In a New Year’s Eve blog post, multi-billionaire Bill Gates Jr. called for raising taxes even higher on rich people like himself. Here are some relevant parts of his post (in boxes) along with my comments.
Although I’m not an expert on the tax code, here are some steps I think America should take to make its tax system more fair.
We should shift more of the tax burden onto capital, including by raising the capital gains tax, probably to the same level as taxes on labor. (bold in original)
It is true that shifting more of the tax burden onto capital would likely reduce inequality, the thing he worries about. But I for one am not upset that he is substantially richer than me: he earned it. (Indeed, he would likely be even wealthier if the feds hadn’t pursued his company with an absurd antitrust suit that I wrote about. The economy is unfair: to him.)
What I don’t want is for tax policy to discourage accumulation of capital, which is what his proposal would do. With less capital accumulation than otherwise, the ratio of capital to labor would be lower than otherwise and, therefore, productivity and real wages would be lower than otherwise. So inequality would fall and most of us would be worse off than otherwise. Thanks, Bill.
At least he admits he’s not an expert on the tax code.
He writes:
I don’t see any reason to favor wealth over work the way we do today.
I don’t think he’s looked hard. There’s an obvious reason: it’s called double taxation, or even triple taxation. You get taxed when you earn wages or salaries (once), then you get taxed when you invest some of the savings (twice) from those wages into corporations (you’re taxed implicitly on the dividends), and then you get taxed again (triple) on the capital gains when the value of the stock rises. And part of this last tax is a tax on phantom capital gains because the capital gains are not adjusted for inflation. If a stock holds its real value at $100 over 10 years, but cumulative inflation over those 10 years is 20 percent so that the nominal value of the stock is $120 at the end of the ten years, you get taxed on that $20 phantom gain if you sell.
Gates writes:
I’m also in favor of raising the estate tax and closing the loopholes in it that many wealthy people take advantage of. A dynastic system where you can pass vast wealth along to your children is not good for anyone; the next generation doesn’t end up with the same incentive to work hard and contribute to the economy. It’s one of the many reasons that Melinda and I are giving almost all of our wealth back to society through our foundation, rather than passing all of it along to our children. (bold in original)
That’s now quadruple taxation. Bill Gates has his own value judgement and wants to act on it. Good for him. And notice that he gets to choose whom to give his wealth to, which is not something that would be true with a loophole-free estate tax. Would he be indifferent between spending more on helping dirt-poor people in Africa, which his and his wife’s foundation do now, or having the Pentagon have more money to spend on arms? How much thinking did he really do on New Year’s Eve?
And notice his idea that he’s giving their wealth back. No they’re not. They didn’t take it. They earned it. Maybe I should wish that he hadn’t dropped out of Harvard where, had he taken Ec 10 from Marty Feldstein, he would have learned a thing or two. And what about people who want to give their wealth to their children? Like him, I think it could be a bad idea, but why shouldn’t those parents be able to deploy their wealth according to their wishes? Bill Gates, with his and his wife’s foundation, truly does have a noble idea about how to use his wealth to help others. But he has a lot of gall in proposing that the government take wealth from people who don’t share his idea.
Next up: Billionaire Mark Cuban spouts nonsense.
READER COMMENTS
Mark Brady
Jan 7 2020 at 7:03pm
David Henderson writes, “But I for one am not upset that he is substantially richer than me: he earned it.”
Most (all?) of his wealth is the consequence of intellectual property. Are inventors, designers and writers entitled to all (or any?) of their government-protected patents, design patents, copyrights, and trademarks? That is the question that has to be asked, and answered, before we agree that Bill Gates earned (and deserved) all his wealth.
David also writes, “I don’t think he’s looked hard. There’s an obvious reason: it’s called double taxation, or even triple taxation. You get taxed when you earn wages or salaries (once), then you get taxed when you invest some of the savings (twice) from those wages into corporations (you’re taxed implicitly on the dividends), and then you get taxed again (triple) on the capital gains when the value of the stock rises.”
Is it any more or any less “double taxation” when Bill Gates buys a car and pays sales tax on it? Or when he buys a house and pays an annual property tax on it? Or when he sells a non-primary residence and pays capital gains tax on it?
Mark Z
Jan 8 2020 at 12:46am
But if he sells stock and then uses the capital gains to buy a house or a car, he then has to pay the property or sales tax then as well, so those taxes aren’t specific to consumption from labor income either.
On IP, I personally don’t take it for granted that IP should not exist, but even if it shouldn’t, I’m not sure taxation is a good ‘corrective’ for past gains from IP ownership.
Dylan
Jan 7 2020 at 7:30pm
I disagree with a lot of what David writes here, but most of that gets caught up in discussions of what it means for someone to “earn” something, which in turn rests on some metaphysical assumptions where my beliefs are probably not mainstream, so I won’t get into those here.
But, double taxation seems like a weird objection by most metrics, just because it doesn’t seem clear why some cases of money being exchanged is considered double taxation, and other times it is not? I’ve made money and paid income tax on it. Now I want to start my own business, and if I pay employees to work for me, they will be taxed on it. But I’ve not heard anyone call that double taxation. Yet, if I instead give my kids the same amount, and they are taxed on it, that’s double taxation? If I buy a computer, I pay sales tax, which isn’t double taxation, but if I instead buy shares of Dell, the tax on the gains is?
