaxed loans from your “unrealized” gains, and never pay taxes on that money at any rate. Meanwhile, I am paying an effective tax rate of around 35%.
The principle is simple: if you are spending the money, your gains are realized, and you should pay taxes.
What's wrong with a 20% tax? We who make a living from labor instead of capital pay more than that.
Paul tries to frame it as an increase of 20% in the tax rate, but in reality the increase is from 0% to 20%, and it's hard to see why that's unfair.
The reason I say it's currently 0% is of course that for the wealthy most of these 5% gains are unrealized (e.g. inflation in the value of their assets) and untaxed.
There's a related calculation you can do -- what percent of your net worth is your employability? Take your salary, divide by 0.05 (or multiply by 20) -- if you had that much additional wealth earning 5%, you could replace your job's income.
For most people their ability to earn is by far their largest asset. You can kind of get a feel for how difficult it is to bootstrap into generational wealth if you think about the math -- it takes time to replace that earnings portion of your own balance sheet, and even more to well replace it; a lot has to go right in the interim.
Man, as a young programmer coming up I really looked up to Paul Graham, but now as a seasoned vet in the industry, it's remarkable (and disappointing) to see him publish an article based on such a false equivalency. I mean this level of missing the forest-for-the-trees is the type of thing that routinely prevents senior engineers from getting promoted to staff because they're pedantically fixated on the wrong details. And that's on top of failing to read the room as to why people are even calling for a wealth tax in the first place.
The more obvious reason to not tax wealth is because it's hard to measure, and if you try to do it you will incentivize hiding it. Meanwhile, there are obvious obvious loopholes that the ultra-wealthy enjoy which could be reasonably closed. Namely, close the buy-borrow-die loophole, don't allow step-up basis for inherited wealth, and tax capital gains at least as much as income. Now people with a lot of money can afford to fund a lot of premium think tanks to come up with fancy economic reasoning why those ideas are Really Bad™, but at this point it's clear that's bullshit propaganda and the unintended consequences are exceedingly unlikely to be worse than the current unchecked consolidation of wealth and power enabled by the current loopholes.
There's a secondary side effect of wealth taxes: they redirect investments (I'm Argentinian and we have wealth taxes).
Investments shift to things whose tax value updates slowly, for example property which typically adjusted more slowly than other financial assets. This tends to rise property prices and concentrate ownership.
It causes other distortions in allocation depending on the tax details, but wealthy people tend to adjust more aggressively to changing conditions.
You don’t need to teach anyone about this. The wealth tax should apply to extremely wealthy people, not everyone.
If you accumulated a fortune, there was some skill at play. There was also considerable luck and some exploitation. The wealth tax is a way of paying back for the luck and exploitation.
You will still be extremely wealthy.
Paul wants to play the fairness card. Life is not fair and those who accumulated massive fortunes won the lottery. Don’t let the massively rich conflate issues. Don’t get fooled.
> It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing. [2]
This is the wrong way of thinking about it. It's not adding 20% to an already taxed entity, it's adding taxes where there weren't before. Adding 20% on top of the income tax would indeed be controversial. In his framing the rate of return is effectively untaxed income, so it would be more accurate to say that this is like adding income tax to a currently untaxed income stream.
The bigger difference between an income tax and a wealth tax isn't the numbers. A wealth tax, for better or worse requires some realization of paper gains that very wealthy folks normally go to great lengths to avoid because their wealth is largely based on a broadly shared polite fiction. So imposing some realization of that wealth requires accountability that doesn't always pan out.
A much more interesting formula would be how to convert between income and income tax - you'd think it worked according to the superficial bracket system, but in fact, it works along the lines of going to 0 at the top.
P.S. a wealth tax is a property tax. They have existed in the US since before the income tax (which was originally considered unconstitutional by its opponents).
Not everybody uses money to make more money, Paul. Most people work, get paid, and spend the money on their needs. In other words, you are in a position to care about the question, it's OK if you are taxed a bit more.
As an aside, in Islam, people have to pay a 2.5% wealth tax annually for charity.[1]
This does make retiring a tad bit complicated. Say you've saved $3M and are ready to retire. That means each year you're spending $75K just to satisfy this tax.
[1] Depending on how your wealth is structured. Cash is 2.5%, but if you own, say, a business, you pay the tax on the value of the goods, not on the value of the building, hardware, etc. You don't pay Zakat on the house you live on. Agriculture is actually taxed at 10%, etc.
Isn't PG's conflation of Denmark's high income tax with a proposed wealth tax a clear flaw in his math and argument re: "the highest taxes in the world"? Why wouldn't you instead compare to other countries that also have both income and wealth taxes?
