I see income inequality as a key issue here. I recently read the "Triumph of injustice" and came away with a changed view in our tax system. After reading the book, I now believe that any household with a net worth over $100 million should be subject to both an income and capital gains tax of 99%.
In short folks with income come and or net worth at levels that surpass their ability to buy a life of finical security for several generations only increase income inequality.
High historically high levels of income inequality have torn countries apart.
There are definitely problems with most wealth tax proposals, but I think the author understates the generational differences in opportunity that emerge from massive wealth inequality. As I stated in another thread, perhaps the best solution would be to combine the two for a wealth-based income tax. If you're already worth 20M, should you be paying a higher rate on your 500k in interest than if you just sold your first company for 500k and previously had nothing? I think that's a reasonable way to address income inequality in the long run without forcing people to liquidate assets, especially those like Elon Musk who have most of their wealth tied into companies they actively manage or people whose entire net worth is tied up in historical family properties.
The current system is broken, but mostly because the income/capital gains tax/AMT need to be graduated on a far different system than today. Right now, making 510k places a single person in the top federal tax bracket, while there are people making 10,000 times that some years. If there isn't a high bracket that is rarely achieved in practice (10B+/year for example), then the brackets are probably broken. Right now we have a sharp cliff where it is very difficult to become a millionaire, but once you get a few million it becomes far easier to multiply wealth.
The problem is not wealth inequality. The problem is lack of wealth. Even if you taxed every last billionaire in this country at 100% and stole every single asset from them, it still wouldn't get you anywhere: 2.7 trillion/ 300 million = roughly 8000$ per head, after that you'd get only tiny fraction, you couldn't squeeze any more out of them because they don't have it.
Even those at the 1% mark may struggle to afford a home because if you're earning that income, it means your paying through the nose on housing: 1.5M or more for a mediocre housing.
It's time we faced facts. We're not nearly as wealthy as we think we are. and it's time we started asking why? this question isn't easily answered and has many many many reasons, many due to economics and our lack of understanding of economics.
I don't have a big problem with income inequality, compared to wealth inequality (averaged over a long time). Consumption taxes and "death tax" (or at least a strong social convention toward donating assets in excess of a certain level, rather than heirs inheriting them) would go a long way. Income inequality is largely due to differences in economic contribution, and encouraging people at the far right of the power curve to do more (and be more numerous) produces positive externalities.
The main quick fixes to the tax code which I'd like to see are immediately taxing carry as income, getting rid of deductions for employer health insurance and mortgage interest, and a national sales tax or VAT (ie consumption tax), ideally highly progressive or exempting the first 50k/yr or something. Then, look at lowering income tax rates to something like 25% flat and setting lt capital gains and dividends at slightly less (20%) or the same as income but indexed for inflation. Get rid of the AMT, and maybe lower corporate rates to try to get firms to repatriate more and avoid abusive tax structuring like the double Irish sandwich and such.
A more transparent tax code, even if revenue neutral, would boost economic activity. A more transparent tax code, taxing things with negative externalities and not discouraging positive externalities, raising more income while cutting expenditures greatly, would be even better.
Not that there is much chance of any of this happening.
Wealth should be taken into account when income tax is calculated.
It's not fair that someone who earns 100k with no assets pays as much tax as someone who earns 100k but also inherited a 1mn house and has a whole load of cash reserves from not paying rent/mortgages for years. It's doubly not fair when the wealthier individual can divert most of their salary into a pension and not pay tax on it, because they can afford to do it now.
Someone's wealth should not be eroded by tax, but their earning power should be adjusted based on marginal dollar value.
You seem to have a lot of research to do on this topic. It’d be a lengthy and at times controversial reply because it hits at a fundamental supply side vs demand side economics.
That said I do fully support a far heavier taxation on capital gains if your net worth is in the hundred millionaires.
We’ve been talking about taxing billionaires for as long as I’ve been alive and the solution seems so simple to me: income caps. We use income caps all the time for poor people but when talking about capital gains the arguments gets easily neutered because they get propose across the board, critically kneecapping the productive value of capital in capable hands.
It’s simple, just cap it at hundreds of millions at not so unreasonable rate. And all the talk on wealth inequality will have a very strong counter argument.
Instead every time we get a new tax it seems to hit everyone except the lowest sectors. Even here in Canada.
The real problem though isn't wealth inequality, it's income inequality. If someone has a billion dollars that's invested in various stocks, and never tries to withdraw that money, leave him alone. The day he decides to sell his investments and start buying private jets, that's the time to tax him on his income.
The argument against a wealth tax, is that it penalizes savers, and rewards spenders. Which is not what we want as a society. It's better for both the individual and for society if people invested their money into productive enterprises, instead of spending it on luxury goods.
If the goal is to provide a more egalitarian quality of life across society, this can be perfectly achieved through an income tax alone. Specifically, by treating capital gains the same way as salaries, and by increasing the marginal tax rates for high earners.