Phil H
Jan 7 2020 at 8:16pm
I’m just a bit confused by the claim that taxes on capital will reduce capital formation. I don’t understand the mechanism by which this is supposed to happen.
If I have 100 million dollars, and the state takes 10 million, then I have less to invest, but the state has more. Is the idea that the state will consume that 10m, rather than invest it?
If I reduce my fortune to minimise my wealth taxes, and spend a lot of money on parties and yachts, that money still goes somewhere, doesn’t it? It goes into the pockets of the people who work for me, where it sits as capital, accessible to any bank where they hold their bank accounts. I still don’t see why the total stock of capital would be reduced. Is the idea that it would become more distributed, and so more difficult to invest?
Christophe Biocca
Jan 7 2020 at 8:38pm
Maybe it’s simpler to think in terms of things instead of money (after all, if it was simply the stock of money that actually mattered, we’d just run the printing presses).
When people are put to work on building yachts and staffing parties, they’re not working on building airplanes or writing software. The opportunity cost of the consumption goods is the capital goods foregone (and the stream of benefits derived from them).
Phil H
Jan 8 2020 at 12:49am
Thanks, Christophe. So, do I understand you correctly to be saying that me *consuming* the money means that it is not converted into *productive assets*?
First, I just don’t understand why that would be so. That 10m is sitting in my vault, and I can convert it into assets once. If I consume it, I pass it to others, and it goes into their vaults. They can buy shares with it (which would increase investment) or invest it themselves, or consume it again, in which case it continues circulating until it falls into the hands of someone with more investment preference. That money’s not gone.
Moreover, depending on how the law works, if I (or more realistically, my company) invested the money in productive assets, wouldn’t that be deductible?
Christophe Biocca
Jan 8 2020 at 4:11pm
You can only choose how to spend that money once, but regardless of your choice, someone else will get their hands on it next (in exchange for either the consumption goods or the productive assets you purchased).
As a simplifying assumption (*) assume that your two choices are:
– A $10M party.
– A $10M steel foundry.
both sold by “Parties and Foundries Inc.”, a completely vertically integrated company, with the same gross margin and the same employees doing either kind of work. So the end result is either:
– You get to have a party, the shareholders of P&F get $2M in profit, their employees get $8M.
– You get to have a steel foundry, the shareholders of P&F get $2M in profit, their employees get $8M.
(*) you may object that this is not very realistic. And it is not, but in the more realistic model where we simply don’t know anything about the suppliers (who they are, what they would do with their next marginal dollar), the expected effect on other people’s consumption/investment is the same (we have no reason to think shareholders/employees/subcontractors of companies selling investment goods behave differently from shareholders/employees/subcontractors of companies selling consumption goods).
Phil H
Jan 8 2020 at 8:04pm
Thanks, Christophe. I have no problem with simplified arguments (they’re the only ones that will work for a non-economist like me!). I like your Parties and Foundries Inc.
What I’m still not seeing is how any of this relates to what Henderson asserts: “…discourage accumulation of capital…less capital accumulation”
As you said, someone gets that money next. Now, for me, because of my wealth tax position, the best marginal choice was to consume that money. But the next person who gets the money won’t be as rich as me. As soon as that capital arrives in the hands of someone with fewer billions, the tax incentives that discouraged me from investing no longer apply, but the investment opportunities remain unchanged. So once again, what is the mechanism that discourages accumulation of capital?
Christophe Biocca
Jan 8 2020 at 9:25pm
Replying to myself because we’ve reached the nesting limit.
The point of the example is to demonstrate that even if the money makes it to the next person, there is still an opportunity cost of choosing to consume instead of invest.
Sure there’s a next person, but whether they choose to acquire capital goods instead of consumption goods is their decision and is not going to change based on how we spent the $10M. Sure, other people will in turn get to make consumption/investment choices of their own (and for the sake of argument let’s just assume their incentives haven’t changed), but those are independent of what choices we made.
And so the only difference between the “acquire a party” and “acquire a steel foundry” decisions is that in one we end up with a hangover, and in the other we end up with a productive asset, with ongoing (taxable) revenue from it.
This is really just a restatement of the parable of the broken window, except instead of the alternatives being breaking something then spending the money on repairing it vs acquiring some other good (durable or otherwise), the alternatives are acquiring a consumption good vs an investment good.
In fact consider the factory-arsonist parable where we compare the outcomes of someone burning down a factory, and the owner spends $X to rebuild it, and the alternative world where the $X is spent towards building a second one. I think that makes the absurdity of saying “no difference in capital intensity” self-evident.
Phil H
Jan 8 2020 at 10:25pm
“there is still an opportunity cost of choosing to consume instead of invest”
I… don’t think that’s right! When you work these out as aggregates, aren’t we supposed to ignore individual choices? It doesn’t matter *who* does the investment. If the incentives exist, the money is going to get invested, right? That’s the kind of assumption that economists make… I thought!
“Sure there’s a next person, but whether they choose to acquire capital goods instead of consumption goods is their decision and is not going to change based on how we spent the $10M.”
It might! I gave up a perfectly good (profitable) investment because it wasn’t in my interest because of my (marginal) tax position. That investment opportunity now exists for someone else to take up.
“In fact consider the factory-arsonist parable”
But I didn’t destroy any productive assets with my party.
I just don’t think that what you’re saying squares with the way economists talk about capital, and in particular, with the notion of capital seeking out the best returns. Why will capital’s ability to seek out good returns suddenly be so damaged by this tax?