Wow, I like to actually see the numbers laid out like this. Most of the ultra-wealthy pay almost nothing on their income taxes from investments because they have found ways to avoid capital gains, and even if they were paying long term capital gains rates of 15%, pg’s assertion that the wealth tax adds another 20% doesn’t seem unreasonable at all. If anything, it makes me think 1% is not nearly enough of a wealth tax!
> You can tell from the way they talk about the subject that they don't understand the momentousness of what they're proposing.
I think that what you can tell is that they think the voting public won't understand the momentousness of what they're proposing (or that their "color" will cheer that very momentousness).
Whether they themselves do or don't understand how impactful the proposal would be is much harder to guess.
So, if we go with 2% wealth tax(instead of 1%) we can cut income tax offset -20%? Go do it right now.
I think 1% wealth tax should be a replacement for income tax. That way only the wealthy will pay taxes.
It's clear from the way paulgraham talks about the subject that they not only don't know the answer, but don't even realize there's such a question.
You can tell from the way they talk about the subject that they don't understand what they're talking about.
If you follow his logic and believe that the ultra-wealthy pay too little tax (as e.g. Warren Buffett does), then a balanced approach is to set the tax rate to: "37% of income or 1.85% of wealth, whichever is higher".
This would close the gap between Buffett's tax rate and that of his secretary, but would not be the "highest taxes in the world" that PG decries.
Always a pleasure to hear capital explain to labor why taxing capital is bad, but this seems like a giant red herring. I don't want a wealth tax so I can cut my income tax, I want a wealth tax to address inequality. Our existing policies have produced a very bad bad outcome - wealth inequality exceeding that of pre-Industrial England led by a small, essentially randomly-selected group of people so wealthy that they effectively run everything who have entirely captured a corrupt government and are very close to making the situation permanent - and a wealth tax is the only policy idea I know of with any chance of changing that.
It's not excessive to charge a 1% wealth tax when the people paying it don't pay any income tax thanks to their financial engineering.
Whenever I've seen anyone suggesting a wealth tax, it is specifically to address the very wealthy who pay an effective 0% tax rate, because they use the "buy, borrow, die" strategy. These are not wage earners, working a regular job, these are folks who own enough assets that they can borrow their way through life, living lavishly, never contributing meaningfully to the common good, the roads they are chauffeured over, the infrastructure and laws they benefit mightily from, the police who protect their assets, etc.
Since a lot of billionaires pay practically nothing in taxes, relative to their wealth, a wealth tax that equates to a 20% income tax would be entirely reasonable, and they'd still pay a much smaller percentage than the taxes I pay from my wages. It closes a loophole, it doesn't punish the very rich. And, nobody is suggesting the average 401k or Robinhood portfolio should be subject to a wealth tax.
This blog post is incredibly tasteless. Really Paul should take it down and get the butler to wipe the egg off his face
It's not excessive to charge a 1% wealth tax when the people paying it don't pay any income tax thanks to their financial engineering.
Here is a cool website showing Wealth, shown to scale.
Are there serious proposals to just add a wealth tax on top of the existing income tax that would apply to the sort of people who actually pay much in income tax vs capital gains? It's an honest question; I haven't seen proposals of that sort, so I'm skeptical that the arguments are meaningful here. For an individual like Jeff Bezos, he's paying virtually no tax under the normal income tax rates referenced in the article, but rather capital gains tax, which tops out at 20%, not 37%.
The conversion would be more accurate if it compared wealth and capital gains taxes, no?
A defining feature of wealth taxes is that they only tax those that make most of their income through capital gains. This is why they're popular among much of the population.
Now the question is, if we lowered capgains tax rate by 20% but instituted a 1% wealth tax, would that be better or worse? My guess would be worse because wealth taxes are nearly unenforcable, but I wonder if there are good arguments for the other position.
This argument strikes me as massively disingenuous. The central problem of the US tax system is caused by a combination of:
- high net wealth individuals essentially being indifferent to income tax.
- income tax and short term capital gains are taxed at much higher rates to long term capital gains.
- lower net wealth folks (ie. the general public) receiving most of their income as income.
- high and ultra high net wealth individuals now making most of their money through dynastic trusts and inheritance.
This combination ends up making it so that, as Warren Buffet would put it, he ends up paying a lower effective tax rate than his secretary.
I effectively don't really care if it's a wealth tax or some other more targeted technical fix, but it's not sustainable to have the very wealthiest individuals taxed at a lower effective tax rate than everyone else and also able to pass on their wealth directly to heirs without significant estate taxes.
I appreciate PG's writing as always.
