I'm all for high taxes for the rich but this particular scheme is fairly unlikely to generate that much additional tax revenue and I think it's even possible that this will reduce tax revenue. Because income in the form of unrealized capital gains is not taxable at all and corporate tax rates are going to be much lower than 70%, it will certainly cause people to shift personal income into one of these forms. Income tax beyond a certain point is almost always going to be regressive because of the fixed costs involved in converting one type of income to another. A much better approach is making taxes relatively flat and spending more progressive - this is basically how it works in Europe.
It will be interesting to see what happens. By not taxing capital gains at higher or similar rates to income most of the larger % of the new wealth being generated was moving to owners of capital rather than workforce already. Now this is going to compound the problem further as the last avenue to increase wealth is closed off for the people without capital.
I don't know what effect that would have. I do know that some countries have very, very high capital gains taxes (30% or more) and no income tax.
The goal is that people who work and provide value are not taxed, and the wealthy are taxed while their money is doing the work for them (rent-seeking).
That's a great solution to the problem in theory, but it doesn't work very well in a modern economy. If capital gains taxes are too high, the wealthy will find ways to shelter their income from them.
I'm coming around to the opinion that taxes on income are a bad idea. Income flows to people as they're trying to accumulate wealth, trying to climb from lower to middle to upper class. Higher taxes on income, especially highly progressive taxes, make it harder for people to move between social classes.
The focus on income tax creates a situation where the person who makes $200k/yr but has a net worth of $0 gets taxed far more than the person whose investments bring them $100k/yr and they have a net worth of $2,500,000.
Oh, and their lifestyle might be about the same despite the disparity in income, because one of them needs to work for a living so they'll need to live somewhere close to jobs, pay more for transportation, etc.
Higher income tax is great, if you're already wealthy. If I was wealthy, I'd be very happy people if stay focused on that. But I think taxing accumulated wealth is a much better way of leveling the playing field over time and also making sure capital stays in productive use. France already has something like a 0.5-1% "solidarity tax" on wealth, and it's a progressive tax.
According to Piketty, the return on capital has historically been around 5% per year, and returns are better at scale. For multi-billion dollar funds, the rates are around 9-10%. The "Financial Independence/ Retire Early" people who plan for pessimistic scenarios say to expect 4% return. Let's say it's reliable to expect 2-3%.
At $10M a person can expect about $200-300k in income. If we have a wealth tax of 1% their investment income after taxes reduces to $100-200k. If they want to maintain their previous standard of living, they need to make about $100k per year.
At $100M let's say economies of scale start to happen and even in a pessimistic scenario you can expect a 4% return. If we have a 2% wealth tax at this point, the person can still expect an investment-only income of $2M per year.
You can see where this is going. At $1B with a 5% pessimistic return, 3% wealth tax, $20M investment income. At $10B with a 6% pessimistic return, 4% wealth tax, $200M investment income.
The nice side effect of this is that the mere scale of capital doesn't provide competitive advantage. The wealth tax should be designed to even out the advantage of scale so that larger accumulations of capital need to be put to best use.
Putting some numbers on the napkin... The US has an aggregate net worth of $85 trillion dollars. The federal budget is $4 trillion. Assuming a power law distribution of net worth, let's guesstimate an average 2% tax on that $85 trillion, which comes out to $1.7 trillion. We could roughly cut income taxes in half or eliminate them except at very high levels ($1M+) if we used a wealth tax instead.
The important thing to note here is that the wealth tax still leaves about 2% investment income, it doesn't reduce the total over time. I think it's great that people can accumulate wealth and then live on it, or pass it on to the next generation. But it would be great if we can keep the income at around 1-2% so that the nearly guaranteed increase in accumulated wealth is the same or less than the growth rate of the economy, meaning that people who build businesses today have the ability to reach the same heights as those who built businesses yesterday, without extraordinary luck or blunders by those with wealth.
I'd like to see a one time wealth tax followed by a restructuring of the capital gains tax to promote capital investment with the middle class while more heavily taxing the capital gains of the wealthy. The current system allows a runaway effect at the higher levels due to such a low tax rate on substantial sums of money. Even earning 5% in an index fund is huge for someone with $100M, yet due to the capital available they also have access to investment opportunities (private equity) that have a good chance to return much more.
poor people already pay very little to none income tax.
lower capital gains tax is supposed to stimulate overall investment, which leads to more jobs, including for poor people. That's the idea behind it.
