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(Mods, let me know if I need to delete this and repost in Small Questions Sunday.)
The US Supreme Court (SCOTUS) hears Moore v United States today. According to SCOTUSBlog, at issue is "Whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states". Since that's not very helpful, I'll quote The Atlantic's summary instead:
Mother Jones, NPR, CBS, and Foreign Policy (of all the friggin' places) are running articles breathlessly proclaiming DOOM! for the US tax code, or at least the ability of Democrats to pass wealth tax laws. This Forbes article seems to be a pretty good explanation of what's at issue but I'll admit that I'm not well-versed enough in tax law to understand the full ramifications of what a Moore victory would mean for the ability of the federal government to raise revenue. On the other hand, I can't say I'm sad about the idea of a wealth taxes getting a bullet to the head. What am I missing or not considering as I read about this from the various outlets?
All else equal, all wealth should be taxed equally (say, flat 1%/y) , not income from wealth. Current tax laws encourage bubbles and poor investing. Just buy a garbage bond or shitcoin and uncle sam will barely touch it, but god helps you if you invest in a company actually making money. And don’t give me the hard-luck grandma story.
It’s like a poll tax on wealth, and like a poll tax, it’s very tax efficient. The problem with income tax is that it discourages economically beneficial behaviour, like working or good investing. Every time you engage in it, the state wants a piece, and possibly, an even bigger piece, the better you are at it. So the state, counter-productively, eggs you on to be a bum and to stack your wealth under the mattress (ignoring inflation). Your lazy bum money should be taxed at least as much as superstar cancer-curing money.
Hmm - I haven't heard this take before. Let me do some quick math, courtesy of the Markowitz model. Suppose you have two investment options:
Let e be your risk aversion and let x be the the proportion of your portfolio you are investing in stocks
U = xA + (1-x)i - exxB
dU/dx = A - i - 2exB
x = (A - i) / (2eB)
Capital gains scales returns by k and variance by k^2 (where k = 1 - tax_rate):
x = (kA - ki) / (2ekkB) = (A - i) / (2ekB)
As taxes go up, k shrinks from 1 towards 0, which makes x increase. Therefore, capital gains taxes cause increased risk tolerance.
A wealth tax reduces returns by k:
x = ((A-k) - (i-k)) / (2ekkB) = (A - i) / (2ekB)
This is the same, so a wealth tax doesn't affect risk tolerance.
I don't think this can be true. The chief academic argument against capital gains taxes is that they impose a 100% tax on consumption in the far future, which is maximally distortionary. The same is true of a wealth tax.
I personally think that if society had no welfare, a flat income tax would be either not distortionary or push people to work more. Note: historically people worked much more and (e.g.) wages being 4x lower because your country is poor is equivalent to a 75% flat tax today.
I have an elegant mathematical model illustrating this result, but I think I've force-fed this forum with enough math already.
Where is “p”? I’m gonna need a template for these equations, like an article who uses similar ones (the wikipedia markowitz model wasn’t helpful). Or more letter definitions.
So a 99 % capital gains tax results in everyone investing in stocks?
I call bullshit on that. A 100% tax on everything right now is more distortionary.
But we have welfare, and the income tax isn’t flat. You’re very theoretical today.
Ignoring the motivating effect of hunger, of course.
Sorry. I ended up using "x" in the actual math. I've edited the post to be correct
You might find the Modern portfolio theory article more useful or even his original paper (scihub). If you want a quick explanation
Obviously, the usual caveat applies: all models are wrong, some are useful.
[ Edit: in case it wasn't clear, I'm saying a wealth tax is better than a capital gains tax in that it doesn't distort risk-taking while a capital gains tax does]
Yeah. Note: people would probably save less, but what the people are saving would be invested in stocks rather than bonds in this model.
Sure. I mean that according to ivory-tower theory, even a 1% capital gains tax now is equivalent to a 100% tax on far-future consumption. A 1% tax on labor income or current-consumption doesn't have that pathology.
Right, my main point is that, contrary to textbooks, I don't think poll taxes are actually non-distortionary. I think a poll tax (and its opposite: welfare) is distortionary.
What do you mean?
I think there’s an error here. The k subtracts itself in the numerator, so the two k’s stay in the denominator, unlike in the cap gains equation.
Vast layers of misunderstandings keep peeling off, yet your position remains as inscrutable as ever. Didn't you (wrongly, see above) determine that the equation was the same : ' x = (A - i) / (2ekB)' for both? So why is risk tolerance increased for cap gains tax and not for the wealth tax?
I want to distort risk-taking, I think we would all tremendously benefit from a 90% reduction in financial risk aversion of the average citizen. By the lights of MPT, shouldn’t we collectively expect a higher return on all our investments if risk aversion went down?