Roger D McKinney
Jan 7 2020 at 9:10pm
Wealth doesn’t just happen, as Thomas Piketty thinks. Capitalists have to re-invest their income to pay for worn out equipment and buildings. If they quit doing that, the equipment will wear out, the business will collapse and the workers will be unemployed. Workers can not earn even a min wage without large amounts of capital to work with. Economic growth requires greater spending above the amount for maintenance and replacement. High taxes on capital will cause it to hide or flee the country.
Phil H
Jan 8 2020 at 12:53am
Hi, Roger. I think you’re giving the same answer as Christophe above, but I’m not sure. I still don’t understand why the tax would disincentivise investment. Firstly, investment is mainly done through companies, isn’t it? And the wealth tax would be levied on individuals. I don’t see why the potential tax on the individual business owner would change the way her company chose to invest its profits in a given year. This is genuine lack of knowledge on my part. My questions aren’t rhetorical, I just don’t know how it’s supposed to work.
Fred_in_PA
Jan 8 2020 at 4:41pm
Phil H,;
Re: ” I don’t see why the potential tax on the individual business owner would change the way her company chose to invest its profits in a given year. ”
I suspect the answer is that a reduction in one’s lifestyle is hard to take. And if I / you / he / she / it can avoid it, we will.
In the simplest case, where the lady owns company, I suspect her compensation will get increased until her take-home pay after taxes is about what it was before. (Junior won’t have to drop out of Yale after all.) But that will leave less inside the company for it to invest. And thus they can’t match last year’s investment level; this year they don’t have the money.
It’s a little less obvious (and deferred?) where the manager is a hired hand, but I suspect — in the face of higher personal taxes — it still comes. It’s just that now it’s harder (i.e., more expensive) for a company to procure such talent.
Phil H
Jan 8 2020 at 8:12pm
Hi, Fred. Thanks, I think that actually makes sense! Essentially the company’s wage bill goes up, so its profits available for investment go down. I can just about see that as a mechanism. I’m not 100% convinced, because I think the wealth tax would mostly affect business owners, and their relationship with the company is a bit different, but I’ll accept it for now.
The money taken out of circulation in these private companies flows into the public purse, and is the theory that government investment is less/less efficient? Because it doesn’t just disappear. If it goes into roads and airports and education, that might be more efficient investment. If it goes into supporting consumption through welfare, then perhaps not…
KevinDC
Jan 7 2020 at 9:30pm
Hey Phil –
Your terminology seems a bit confused, like when you said “that money [spent on yachts and parties] still goes somewhere, doesn’t it? It goes into the pockets of the people who work for me, where it sits as capital, accessible to any bank where they hold their bank accounts. I still don’t see why the total stock of capital would be reduced.”
You seem to be using the term “capital” in the accounting sense. But that’s not what capital means in economics. Money sitting in people’s pockets (or in their bank accounts) is not capital.
Terminology can be a vexing thing sometimes. I can’t count the number of times I’ve had people insist to me that economists were crazy because economists say that in a competitive market the rate of profit is driven down to zero, because they were conflating the idea of accounting profits and economic profits. A firm can be making massive accounting profits and still make zero economic profit. Part of this is our own fault – economists are just bad at naming things. A normal person hears the term “public goods” and assumes it means “goods provided by the public sector,” when in fact very little of what the public sector provides are actually public goods.
Vivian Darkbloom
Jan 8 2020 at 12:14am
“Money sitting in people’s pockets (or in their bank accounts)…”.
Does the money I deposit in the bank normally just “sit” there?
Phil H
Jan 8 2020 at 12:57am
Hi, Kevin. I’m very willing to believe that I’m being confused by the terminology here. But I need to be deconfused, not just told that I’m confused! You say money in people’s pockets/banks isn’t capital, but isn’t that exactly what banks do? I thought banks were machines for turning savings into capital. Why would that not work in this case?
Moreover I had a long argument with Jon a few weeks ago in which he made precisely the opposite argument to you! He was arguing that there is no such thing as idle money, only total savings – and isn’t savings basically our capital stock?
Phil H
Jan 8 2020 at 1:08am
Sorry about the million posts, but here’s part of my confusion:
Kevin above: “Money sitting in people’s pockets (or in their bank accounts) is not capital.”
Jon during this previous conversation https://www.econlib.org/youre-not-using-the-money-for-anything/ : “If I remove my capital from current consumption, my intention is ‘something better will come along and I want it ready then.’ The $13k currently in my savings account doesn’t magically stop being savings”
Jon appeared there to be using capital and savings interchangeably, and saying that any money in someone’s savings account is capital.
I’m not being deliberately dim here. I think I’m getting told very different stories on some really basic concepts.
Fred_in_PA
Jan 8 2020 at 3:49pm
I always have to preface my posts by the observation that I’m not an economist, but . . . .
Isn’t the problem here one of “eating the seed corn” (mixed in, perhaps, with a scoosh of the money illusion)?
If we tax the wealthy more we can tax the poor less. But savings & investment (i.e., non-consumption) should drop. At least in part because many of the “poor” will shift more of their consumption from inferior goods to more desirable ones. (Less cotton & more silk.) So “surplus” income for a wealthy family — which likely would have been invested — becomes consumables income for the poorer family and definitely not leftover for investing. We (the collective “we”) eat better now, but there’s less seed corn left for next year’s planting.