I'm skeptical that the super-rich are only generating 5% on their money. My anecdotal experience is that it's usually north of 15%. They have access to investments that main-street does not.
If we plug in 15% instead of 5% in PG's reasoning, the effective income tax increase is quite a bit lower.
Hahaha this is so bogus.
Americans really struggle to understand how tax work outside of their country.
First, the whole premise of income to wealth tax equivalence is non sensical, because interests are rarely literally in the form of coupons/payments, but rather left as compounding value. This is the whole point of share buybacks, reinvested ETFs, etc; and Paul Graham knows that of course. If you are rich, you don't need the cash of your investments, so you don't want to trigger taxable events, so you are effectively at 0% tax rate and just let it compound.
> Currently the country with the highest marginal income tax rate is Denmark, at 60.5%
This is the most BS statement ever, and would only be believable to Americans with no understanding of how foreign country do taxes. Which is at best very naive of him, or highly disingenuous. This is because "tax" in the US is essentially employee paid, whereas most other countries split the bill between employer and employee at a higher proportion. The result is the same, but the employee part only is labeled "tax", the employer part being often called "contribution".
When comparing across countries, you have to look at the tax wedge (super gross to net), not the tax rate (gross to net).
And if you do that, well the US has a lower tax wedge than even the most generous European countries (Ireland).
In France for instance, the tax wedge is close to 70% for the higher bracket. Yes, that means if your employer pays $100, you get $30. And that's in a country with 20% VAT compared to US ~8%.
Not to mention, except super rich little little business-hub countries (Hong Kong, Singapore, Ireland, Malta, Cayman Islands, etc), pretty much all _developed_ countries have some form of wealth tax, it's just common sense.
True enough, but it doesn't address the motivation or the issues presented by California's proposed wealth tax.
It's a big democracy red flag when a majority wants to take a lot from a tiny minority; the moral hazard of the unfairness is that it's unclear where this ends. (Saying "one-time" and "1%" are trying to limit that risk)
It's a democracy red flag when an unpopular minority is vilified as the cause of society's problems. It short-circuits real policy making and distracts from real issues.
The bargain of private wealth is that it's better at innovation that should spread widely -- if it's subject to competition and does not export costs.
One problem is that one of the best investments is to change the law to reduce competition, increase market power, and export costs -- i.e., to weaken politics.
Another is that wealth used to mostly invest locally (information and transaction costs), so locals would see some benefit. No longer.
Finally, as an accelerant, enterprises are made of legions of managers and experts, who now compete more than ever; they would lose that competition by supporting less extractive policies or gentler politics.
Net result is that wealth seems not productive but extractive, and there is no negative feedback to reduce that.
Once the grand gambit of goodwill is lost, it cannot be recovered for at least a generation, but there's no real feedback to prevent that. The political viability of something like a wealth tax is just an early indicator.
You obviously can’t convert between the two directly and suggesting that is disingenuous.
Income tax doesn’t affect unrealized capital gains (where the rich “hide” most of their income).
A wealth tax (even without a minimum threshold) doesn’t apply to the poorest who can’t accumulate enough to even have any savings.
This conversion only works for income that is entirely saved and reinvested, which the majority of people can’t afford to do.
So make income tax a deduction on a wealth tax, and avoid penalizing people who do indeed pay top marginal rate income tax on a large salary/bonus.
Given that the ultrarich pay very little to no income tax then Paul’s argument is “don’t increase my income tax from unnoticeable to 20%”
Stop thinking about taxes as a way to fund the government.
Money in the long run can buy anything, including political influence. There are no regulations that can effectively preclude this. (And empirically, America over the past 40 years has seen moneyed entities successfully re-align politics and economic policy with their interests -- this was entirely predictable). An unequal society therefore cannot be a democracy. If you believe in democracy, then you necessarily must believe in wealth redistribution. (In fact, I argue that any person who believes that the American Revolution was justified, for any non-trivial reason, will likely find that those the same non-trivial reason could be invoked to reallocate wealth away from today's wealthy.)
Counterarguments to this view (i.e. a different top-level value than democracy / meaningful sovereignty over the society in which one lives) might invoke utilitarianism: an unequal society potentially produces "better" outcomes if capitalism is allowed to run unrestrained.
But a problem this argument encounters is who gets to decide what "better" is? All systems are economic in the long term, including political ones. A good framework for understanding is that a society in the long term is not "one person one vote" but rather "one dollar one vote." Today's preferences are dollar-weighted. Those with money decide what is better. The economy serves the average dollar's interests. And the average dollar's interest are the wealth-weighted preferences of society's members.
