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I don’t see a tax on unrealized gains passing. The entire lobby of every super rich person in the US would have to fail, and that would surely represent an extraordinary failure.
The better approach would be to tighten up estate taxes so that the wealthiest families have a ‘minimum required tax burden’ to pay when a patriarch dies, regardless of what measures they’ve taken to transfer wealth in life. So if Bob dies having unquestionably accumulated $500m in his life,
In any case, this wouldn’t require anyone to relinquish control, because you could borrow against your equity to pay the tax bill.
I have wondered if replacing income tax with a tax on expenditures would fix some of these questions. Sure, the rich might accrue huge bank accounts, but money isn't actually useful until it's spent. Something like a flat percentage (or maybe progressive) on anything over the computed cost of living for your family. Sure, this has its own questions: does buying investment assets count? Does it have a negative version of the EITC? Can you pro-rate multi-year expenses? I think you might be able to balance timing expenses pretty reasonably with cumulative lifetime values (math: a conservative vector field, although we could do this with income tax already). How do you deal with cash tips?
Maybe it's more bookkeeping to track expenses, but those are starting to be almost entirely automated systems that could make this feasible. But I'm also not really sure it's a better system, just a different answer to a problem with no ideal solutions.
I suspect if you had a button you could press that would make the 'rich' consume less over their lifetimes, other people consume more over their lifetimes and the 'rich' to increase their share of capital then a lot of the people pushing the unrealized capital gain tax would not support pressing the button. for them its not just about fairer consumption but also about who controls capital. so this kind of kills broad support for a consumption tax even if you are able to make it fairer in terms of lifetime consumption.
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The typical proposal for something like this is call a "consumption tax", using the economics definition of "consumption". Though, my understanding is that most proposals either just put it all into a form of sales tax or have something of an "implied consumption", where the calculation is just income minus investment/savings, where it's implied that you've used the rest on some sort of consumption. This is a simplification that has some edge cases, but it makes the calculation problem a lot simpler. It's still slightly more complicated than an income tax, because you have to include information from your various financial institutions about how much net new investment/savings you had in that year. You're probably getting a tax document from all these people, anyway, since they're taxing interest/cap gains, but they'd basically have to include this number, too.
The justification for such a tax regime is pretty much exactly what you've hit on. First, if what people actually care about for inequality is that some people can consume obscene amounts of things, then it makes sense to just tax that directly; we mostly don't care if some money sits in an investment account in perpetuity. Even if it is inherited, why would you care, except to the extent that those heirs are using it for consumption? Secondly, economists believe pretty strongly that investment/savings in capital is an important component of increasing GDP (super simple example here), and so people should be perfectly happy to incentivize investment/savings. Every dollar that you save, even in your bank account, makes the cost of capital 'cheaper' for a potential new product to be developed, improving the lives of everyone. So, if we want a rich society with cool stuff that people can consume, it's good to incentivize investment and not care if some baron has a billion dollars invested in an account somewhere, providing this capital. And if we want to make sure that people maybe moderate their consumption at least a little bit rather than going all out with opulent displays of consumption, it seems more palatable to just directly tax consumption, perhaps quite progressively.
I worry that a consumption tax would work too well and suppress overall demand for goods and services which might lead to government subsidy of "core" goods and services but would be difficult to fund because people stop spending on consumption and tax revenues go down.
There's some behavior assumptions built in there, so I admit that.
Consumption and consumer behavior is how prices are discovered and demand signals are captured. I don't know how you'd do it otherwise. Investment is good, but you have to eventually invest in a company that makes sales.
Possibly so, similar to how income taxes suppress overall income. I guess whether this is a good thing might depend on how one feels about vague things like "consumer culture".
I don't see why this would be the case. What would be the set of "core" goods and services in question?
Sure. I can't imagine consumption would go to zero, just like how income doesn't go to zero just because we tax it. People still want to earn income and consume stuff. Both income and consumption taxes have some distortionary effects and suppress some amount of things that we like... but a consumption tax just does it all slightly better. I think a shift from income to consumption tax would have, as they say, marginal effects for most people. On the low income end of the spectrum, the rate is likely to be quite low, but it may provide a small nudge for such people to think about saving a bit more (which is often good for them, individually). This should be a positive for anyone who is worried about poor people not having a lot in savings to get through the occasional tough time.
Most importantly, for people who are concerned specifically about the opulent consumption of the super wealthy, this should be incredibly appealing. If anything, it's great for figuring out which people actually care about extreme consumption inequality (who should be totally fine with investment that helps everyone)... and which mostly just hate rich people generally and want to stick it to them.
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I'm not sure exactly how I'd tie the concepts together, but somewhere here is the difference between spending that money on, I dunno, a bottle of fine wine and drinking it, and spending that money buying capital assets to make bottles of wine. Intuitively to me, it seems like the latter is "better" even if both nominally contribute to (immediate) GDP equally.