If we shift taxes from labor to capital, doesn’t that incentivize the provision of more labor while dis-incentivizing the provision of capital? Won’t less capital / worker make those workers less productive, with the result of fewer consumables per hour worked? And hence a falling standard of living? (Unless, perhaps, that gets offset by a sufficient increase in the number of hours worked. Our (that collective “our”, again) standard of living doesn’t fall — at least as measured by goods consumption — but we work harder (or longer) to get it.)
While the workers realize more disposable income (because their taxes are lower), there should be less for them to spend it on. I would expect inflation to rise just enough to limit their consumption to the — now more constrained — supply of goods & services.
(And may I wonder a little bit about those extra dollars “sitting in the bank”? Doesn’t it make a difference whether they’re deferred investment (as your quote of Jon seem to imply) or — in the case of a poorer family — deferred consumption?)
Phil H
Jan 8 2020 at 8:30pm
Hi, Fred.
“If we shift taxes from labor to capital, doesn’t that incentivize the provision of more labor while dis-incentivizing the provision of capital? Won’t less capital / worker make those workers less productive, with the result of fewer consumables per hour worked? And hence a falling standard of living?”
So, I think this makes sense, BUT… the but is innovation. If we incentivize labor, then we get more people working for more money (a good thing in itself!), but as you say, capital intensity could be reduced, which *could* lead to lower productivity. The reason it might not is innovation: the things that increase productivity are (1) capital and (2) new technologies. Seeing as the USA is the technology capital of the world, if more work meant more innovation and more new technologies, then that might actually lead to higher productivity.
I don’t know how those two factors – capital and innovation – balance against each other. But I do know that the world has had a relative capital glut since 2009, and that productivity growth seems to have slowed. This suggests that throwing more capital at productivity isn’t working at the moment. It doesn’t seem like a terrible idea to shift the balance towards throwing more human resources at it. (Especially as for the first time ever, Chinese labor is now really well-educated. That’s a billion people of human resources that didn’t exist a generation ago. I really, really, really want the balance of the economy shifted towards them, because… it could lead to spectacular growth like nothing seen before.)
Fred_in_PA
Jan 8 2020 at 4:22pm
Aren’t you ignoring the fact that consumption consumes?
It seems obvious to me that the steak is more valuable than the poop our consumption reduces it to. That the yachts wear out and the drunken parties don’t leave much behind (except perhaps embarrassments, regrets and hangovers — okay, and perhaps some beautiful memories, too).
Perhaps if we’re all equally wealthy — the attendants who serve the drinks and the tycoons who are treating the room — then perhaps surplus (to be saved/invested by the tycoon) remains surplus for the single mother waitress with two kids to feed. But . . . .
Roger D McKinney
Jan 7 2020 at 9:14pm
Helmut Schoeck shows in his Envy: A Theory of Social Behavior that wealthy people like Gates fear the envy of others, so they furiously signal that they are different. They have the interests of the poor in mind and that of the common good. Very sad. He did earn every penny but feels guilty about it.
nobody.really
Jan 7 2020 at 9:30pm
Look, I favor efficient public finance as much as the next guy. If Henderson would like to tell us what his favorite form of public finance is, great. But merely grumbling how every form of public finance has downsides–while accurate–doesn’t really doesn’t really help, unless Henderson also favors government defaults and a debased currency.
In particular, I’m baffled by this:
I earn $100 and pay taxes on it. That’s one level of taxation. I invest it. It doubles in value a gajillion times over. I could now sell the investment, pay capital gains, and distribute it to my kids. Or I could simply die and, but for the estate tax, my kids would get this massive windfall with a stepped-up basis, tax-free. How does the fact that I paid taxes on the initial $100 offset the tax advantages of a stepped-up basis flowing through my estate?
Moreover, how would any amount of estate tax be double taxation (let alone quadruple taxation)? I’m not being double-taxed; I’M DEAD. And my kids had never paid any taxes on these funds. It’s bizarre that libertarians obsess about autonomy, but then want to embrace a ludicrous fantasy that a decedent and his heirs are someone one corporate entity.
The only downside I know of to an estate tax is that the tax may be less efficient than other forms of public finance. But I don’t regard it as especially unfair.
Want to avoid the estate tax? It’s easy: Simply decline your inheritance. You will be no worse off than before you were offered the inheritance. But the idea that you are entitled to tax-free money because your parents were rich is just goofy.
Mark Z
Jan 8 2020 at 12:52am
Because the estate tax is not a surprise. You know, well before you die, that a big chunk of what you leave behind will be taxed. Assuming that part of why people work and invest and try to earn money is so they can leave something for their children, then the extent to which what you accumulate will be taxed upon death (negatively) influences your incentive to accrue wealth. In the extreme case of 100% estate tax, anything you accrue beyond what you can spend during your lifetime is wasted. Perhaps most people don’t aren’t influenced by the prospect of how much they’ll leave behind, but the fact that so many people seem to deliberately plan to leave behind something for their progeny suggests otherwise.
nobody.really
Jan 8 2020 at 8:01am
Fair enough. Yet if you spend the money on goods, you might well pay sales tax. If you (conceptually) spend the money by transferring it to your heirs after your death, you (conceptually) pay an estate tax. Both taxes are foreseeable. Both may impair your incentive to earn (as does an income tax). I see nothing especially objectionable about the estate tax.