We started with an income tax to fund the government. But today our most pressing issue is not funding the government, but not having an oligarchy. Wealth is the thing that most needs to be taxed in order to allow for any semblance of democracy. Analogies drawn to income, though interesting, are meaningless.
The wealth tax that we should have is a federal property tax, in the form of a land-value tax. A property tax is more enforceable and produces much better incentives than an income tax or capital gains tax or death tax or wealth taxes in other forms.
I think it's underestimated how important ease of enforcement is for taxes and laws in general. Laws that are hard to enforce require more powerful law enforcement agencies, more invasion of privacy, more punishment, more restriction of freedom. Enforcing a death tax, for example, necessarily requires limiting and tracking of all transfers of money or assets between people including personal gifts. A property tax merely requires keeping track of land ownership, which is a function governments already do, and in the worst case you can simply physically go to the land and see who is using it or seize it.
I think the post is correct in a one-period sense, though I’m not sure the equivalence survives once you model long-term compounding, additional capital gains taxation and liquidity constraints.
The argument is plausible - that you can treat wealth taxes as equivalent to income taxes if you treat wealth taxes as a tax on the ostensible income generation of the wealth.
Of course there's more complexity than this, but that aspect is a plausible reductive lens.
But the conclusion is silly. We all know the extremely wealthy who'd be subject to a wealth tax basically don't pay taxes and that a 20% tax is totally right around what the typical overall tax burden is for the middle class or median households. The 1% example equating to 20% is basically saying the wealth tax would be in line with a flat tax, not even with a progressive rate tax. The wealthy have turned the tax system into one that's functionally regressive for the most wealthy and then PG complains that a proposal that makes it more like a flat tax is "not understood" by lawmakers?
It sounds ridiculous to me.
Or maybe I'm missing something.
Yet... an entire industry (financial advisors) will happily charge you a 1% "wealth tax" to manage your money. And you don't see lengthy articles from luminary venture capitalists about that.
Feel free to just tell the masses to eat cake since bread is so expensive while you dine on your mega-yacht. Just like the market can stay irrational longer than you can stay solvent, you may or may not be able to outlive the eventual violent outburst from the rest of the 99%. Scott Galloway is right on that the anti-data center backlash is just a proxy for anger at wealth inequality.
Anymore I think the question shouldn't be about some kind of economic fairness (the time value of money thing being discussed) but the idea that wealth accumulation is a disease that afflicts society. I don't think anyone should have the level of control or influence on others that having a billion dollars currently allows. If a millionaire gives $100 to a political candidate it probably doesn't require too much thought. It's impressive to note that a 10-billionaire can give $1M just as easily, and so we have a class of folks who can throw around influence, who can order a team of lawyers to do things, can employ their legion of sycophantic followers to harass people, or can threaten the employment of many people not-of-their-class because they can make decisions that threaten someone's employer's bottom line. And note that above I compared a millionaire to the 10-billionaire, but there are plenty of folks, especially around the planet, who economically live several orders of magnitude below the millionaire.
As a bit of an aside, "spending more time with family" is an often-used euphemism around someone being fired, but if you have more money than you know what to do with and you aren't using it to spend more time with those you love, then what on earth is it for?
I think a lot of ink has been spilled on the problems with the proposed California Wealth tax, the main points being:
1- Is this in fact a 1-time tax or is that a dishonest narrative to make the proposal easier to swallow?
2- How do you prevent capital flight to other states?
3- How do those with paper money or more voting shares than equity shares cover their tax bill?
That being said, I think more creative energy needs to be spent on the problem itself.
What do we do about individuals with $100M+ of unrealized capital gains that through various methods will never have to realize those gains to live an extraordinary lavish lifestyle, and their children will inherit the money with a step-up in basis? For those who make all their money from W2s, they pay very high tax burdens, while those who strictly have capital gains generally pay at most around ~20% for LTCG.
To those criticizing the California Wealth Tax, how do we solve this? How do we make billionaires pay more and lawyers/doctors/software engineers pay less?
> To convert between wealth and income tax rates, you have to divide by the rate of return on capital. The conversion rate of 20 comes from assuming that the risk-free rate of return is 5%.
This seems to only be true for people whose income entirely comes from their wealth, rather than their labor. The math doesn't math for someone on the other extreme end of the spectrum who has zero savings or investments and obtains all his income from labor: To him, a N% wealth tax = 0% income tax for all N. Those with -some- savings are somewhere in the middle.
It is a very sneaky way to argue that a wealth tax should be as across-the-board unpopular as a large income tax increase. But Graham's math is only applicable to those flush with investments and with relatively small salaries from labor, so a wealth tax is only unpopular to that particular group.