But you're not wrong that if we all spend all our money on vineyards and not finished bottles, the vineyard isn't really a productive investment either. There's probably a Russell Conjugation here: "I buy and experience valuable cultural institutions; you spend money on fleeting entertainment; and that guy over there is a drunk buying wine by the case." And maybe someone's culture values paperclips.
I'd be curious if Real Economists have words for this concept.
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That you think there's a "better approach" means the proposal is already working. You've already accepted the frame that there's some problem to be solved to get the government more revenue from "rich people" (which may start with hundred-millionaires but will quickly if not immediately hit hundreth-millionaires), and now you're only arguing about the form of the massive tax increase.
Of course the rich should pay more. Since 2009 Western governments have engaged in propping up to extreme effect a ridiculous, comically unfair asset bubble that has made rich people vastly richer than at any time in the previous century while regular people have to contend with much more expensive house prices and only modestly higher incomes.
And I say that as someone who has benefited personally from that asset pricing bubble more than almost anyone, perhaps anyone, else here.
Why "of course"? The rich already pay essentially all the federal income taxes in the US.
Taxing rich people more will not reduce house prices nor increase income for "regular people". Further, real median income had been increasing up until COVID. Yes, housing was higher, but there's always something you could pick that would be higher.
I'm sorry you feel guilty about your success; I've worked for a living.
How much harder have you really worked the average hard working middle class person? I’m no communist, but this fanatical obsession with meritocracy regardless of inequality has never seemed particularly sound to me.
More than some, less than others. I've certainly worked a lot less hard than some of the people this proposal targets, in particular Elon Musk. The point isn't how much more or less I worked for it, the point is I worked for it. The government didn't hand it out to me as some prize which it's perfectly fair for them to take back. What does inequality have to do with it? Why should I be upset that Elon Musk has a crapload more than me, and why should I feel guilty that I have more than someone who pushed a broom their whole life? Or did nothing productive at all? For what reason should the government be trying to equalize income levels?
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He didn’t say he worked harder than the average hard working middle class person. He said he worked for a living, presumably about the same as they did.
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Or .... Everything should be cheaper so that more people can buy whatever they want.
This is redistribution vs growth encapsulated.
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Then isn't the way forward more restrictive monetary policy and higher tariffs?
Yes, it will reduce economic growth, but it will reduce inequality too. Importantly, it will reduce inequality in a societally constructive way – by encouraging labor, discouraging speculation, and rebuilding our industrial capacity.
The current policy seems to be to encourage financial speculation and then tax the speculators to pay for welfare for the underclass. The rich get richer, the poor get their helicopter money, and middle class and small businesses get eliminated.
Instead of taxing asset bubbles we should stop them from forming in the first place.
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This is a good point. When the first income tax launched in 1913, the tax brackets were 1 to 7 percent.
More than 99% of people fell into the 1 percent bracket. The 7 percent bracket was for incomes over $500,000 (approximately a bajillion in today's terms).
Once a new form of taxation is invented, it is almost never reversed, but only expanded. Federal spending as a percent of GDP has increased from 18% to 25% in the last 20 years. State and local spending has increased apace. That is problem.
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That depends in part on how capital loss rules would work. It’s one thing to take a margins loan of 50m on a 1b to fund a fun lifestyle. It is another thing to take a 250m margin loan just to pay taxes. What if the stock drops to 500m? If you get a refund of 12.5m, then you can pay down debt to retain same debt to equity. But I doubt there would be a refund.
So now you introduced a lot more risk to the founder in holding onto shares. And that’s before you even account for the founder taking out some cash to have fun.
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Better yet, just close the loopholes on capital gains taxes.
If you buy $100 mil of stock and it grows to $1.1 bil, you have capital gains of $1 billion. Someone needs to pay capital gains taxes on that $1 billion. Figure out exactly how each wealthy family is paying less tax, and change the laws so that that process results in an identical tax burden. If you sell the stock, you pay tax. If you give the stock as a gift or inheritance, have the tax burden stay attached to that stock and then when they sell it, it gets taxed. If people take out loans using the stock as collateral, make sure the tax burden stays attached to that stock, which deflates its value because eventually some day it will be sold and whoever sells it owes the tax out of the proceeds. The only way the tax never gets paid is if the stock crashes in price, in which case the stock didn't actually generate a real profit that needs to be taxed, and nothing was dodged.
Inheritance and estate taxes shouldn't be relevant here, just tax the profit directly when it's realized, no matter who is currently holding the bag.
The only loophole is there is a step up upon death. Get rid of that and someone pays the tax on an exit.
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You're taxed on income, the business is taxed on profit, then you're taxed again on dividends or capital gains...
Yes?
It's awful because a large percentage (sometimes more than 100%) of those gains are just inflation.
So what?
It's all in the numbers.
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Operative term is "shouldn't be". Step-up and all that.
Well yeah. My point is, fix that directly. You don't need to do weird esoteric things with estate taxes to try to balance it out, and probably create more loopholes along the way. Just fix the actual problem.
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