That’s how public finance works: To pay for public goods (for which we cannot impose a transaction-based price on users/beneficiaries), we extract a share of the benefits when beneficial transfers occur. All parties benefit, but the private parties benefit less than they would have if the tax didn’t exist. The conceptual problem is not the estate tax; the conceptual problem is that so many beneficial transfers occur that we cannot measure and thus cannot tax. (Old joke: The researcher refused to disclose his method for estimating the number of times people have sex in a year, arguing that otherwise government would be able to turn sex into a taxable event.)
Nah. Wealth is insurance against financial contingency. Go tell your insurance agent that you want your money back because your house didn’t burn down last year and thus you derived no benefit, and maybe she’ll explain it to you better than I can. Or look at all the people holding spaghetti suppers to raise funds for Tiffany’s cancer treatments, and then tell yourself that the people who died after a lifetime of financial security derived no benefit from their excess wealth.
Vivian Darkbloom
Jan 8 2020 at 3:01am
“Want to avoid the estate tax? It’s easy: Simply decline your inheritance.”
There is a reason the federal estate tax is called the estate tax and not the federal inheritance tax. The tax is calculated, assessed and collected at the level of the estate, not each individual beneficiary. If a beneficiary declines his, her or its inheritance, this per se does nothing to avoid the estate tax.
nobody.really
Jan 8 2020 at 7:14am
Ah–so the ESTATE pays the tax, not any human being. So no human being is in a position to object, right?
Vivian Darkbloom
Jan 8 2020 at 8:38am
Of course, similar to a C corporation. But, the point was (is) that no (estate) tax is avoided simply because a beneficiary declines his or her devise and/or bequest. Whether an individual (in this case the executor or executrix) have the right to object to an estate tax assessment does not change that essential fact.
A number of states of the US and most foreign countries have inheritance tax regimes. The US federal government estate regime is different.
nobody.really
Jan 8 2020 at 9:30am
Ah–fair enough. I hadn’t distinguished between the federal estate tax and inheritance taxes.
But the larger point remains: No recipient has a basis for objecting to such taxes, because no recipient has a right to a (pre-tax) inheritance.
Kevin Dick
Jan 7 2020 at 10:39pm
Readers might benefit from reading Mankiw’s 2009 paper, “Optimal Taxation in Theory and Practice” for an overview of the issues involved in designing a tax system.
Phil H
Jan 8 2020 at 8:42pm
Thank you, that is very helpful.
Danno
Jan 8 2020 at 12:15am
He may not be an expert on taxation but he has an expert in his family. If I recall correctly, Bill Gates Sr.’s law practice was in the are of estate planning and using those loopholes to reduce his clients’ tax obligations.
I’m not an expert either, but didn’t he reduce his own taxes by setting up the foundation?
Danno
Jan 8 2020 at 12:17am
https://www.gatesfoundation.org/who-we-are/general-information/financials
Vivian Darkbloom
Jan 8 2020 at 3:17am
You may be no tax expert, but this is the essential thing to remember about Gates and Buffett’s lectures on how to tax the rich. Neither of these two gentlemen would be significantly affected by an increase in the federal income tax of dividends, capital gains, estate tax or even the ordinary income tax. These two are so wealthy they would not be able to “consume” their wealth during their lifetimes even if they tried so there is no reason to convert even a small percentage of their holdings to cash to enable them to do so. Buffett’s stock doesn’t even pay a dividend. Gates might pay a marginally larger amount of tax on his Microsoft dividends.
Instead, Gates and Buffet will continue to contribute their appreciated stock to tax free trusts and foundations. And, both will continue to control how that wealth is allocated both during their lifetimes and long after they are dead. What Gates and Buffet are saying implicitly is that they want control over their wealth and how it is allocated rather than the federal government. And, Buffet has said repeatedly and quite correctly that what he is best at is how best to allocate capital. These two draw the line at wealth taxes and eliminating the tax advantages for contributions to tax exempt entities and the income of those same entities. This says it all—both of them believe that they are better than the federal government at redistributing their wealth. And, both of them are right.
Thaomas
Jan 8 2020 at 1:47am
Bill’s heart is in the right place but he is off base about how to reform the tax code. (Actually, taxing all income equally might be a good tactic to get the attention of rich folks and make possible the kinds of reforms we actually need.)
Yes we should encourage the accumulation of capital, especially of those who have less of it. We need to base our tax system on a progressive consumption tax, basically by allowing unlimited deductions for capital accumulation, possibly subsidized accumulation by lower income people. This would replace (except for administrative convenience — businesses should not be able to disguise consumption as cost or hide income) all business taxes and the wage tax that funds the SS and Medicare trust funds. The level of the progressive consumption tax should be enough to keep the structural (full employment) deficit near zero.
robc
Jan 8 2020 at 9:16am
You misspelled “single land tax”.
nobody.really
Jan 8 2020 at 9:40am
Ha!–but I suspect Thaomas is referring to something like the X Tax.
Alas, apparently transitioning from an income tax regime to an X Tax regime poses difficult challenges involving basis. I can’t say that I’ve followed it closely.
Thaomas
Jan 8 2020 at 2:43pm
No, I mean a progressive tax whose base is the amount consumed, roughly a progressive tax on all income (wages, capital gains, dividends, imputed earnings of owned businesses) with unlimited deductions for saving/capital accumulation an maintenance.
The complaint about “double taxation” is basically that income is taxes more than once (and therefore presumably “too much”) on the way toward consumption.