I think that discredits the model. They’re not going to take all the equity risk for 1% of the equity premium, they’re supposed to be loss averse.
This is a useless extrapolation theory.
Welfare is not the opposite of a poll tax, it’s a progressive tax that goes into the negative. Regardless, how is a poll tax distortionary?
I never responded to this. The point you're missing is that a 99% capital gains tax also reduces the risk. An investment that returns 10±30% now returns 0.1%±0.3%.
That's not what risk is. If the company he invests in goes bankrupt, that's not helped by the 99% capital gains tax. That is the risk he cares about, not the variance on his profits. But let's not get into that.
It does. He then gets to deduct those losses on his taxes, resulting in recouping 99% of his lost value.
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I want to also take this opportunity to wax poetic on financial markets and risk.
Most economic risk in society has nothing to do with financial markets - think things like
etc.
Finance, as a market, serves two purposes:
So, for instance,
Why are the investors better positioned to take these risk? Two reasons: they have money (duh) and they can diversify by buying a basket of somewhat independent risk.
So, when functioning properly, financial markets reduce the cost of risk to society.
That being said, "functioning properly" is key and, due to the principal–agent problem and plain old human error, there are significant sources of imperfection.
Much of that imperfection probably pushes investors to take too much risk: generally speaking if a trader does well, they make oodles of cash, while if they do poorly the worse they can be is fired. Note, however, that absent a specific scenario (see next paragraph), that cost of that risk is still paid by the company funding the trader, so it is internalized to the company and we, as the broader society, don't really need to care too much about it. When a trading firm's net worth hits zero and it closes, we still don't really care - the costs of that firms' sins were laid at that firm's feet.
The specific exception to this is when a company's net worth hits negative, which can only happen if a firm takes leverage. Even in leveraged firms, this is not too common, since as any firm worth its salt will start winding down positions automatically as its overall wealth goes towards zero (the specific terms are "funding risk" and "unwinding"). Robinhood, for instance, will do this for you automatically (or, rather, force you to do it).
Even if a firm's net worth hits negative, someone was lending the firm money and that firm bears the costs, so, again, you and me (as outsiders) shouldn't really care. So, the actual exception is a firm that
This gives us the three things to target in seeking solutions:
But none of these imply a wealth tax or capital gains tax. Neither tax policy discourage leverage (borrowed money is deducted from wealth and, at least today, margin interest is tax deductible). Neither have any bearing on unwind strategies or target firms that impose systematic risk.
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Yeah, my bad. It should read
x = ((A-k) - (i-k)) / (2eB) = (A - i) / (2eB)
So, my conclusion remains: the wealth tax doesn't affect the allocation into stocks, while the capital gains tax does. This also explains your second point: the two conclusions are no longer the same.
Do you believe venture capitalists and the startups they fund are net-bad for society? I think they're (a) net-positive and (b) the platonic ideal of high-risk-taking, so I don't think we want to discourage risk-taking in general. I do think you can argue that leverage should be discouraged more, but I don't think a capital-gains-versus-wealth tax is the appropriate tool to do that, even if you insist on using taxes rather than regulations. For instance, you can remove the interest tax deduction.
I don't see how MPT implies this. This sounds like you're "reasoning from a price change" - i.e. what matters isn't that risk is reduced - what matters is how it was reduced.
Hence my use of the term "ivory tower" :p
Just to make sure we're on the same page - you're saying welfare is a "progressive tax that goes into the negative". A poll tax is a fixed sum demanded regardless of income.
You can decompose any tax system as the union of
In this sense, welfare and poll taxes are opposites:
Well, if you want math - suppose my utility function is
U = ln(wage * labor) - labor
dU/dLabor = 1/labor - 1
∴ labor = 1
With a poll tax
U = ln(wage * labor - poll_tax) - labor
dU/dLabor = wage/(wage * labor - poll_tax) - labor
∴ labor = 1 + poll_tax / wage
So, in this model, a poll tax would cause me to work more.
If you want a story: consider someone who barely makes enough to survive - a poll tax would force them to work more hours to continue surviving.
And it keeps going, more layers of misunderstandings.
So your math was incorrect, but luckily you interpreted it wrong, so by being doubly wrong you went all the way to being right again?
And what happened to the k’s now, why did you remove them from the denominator? You previously used them to justify “As taxes go up, k shrinks from 1 towards 0, which makes x increase. Therefore, capital gains taxes cause increased risk tolerance. “
By that logic, and assuming the equations are worth a damn, the wealth tax also causes increased risk tolerance. More even, since you have two k’s in the denominator going to zero.
Another misunderstanding. Man, I am in favour of risk, from the beginning. Between low-risk/low-return and high-risk/high-return, I choose high every time. Personally, and macroeconomically. I said people should be less risk averse, ie, take more risk. I could rail against insurance companies and the giant societal loss they represent all day. They prey on the irrational fears of people to the tune of trillions of dollars annually. But that’s besides the point.