Your first is an appeal is an appeal to the extreme fallacy. A law like that would never pass in a functioning democracy, and if our democracy isn't functioning, then I would say we have bigger problems than a single person be taxed of all their earnings.
Your second point would matter if making income is that was how people became billionaires. That simply isn't the case. The vast, vast, majority of people with a 9-digit or more net wealth did not get there by income.
I also advocate for other taxes and methods of taxation that would handle high net-worth individuals/families.
I'm not looking for a perfect system, nor am I looking for a system that appeases everyone's idea of fairness, I'm advocating the system that I think is best for America moving through the 21st century and the threats it will face this century.
The wealth disparity that is increasing is mostly due to investments and an extremely low capital gains tax. We can't just increase the income tax because the wealthiest 1% probably don't even have much of an income...they have capital gains from investments. Yes, the income tax needs to be increased (or actually more brackets need to be created) but we also need to raise the capital gains tax for higher amounts of capital gains.
I don't disagree, but the wealth disparity is different than the income disparity. On the one hand, a wealth disparity can be directly passed down, and repealing the estate tax will only deepen this trend. On the other hand, reducing income inequality may help with the here-and-now, helping families to BUILD wealth while not also living paycheck to paycheck. So, IMO, we should tackle both income inequality via progressive taxation, and we should tackle wealth inequality by instating a much stronger estate tax that prevents a landed gentry, a permanently wealthy and insulated class of millionaires and trust fund babies.
There is also something to be said for personal choices of the non-wealthy. I see many in my lower-middle class city with new luxury BMW or Benz ($30-50k) vehicles, who are living in $120k condo units. I see many people with shiny massively spec'd out trucks that they never used to haul anything and just park at their office job. What would the country look like if average people saved more and invested some of their lifestyle splurging?
So, while the tax structure and skill gaps are big, we can also say consumers need to be much smarter and more modest if they want to build wealth and improve their station.
90% tax on income not wealth. Our current system already punishes income earning over wealth growth and much gaming goes on by the rich to keep wealth growing while keeping taxable income low.
The majority of income the top 0.1% make is from investments and gets taxed as capital gains, only about 15% of their income is taxed as ordinary income. [2][3]
We have an economic system where it's dramatically easier to make money the more money you already have. If you have $50M, you can park it in an index fund to get 4% returns and make $2M every year just off of your investment returns (which then gets taxed at 15% instead of 35% for ordinary income). If you don't spend all of that $2M, you'll continue to make more money just by having more money.
By taxing income instead of wealth, we're also essentially penalizing labor and rewarding wealth. We shouldn't penalize something that actually contributes to the economy and instead ask people who have more (not earn more necessarily) to contribute via taxes.
On the contrary, taxation based on wealth would be much fairer than taxation based on income. Unfortunately a wealth tax is pretty much impossible to implement. The closest thing we have is property taxes.
> You hold $100. I hold $1. We live the same life, live the same services, make the same income, and you pay 100x the taxes, if you base it on wealth. Does this really feel fair?
Yes, that is fair! How about this scenario instead: I hold $100,000, but suddenly make $300,000 this year because I sold my startup. Trump holds $1,000,000,000, spends $1,000,000, and loses money on a stupid investment so his net income is negative. I pay $120,000 tax, over a quarter of my net worth, while he pays nothing. Is that fair?
Growing wealth/income inequality is bad. Transfers can be effective for reducing wealth inequality. We'd need more revenue for that, however.
Progressive taxation is good. Progressive taxation that only targets the top 0.1% isn't effective unless income inequality were much worse than it is.
To make a meaningful amount of more revenue via income tax without hurting the bottom 90% too much, we'd need to target the top 10%. That probably means the top tax bracket should kick in around $130K. Much lower than where it is now, but high by the standards of many other rich countries (in the Netherlands 52% kicks in at $63k/yr, in Denmark it's 60% at $55/yr).
We should add a VAT too. Possibly with a simple UBI-style system to offset its impact on the poor (since they consume more of their earnings than the rich)
I have no issues with income / wealth inequality, per se. But I have some issues as to why that inequality happens. Some important rationales are the following:
A) Taxing high income will cause capital / investment flight.
B) Wealth trickles down.
A: could be true, but it does not warrant letting private investors take all profits without incurring in the necessary expenses, which are currently funded by the tax payer (disproportionately low-medium income workers), or simply not covered (health care).
B: This is, after several decades of lying to the electorate, patently false.
That's a real problem. Wealth and income are radically different numbers for people at the top end. High income taxes end up punishing the upper middle class instead of the truly wealthy who own assets.
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.
Very few people get rich off wages, and those that do pay 40-50 percent tax for the privilege. It's ownership of assets, largely tax free, and propped up by government policy, that drives inequality.
High historically high levels of income inequality have torn countries apart.
https://wwnorton.com/books/the-triumph-of-injustice
reply