Alan Goldhammer
Jan 8 2020 at 8:46am
The argument for a “wealth” tax is like counting the number of angels on the tip of a pin, pointless (pun intended) and likely to fail as there will always be ways to avoid it. The critical issue has always been how to simplify the tax code and eliminate all of the preferences so that tax lawyers and accountants eventually are forced into other areas of practice. I don’t buy the argument that eliminating the preference for capital gains somehow impacts capital formation and investment. Under the current code, capital gains are taxed when the investment is old and not before (I know the wealth tax wants to change this but that is of course a stupid idea).
Total elimination of the Estate Tax creates a huge tax preference for the very wealthy. Large wealth gains end up never being taxed as they are accumulated over many years. Under the example that David has used, all of Gates’s MSFT stock can be passed to heirs (I know he is part of the giving compact so this is a hypothetical) tax free regardless of it’s initial value. The tax authority is never able to capture the capital gains that has accrued over the years. Contrast this to an investor who has purchase MSFT stock and held it for a long period of time and then sold it, at which point capital gains tax is triggered. [I would point out that there are some inherited investments that are taxed. I received a small IRA a decade ago when my mother passed. The US tax laws require me to immediately begin to withdraw funds based on my age schedule even though I was not 70 1/2 years of age. The income from that IRA is subject to my individual tax rate and not exempt under the estate tax laws.]
I do think there is inequality in this country and I note this every year during proxy season when I’m asked to vote on executive compensation for the equities held in my account. One only need look at CEO pay and the ratio of that compared to the average salaried worker. It keeps going up at a hire rate than those who work at the firm. Other examples can be cited. That being said, a wealth tax is not the way to attack this problem. Let’s end all the tax preferences and simplify the tax code, put in place a VAT which is far easier to administer, and even end corporate taxation (which pay a decreasing % of the Federal budget).
robc
Jan 8 2020 at 9:15am
Gates is lying. If the issue was just that he isn’t paying enough in taxes, he could solve that today, the treasury department will take a payment:
How do you make a contribution to reduce the debt?
There are two ways for you to make a contribution to reduce the debt:
At Pay.gov, you can contribute online by credit card, debit card, PayPal, checking account, or savings account.
You can write a check payable to the Bureau of the Fiscal Service, and, in the memo section, notate that it’s a gift to reduce the debt held by the public. Mail your check to:
Attn Dept G
Bureau of the Fiscal Service
P. O. Box 2188
Parkersburg, WV 26106-2188
nobody.really
Jan 8 2020 at 9:36am
Could you quote where Gates says that the issue is just that he personally isn’t paying enough taxes? I suspect someone may be lying here, but I’m not sure it’s Gates.
Todd Ramsey
Jan 8 2020 at 9:53am
“I think the rich should pay more than they currently do, and that includes Melinda and me.”
nobody.really, Gates is capable of acting on this statement via the methods described by robc. Perhaps “lying” is the wrong word, but it’s hypocritical to advocate for a position one is capable of acting on but does not.
Gates is actually advocating for other rich people to pay higher taxes. His revealed preferences show he believes he can use his wealth more effectively than can Trump, McConnell, Pelosi et al.
nobody.really
Jan 8 2020 at 10:59am
Yes, Gate is forthrightly advocating for other rich people to pay higher taxes. And you have identified no mechanism by which Gates is capable of acting on that objective, other than via advocating legislation. I find neither lie nor hypocrisy–at least, not on Gates’s part.
Indeed. And I find no conflict between that preference and his advocacy. In short, Gates favors more progressive taxation. Yes, this would result in more of his money going into federal coffers–and outcome which, by itself, Gates does not favor. But it would ALSO result in more of OTHER PEOPLE’s MONEY going into federal coffers–an outcome that he values so highly that he would be willing to sacrifice more of his own money to achieve it. Is that so hard to grasp?
This web page tends to attract fairly savvy policy people, so the fact that people cannot fathom the merits of progressive income tax baffles me.
robc
Jan 8 2020 at 11:53am
Yeah, lying was too extreme as he did include other people in his statement. I was thinking he just said that he wasnt paying enough. I know Buffett has made similar comments in the past, but also doesnt correct it himself.
If Buffett is really worried he is paying a lower tax rate than his assistant, he can just pay more and problem solved.
Danno
Jan 8 2020 at 11:49am
Economist believe actions speak louder than words. Look at the actions Bill & Melissa Gates have taken. Look at the quotes taken from his post:
And:
Yet what are his actions? Instead of selling stock, paying capital gains taxes, then funding the social causes they believe in, they donated investment assets (see site from the Gates foundation above) to fund a tax-exempt foundation.
RPLong
Jan 8 2020 at 10:18am
It looks like Gates is wrong about incentives, too:
I don’t think that’s right. I think the next generation has more incentive to work hard if they know that their estates can be passed down to their children. Indeed, the main reason I work today is to save money for my kids’ educations and, if I’m lucky, leave them with a nice nest egg or a start to one.
nobody.really
Jan 8 2020 at 11:23am
Hard to say in the abstract. Yes, the opportunity to pass on wealth to your heirs may motivate some people to work harder. But wealth, including inherited wealth, may prompt people to consume more superior goods–including the good of leisure.
Which dynamic predominates? Well, economists have documented a backwards-bending labor supply curve–suggesting to me that the wealth effect exceeds the benefit-your-heirs effect.