To be 100% clear, no, I do not believe VC and startups are net-bad for society at all.
I am not talking about a reduction in risk, but a reduction in risk aversion. An investor with less risk aversion (ie, willing to take more risk) could expect higher returns, correct? I’m just applying this to all investors in the economy.
Yes, and yes.
Your progressive tax depends on your income. When your income is low enough, instead of paying the tax, you get welfare. So it’s the ‘negative side’ of the progressive tax. Your progressive tax becomes a payment to you.
The poll tax is not distortionary, because nothing you do matters. You can work or not work, you’re still on the hook for the same poll tax, 100 dollars or whatever. The progressive tax( including welfare), takes from you if you work and gives to you if you don’t. Whether that is good or bad is another issue, but it definitely distorts your behaviour more.
Any tax in this model is distortionary. We’re talking relative distortionaryness.
That’s what I referred to above : “ignoring the motivating effects of hunger”.
This whole section is my bad. My reading comprehension clearly needs work. Mea culpa.
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No. I did the math on a piece of paper correctly and copied it wrong.
Because a wealth tax doesn't affect the variance of post-tax returns.
I've been arguing this whole time that
So it does, indeed, follow that, relative to a capital gains tax, a wealth tax increases risk tolerance.
Incorrect. A flat tax (without any poll tax or welfare) is non-distortionary in that model.
Edit:
U = ln((1 - tax_rate) * wage * labor) - labor
U = ln(1 - tax_rate) + ln(wage) + ln(labor) - labor
dU/dLabor = 1/labor - 1
so labor = 1
all independent of tax_rate
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In principle I'm open to almost all kinds of taxation - I was in favor of georgism before it was cool, for example (though I'm tentatively against it now that it is cool, so I guess you may call me a tax code hipster?).
It just so happens that wealth is absolutely horrible to tax in practical terms. The state can only meaningfully tax anything for which it has easily accessible bookkeeping. We already expect companies to have accounting software & books anyway, which means income & sales are easy to tax. For wealth, only investment & bank accounts are easily accessible. So in practice we have two extreme outcomes of a wealth tax (and a spectrum of combinations inbetween):
a) only bank accounts and investments are taxed, maybe in addition to some reasonably easy to estimate forms of wealth such as land ownership. This will strongly incentivise, as you put it, lazy bum money, and other difficult to access forms of wealth.
b) Every individual will have to do extensive bookkeeping of all their belongings, and the state will regularly need to check homes (in fact, any place where valuable assets might be hidden) to make sure that these books are accurate. Aside from the extreme inefficiency of forcing people to keep books of their belongings, this is utterly impractical for the state as well. In practice there will probably be arbitrary limits on both individuals and goods - you only need to keep book about your belongings which are worth >X / only individuals who have a net-worth >Y need to keep books. But this will again strongly encourage people to move their wealth into assets that are below these lines / to get themselves below the line.
Either way, even if a wealth tax might be efficient in a world with a theoretic omniscient tax AI, I have yet to see an actual implementation that isn't horribly distortive AND impractical.
Why's Georgism gone sour for you? I've only been tracking it loosely and casually, not to the point of going hunting for counter-arguments to it, and I'm certainly not qualified to generate them on my own.
I think that its central claim, namely that it's not distortive since you can easily separate out "true" land value and development, is straightforward false. In practice, what we call land value is extremely dependent on the development around it. As a simple toy example, a neighbourhood group that works together to keep the streets clean increases the land value of their own houses, which in a pure georgist world would actively impoverish them.
That said, directionally speaking I'm not entirely opposed to moving into the direction of more georgism, I'm just opposed to going full george. Right now for example we have a questionable NIMBY feedback loop where real estate owners have an incentive to block any development nearby even if it does not actually bother them just to drive up their own land value. This means that you often have a small number of dedicated NIMBYs that genuinely are bothered by something, and a larger associated block of people that are tentatively on their side just because when in doubt, more land value is always better for you. A well-chosen land tax around 1 or 2 % might balance this out a bit better ( assuming 5%+ as full georgism). But you then also need to be dedicated to this tax. In the worst case, you grant extremely common exceptions so that everyone is paying land value taxes from de facto something like 20 years ago, and then it's strongly in everyones best interest again to drive it up.
Similarly, there are some decent georgish models for resource extraction such as the norwegian petroleum tax / oil fund system. I'm also in favor of those.
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People who park their money in a completely unproductive manner are already granted total tax- exemption. The state can’t possibly incentivize them more. Plus the destruction of income/capital gains tax would obviously incentivize successful kinds of investment.