I'm all for higher taxes on capital, maybe with some exceptions on the amount of capital gains tax to pay on your first €10m. But honestly, a wealth tax is just demotivating. Not every wealthy person invests their new found riches. It makes sense only to tax gains from investments, but only gains. Not making money on your capital? No problem, you don't pay. If you are, you do pay extra tax. I don't even think it's a bad idea to group income and capital gains together, as long as you can offset losses from capital against taxes on income.
Second point against a pure wealth tax: some of that wealth might be tied up in very illiquid assets (say, a castle worth €20m), meaning you might not be able to keep them because you have to pay the annual wealth tax. Or in say, art, which can be highly volatile in its valuation. This will automatically lead to disputes with tax authorities about valuations, etc etc. Not exactly fun to deal with + it's hard to enforce/verify
There are two counterpoints to this. The first is that capital gains taxes tend to be on investments made with income you've earned, so there's already been an income tax. The second is almost all of the uber-rich made their fortunes by growing a small company into a big one, so it's not as though they're already being taxed (through progressive corporate taxes).
There are obvious flaws to this scheme, but it's pretty hard to tax income in a fair way. Some places (notably the EU) favor using a consumption tax instead.
If you want to increase taxes on the rich, why is it better to do it with capital gains tax rather than income tax?
I'd prefer to target whichever factor correlates best with how much the person can afford to pay. A capital gains tax is bad by this analysis, because it also hits the retirement accounts of poorer folk. An income tax increase for high incomes would only affect the rich.
Wouldn't that also force the less wealthy to sell their assets to pay the tax? They have less cushion and fewer assets, so they would be more likely to need to sell and reduce the compounding they could achieve, leading to less upward mobility.
I agree. Taxing unrealized capital gains is just not a good idea at all. What's more problematic than people having huge sums of unrealized book value, is that in the current system they're allowed to live a lavish lifestyle by taking out loans against those assets (which effectively is an income for them) without paying any taxes at all. That is what should be taxed in some form.
I think you have something backwards. A high income tax on the rich would decrease the amount of money they get to invest, and also reduce their returns on that investment.
I'm just amazed that the threshold in the proposal is as high as $50M, meaning it only affects what I would call the super-rich.
Here in the Netherlands we have a wealth tax (but no financial gains tax) of 1.2% with a threshold under $1M, which seems fair enough.
Does not change that the product of lower capital gains tax rates than income tax means those who earn absolutely less in a given year are paying a higher percentage of their income in tax than those who make absolutely (much) more.
I think the fundamental problem is everyone talks about capital gains as some flat thing. It needs to be progressive like income tax (or at least in the US, way more progressive than current income tax) to have the positive effects economists want so long as the gains are distributed across many people than centralized in the hands of few.
I'd say the same with waged income. In a theoretical better society we would even be taking income up to the happiness threshold and would progressively tax to an absolute income limit beyond that. And that is not just for bitternesses, sake, the problem we are going to face is that automation and the private ownership of automated production will produce literal money machines, where no human labor is required but goods are made and then sold which transfers money to you, that you then never spend back out again so long as you can own the whole supply chain. That situation is not sustainable - it is money flowing uni-directionally - and the consequences of uncapped income have precipitated how in the past five years we went from a little over 300 billionaires having more wealth than half the human population on Earth to just over 50 today.
But this is kind of my point. Capital gains tax is a dumb tax, it mostly screws middle class people and creates several perverse incentives, and we'd be better off to use a simple consumption tax instead. The argument against this is supposedly that "rich people" are the ones who pay capital gains tax, but in practice "rich people" are the ones in the best position to avoid paying it using fancy accountants and cross-border shenanigans. The middle class people actually paying it wouldn't be any worse off with a consumption tax that lacks all of those perverse incentives, and might even end up paying less because then the super rich would pay the same rate as they do instead of a lower one.
I believe this is part of the premise on how Wealth Tax is supposed to work. While I'm not a big fan of Wealth Tax, I do think this is an idea that should/can be used across the tax system.
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