RPLong
Jan 8 2020 at 11:49am
I don’t know which economists you’re referring to, but a few years back, Raj Chetty released a paper with some findings that are consistent with what I would expect:
Employment at age 30 was directly correlated with parental income (the richer the parents, the higher the employment rate of the children), except at the very tip-top of the distribution.
Earnings at age 30 was even more directly correlated with parental income, all the way up to the tip-top of the distribution.
Household income at age 30 was directly correlated to parental income.
College attendance rates were directly correlated to parental income.
FiveThirtyEight wrote up a nice summary of Chetty’s findings. You can find it here: https://fivethirtyeight.com/features/rich-kids-stay-rich-poor-kids-stay-poor/
To bring this back to what I was saying before: I think increasing things like estate taxes create marginal disincentives to work hard accumulate large estates, and bequeath them to children. This belief doesn’t rely on any assumption about whether beneficiaries have a further marginal incentive to work; but if it did, Chetty’s analysis provides compelling evidence to suggest that employment, education, earnings, and income all increase as parental income increases.
nobody.really
Jan 8 2020 at 1:06pm
Odd; I included a link, but it does not appear in my post. But it’s a sufficiently standard concept as to have its own Wikipedia page (with associated citations) here: https://en.wikipedia.org/wiki/Backward_bending_supply_curve_of_labour\
And the concept is manifest in standard labor practices such as offering “time-and-a-half” pay when workers are asked to work overtime. The assumption is that a standard hourly rate is fine for up to 40 hrs/wk, but when you ask people to sacrifice more leisure than that, you must compensate them at a higher rate.
Thanks for citing this. Some people express opposition to estate/inheritance taxes, and to progressive taxation in general, on the theory that rich people EARNED what they have. But as the FiveThirtyEight story states, Chetty’s study was part of his Equality of Opportunity Project, which copiously documented that “where you come from — where you grow up, how much your parents earn, whether your parents were married — plays a major role in determining where you will end up later in life.” The study you cite in particular found a strong correlation between a person’s earnings at age 30 and the income of that person’s parents roughly 15 years prior—a variable that the person presumably had little or no influence over. In short, the idea that people EARN their outcomes is hard to reconcile with the data.
However, as you note, this general correlation between a parent’s earnings and their kids earnings erodes badly at the tip-top of the distribution, with the children of the very rich earning substantially less than their parents. What could account for that?
Maybe it’s because, while people in the tip-tip of the income distribution still had kids in high school, they could anticipate that they’d pay an estate tax, and this somehow impaired the earning power of their offspring. Alternatively, maybe it’s because their offspring realized that they’d never have to work a day in their lives. Which rationale seems more plausible to you?
And, which households are subject to the US estate tax? The top 0.02 percent. One might even say tip-top.
Does the estate tax really seem like such a bad policy now?
nobody.really
Jan 8 2020 at 1:24pm
Correction:
The thing that erodes as parents grow richer is a kid’s likelihood of employment by age 30, not earnings. No, as other graphs in the study show, the children of the rich have the highest earnings and household incomes, regardless of their employment.
RPLong
Jan 9 2020 at 12:09pm
I guess I’m confused. I said that estate taxes are a disincentive to work. You said that was hard to say in the abstract. I cited data that unambiguously finds that employment increases with parental income. I’m eyeballing the graph, but it looks like even the good-for-nothing spoiled 0.2%’ers are still employed at rates higher than the median and in absolute terms higher than 80%. As you note, this is coming from a source that is friendlier to your position than mine. We should be close to agreeing on this.
I’m also confused as to why you said this:
That’s not at all what the data say. Take a look at the second graph in the link I provided, entitled “Earnings at age 30 by parental income.” Earnings are in fact highest at the tip-top of the distribution. That is, the correlation is strongest there; it hasn’t “eroded” at all.
If you believe that high earnings are a good thing — and I happen to — then an estate tax appears to be a detriment to society. I am not sure under what argument society benefits when anyone, including the top 0.2%, earns less. Can you think of such an argument?
nobody.really
Jan 9 2020 at 3:22pm
1: And I cited principles of labor economics showing that people tend to reduce their working hours as they get richer. These are countervailing dynamics, making it hard to draw conclusions in the abstract.
2: Remember, you cited a study about a correlation between (a) parental income when someone is in high school and (b) subsequent employment rates when the person is 30. You merely hypothesize that the estate tax deters earnings during these years. Let’s think about that hypothesis: You’d have to be WILDLY rich to be able to predict, while your kids are still in high school, that you’re going to die as a member of the top 0.02% of households. Heck, how could you even know what the state of the tax laws would be when you died? Thus, I’m not impressed with the argument that the estate tax depresses earnings among people with teenage kids. (They have enough other reasons to be depressed.)
3: Again, Chetty’s study compares parental income to kid’s subsequent earnings. What mechanism do you imagine results in high parental income during a kid’s formative years leading to high employment rates? Here’s a crazy thought: Maybe parents with high incomes have more resources to spend on their kids during the kids’ formative years? If so, then one possible use of an estate tax would be to transfer funds from households with lots of resources (and probably few kids in their formative years) to households with fewer resources and younger kids. Like I say, it’s a crazy thought….
(In fairness, I expect Chetty’s study also reflects genetic and social advantages that productive parents bestow upon their kids–and an estate tax would NOT permit society to transfer these advantages to other households. But neither would it impair a parent’s ability to transfer these advantages to their own kids.)
I concede. That’s why I added the correction that’s just above your comments.
This is an excellent argument for why there should be no taxation whatsoever. And if you embrace that argument, I won’t trouble you further.