They already do if they file for income tax. Impractical? Somewhat, like most changes. That’s all small stuff, the status quo is far more “horribly distortive”. Most of the capital base of society is effectively stored in a dark room instead of being put to productive use. The minority of actually working capital is being bled dry so that working class grandma doesn’t ever have to sell the family castle.
Never underestimate the capacity for things to get worse! Currently, the most pragmatic place to park your money is on a bank account. This is not the most accessible & liquid place for the greater economy, sure, but it also is far from unproductive. In most countries, the banks can use it for investment or lending with decent leeway. A wealth tax can easily make people bury their wealth figuratively in their backyard (hell, maybe even literally), where it is actually entirely inaccessible.
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I'm confused. Are rich people who choose to deliberately put their money in suboptimal investments because of the capital gains tax?
Just so. You have a million dollars. You can either:
A) put it in a highly productive, socially beneficial company, which produces 100 k/y profits
B) stack it under your mattress, buy a huge house you don’t need, or a very secure (read: lame) bond
The tax is 33 % on profits. The alternative wealth tax is 10k/y.
Under an income tax regime, your personal profit is A: 67k and B: 0 .
Under a wealth tax regime, your personal profit is A: 90k and B: -10 k
Of course B is also safe, that’s why it’s so popular. A results in a societal gain greater than 100k/y, B close to zero. For a more productive economy, people should be encouraged to choose A.
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Taxes on wealth have to be one of the worst ideas wrt to efficiency and improving the economy. Wealth fluctuates wildly throughout a year, so calculation is very hard, and this rule would make investing in nonpublic and non liquid assets be double taxed, because you would be taxed on them, but would have to go through massive efforts to pay the taxes by executing instruments to liquidate some equity.
Who has 99% of their income generating power tied up in private equity? The illiquid unassessed capital is invisible to the rest of the economy and therefore wastes productive capacity. If you don’t believe in price signals, might as well have communism.
Double tax/it can be inconvenient: yes, but so are ordinary taxes. You’re comparing this replacement tax to a hypothetical tax with no downside. But the taxes it replaces are actually worse. They impair the wealth generation of everyone, not just a few special cases. Imo you’ve got status quo bias, and you’re all annoyed that this argument supports the democrat side.
Well I don't see any upside to a wealth tax. There is the massive calculation problem. My dad used to have a small business who's purpose was selling other small businesses. And the calculation problem is enormous. One company can look almost exactly the same as another until you are at analysis part 3 or 4. And we are going to do that for all equity every year? John Smith over here running Smith's Recycling is going to figure out, on a yearly basis, what his (the only recycling business in town by the way, so no comps, this isn't real estate) how much its worth to have a recycling business? And, remember these valuations aren't simple or static. Recycler A who sells in 2009 might have gotten 1/5 what B does 2 towns over in 2010 (real example). And its another case where we are forced to trust tax agencies to be fair and unbiased in the application of the law. No, I don't think I have that trust.
As an investor who deals in highly productive capital (as opposed to less productive cash, houses or bonds), your father would be among the people who benefit the most from a wealth tax. It would be a laughable sum compared to the capital gains tax and corporate tax he pays. So imprecision barely matters. And that kind of business is the worst example possible when it comes to calculation problems. Besides, increased liquidity and transparency about how much those mom-and-pop businesses are actually worth would be economically very beneficial, though that is admittedly my personal instinct.
Your example makes no sense. If you can buy an investment in capital it doesn't produce static returns like "$100k/year in profits." If it does, its purchase price will go up significantly and approach the cost of buying an equivalently risky bond. What a more realistic scenario of investing in a new company would look like:
Year 1: Invest $1 Million. Pay $10% taxes on that. Y/Y Profit: $-50k. Pay $100k in taxes. Now we have to sell 10% of the company (to who is an important question I might add). Year 2: Your stock still has paper worth 900k. Y/y profit: 0k Pat 90k in taxes. Sell equity again. Year 3: $Paper stock worth $810k. Y/Y Profit 100k. Your Share, 81k, Your taxes. 81K. Finally breaking even.
It's not difficult to find companies with a P/E of 10.
My wealth tax was 1%/y yours is 10%/y. A 10% wealth tax is obviously confiscatory and destroys the economy.
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Charles Koch?
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All those bubbles generate substantial tax revenue for the government. Those people buying shitcoins generally go bankrupt. And it can be quite hard to ever take advantage of prior capital losses as tax write offs. In a pure Ponzi scheme like say bitcoin you have smart traders trading the bubble and generate a lot of gains and a ton of idiots generate losses. All those gains the government collects taxes on while the losers often enough never get to monetize those losses. Even if it’s not smart traders making money but random some take profit and random others buy tops that still generates on net a bunch of tax revenue.
The punishment for bad investment is losing your investment. All those Gme bros lost all their money. And some quant trading firms probably scalped a ton of profits in the vol.
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