But for readers who acknowledge that we DO need taxation, I refer you to Churchill’s observation that democracy was the worst form of government ever devised—except for all the others. In other words, optimization does not mean picking a costless option; it means picking the best option from among the alternatives.
If government needs to raise $X to finance a public good, what mechanism should government use to raise it? Merely saying “But Option A would impose costs!” is irrelevant, even if true, unless you can point to an Option B which has fewer costs. Welcome to the game of public finance!
In this vein, one of the chief advantages of an estate tax is … that it might avoid or reduce some of the disadvantages found in the other forms of public finance–especially sales and income taxes. Honestly, if I wanted to design a public finance system to raise $X in a manner that had the least harmful effect on people’s employment rates when they’re 30, an estate tax might be the most efficient mechanism around.
robc
Jan 10 2020 at 8:50am
The single land tax has no deadweight loss.
It is also, literally, taxing rent seeking as opposed to productivity (which is why it has no deadweight loss) so these kind of arguments cease to exist.
Dave Smith
Jan 8 2020 at 11:27am
I agree with Gates. Taxes on labor and capital income should be the same. Zero.
Don Boudreaux
Jan 8 2020 at 2:07pm
Here’s footnote four from Robert Ekelund’s and Douglas Walker’s 1996 paper, “J. S. Mill on the Income Tax Exemption and Inheritance Taxes:The Evidence Reconsidered“:
Paul Kositzka
Jan 8 2020 at 2:13pm
The estate tax should be 90%+ on all wealth beyond a certain amount such as $20M per couple. That’s enough for anyone to get a great start (children, grands, etc). The billionaires should not get a deduction for funding their own private foundations. They become proxies for the family that controls them, and the power that comes with controlling huge amounts of wealth.
The money collected by the treasury should be used for infrastructure, lower income taxes on the middle class, debt reduction (assuming a balanced budget requirement), and other activities that benefit the country as a whole and not pet projects.
The last thing we need is more oligarchs wielding political power. We have a billionaire in the WH, two running for the job plus a gaggle of millionaires.
We need a large, strong, middle class – the backbone of a democratic republic.
National Jester
Jan 8 2020 at 3:57pm
If Bill Gates and the rest of the .0001% want to pay more taxes, they can do that today. 1) take your incomes as a salary instead of capital gains, 2) take the Standard Deduction instead of itemizing, 3) Sell all of your investment portfolio each year (or every 3 months)and then reinvest it. It’s as simple as that.
What Bill and company REALLY want is for the middle class and upper middle class to pay more of their income into the U.S. Treasury. Bill and his billionaire buddies do not have our best interests at heart!
Mark Bahner
Jan 8 2020 at 10:09pm
It’s even easier than that. Bill Gates can just send in a check for whatever billions to the IRS.
Many years ago, I had some dispute with the IRS about taxes. I sent them a check that included their stated penalty for late payment of like $20…but I protested that I didn’t think I owed the late penalty. So I told them that they should use the late payment penalty to reduce the national debt. They eventually agreed that I didn’t owe the late fee, and sent me a check for like $20, but I never cashed it…because…well, that’s just the way I am. So I reduced the national debt by $20 (minus the cost of them contacting me occasionally for the next few years about the non-cashed check).
Mark Brady
Jan 8 2020 at 8:32pm
I suggest that the rates of taxation are a crucial consideration when debating “double taxation,” “triple taxation,” and “quadruple taxation.” For the sake of argument, let’s grant that income taxation and estate taxation consitute “double taxation.” For those of us who prefer a smaller state with lower tax revenues to a larger state with higher tax revenues, a proportional tax of 5% on both income and on the market value of the estate is likely preferable to, say, either a 25% tax on income and no estate tax, or no income tax and a 25% estate tax.
MikeH
Jan 9 2020 at 5:02pm
I would get rid of the estate tax altogether but tax all capital gains at death for everyone on some progressive schedule decided by the amount of net assets in the estate at death. If we’re going to have a capital gains tax at all we should be collecting them instead of letting it all leak away to small estates that never get hit with any tax at all.
David Seltzer
Jan 9 2020 at 5:32pm
It’s reprehensible enough that the feds take at a probable marginal rate of 70%. Now Kermit wants to lecture me on more taxes? No pal. It’s mine and you can’t have it.
Jacopo
Jan 10 2020 at 8:56am
It seems to me that the article is much, much more nonsense than the Gates statements.
About double taxation, I don’t get the point really. I can see it in two ways. (1) It’s the same money. Than what do you care if it’s taxed twice at 15% instead of once at 30%? (2) It’s actually not the same money, it’s new income. Then it’s not double taxed.
Notice that I did not enter in the incentive part: of course any kind of taxation has tradeoffs, but if capital gain tax reduces the incentive to invest then income tax reduces the incentive to work.
Simple counter-example: instead of investing my savings in stock, I use them to pay for a course that allows me to land a higher-paying job. That’s usually a very good investment for people in low-paying jobs. But the return comes as higher wages, and such wages are taxed at income tax rates. So the return for what is arguably the best investment for the poor is highly taxed! Talk about perverse incentives…
All things that Gates said make perfect sense. They just require that you understand how most non-libertarians see income and wealth, and the relative contributions of individual and society. You can disagree, obviously. But branding it nonsense shows that you are not interested to understand what is even slightly outside your ideological framework, and is just useful if you want to preach to the choir.
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