How to convert between wealth and income tax

The issue at hand is the incredibly wealthy can pay close to nothing in income tax because they often borrow on their collateral vs. sell their holdings. Hence that 1% that PG equates to 20% tax is quite fair. Look at what Buffet says the percentage he pays is: https://finance.yahoo.com/news/warren-buffett-view-taxes-vs-.... Furthermore afaict the state proposals usually have a floor on how much of your wealth is taxed. I'm personally against the one time wealth tax by California for several reason but it only impacts those with a net worth of >= 1 billion.

> To convert between wealth and income tax rates, you have to divide by the rate of return on capital. The conversion rate of 20 comes from assuming that the risk-free rate of return is 5%.

This seems to only be true for people whose income entirely comes from their wealth, rather than their labor. The math doesn't math for someone on the other extreme end of the spectrum who has zero savings or investments and obtains all his income from labor: To him, a N% wealth tax = 0% income tax for all N. Those with -some- savings are somewhere in the middle.

It is a very sneaky way to argue that a wealth tax should be as across-the-board unpopular as a large income tax increase. But Graham's math is only applicable to those flush with investments and with relatively small salaries from labor, so a wealth tax is only unpopular to that particular group.

I think the assumption that we're looking for an equivalence here is fundamentally flawed and with it the entire post.

For most people income is tied to selling their time. It doesn't scale at all. Unless the income comes from wealth.

The societal problem here is a group with self-reinforcing run-away levels of wealth. And to counter that you do need something more extreme than this nonsensical equivalency of income tax

> In fact the conversion rate between them is about 20. A wealth tax of 1% is equivalent to an income tax of 20%.

Sure, but you actually have to work for continued income. Wealth accumulates with no input once established.

Wealth has the ability to increase (capital gains) without having to pay tax until it changes hands, whereas when income increases it is immediately taxed at a higher rate. Additionally, wealthy people can use securities as collateral for near zero interest lifetime loans which also bypass having to pay income tax.

This is simultaneously incredibly condescending and hopelessly naive. Politicians understand perfectly well that a 1% wealth tax is not a small tax on wealthy individuals. That's the whole point. They are engaging in basic political rhetoric when they say things like "a mere 1% tax".

> You can tell from the way they talk about the subject that they don't understand the momentousness of what they're proposing.

All proposals focus on ultra-wealthy individuals. This "momentousness" wouldn't really touch the absolute vast majority of the taxpayers.

But, yeah, I bet the targeted people are getting nervous.

Some thoughts I have been having recently

1. Wealthy more or less means able to live off the investments (passive income). Usually it means live off the interest of the interest (generally assessed as 8 million bucks nest egg)

2. It’s an obvious logical step but it is literally impossible for everyone to be independently wealthy. As in everyone cannot have a passive income.

3. So this debate just chnages when we ask “how do we make everyone wealthy” we can’t given the definition we have.

4. So we have to change the definition

5. How can we make everyone in society share fairly in the wealth that society has?

6. What if we made it much harder for wealth to Snowball into more wealth pulling it away from middle class

7. What if instead of a foolish wealth tax where we assess wealth, we stick to the “freely entered into transaction situation”

8. So Capital Gains taxes at same rates as income Also tax the “borrow till you die” idea - over a certain yearly amount, borrowing against your assets (ie Deutsche Bank lending you 100M against 1M shares of Blurb corporation should be treated as income just as if you sold the shares.)

I know that get hard but in the end we need money to circulate.

That’s how everyone shares

From the article:

Currently the country with the highest marginal income tax rate is Denmark, at 60.5%. The top US federal tax rate is 37%, and the median state income tax rate is Oklahoma's, which is 4.75%. So in the median case, a state adding an additional 20% in income tax would have a total marginal tax rate of 37% + 4.75% + 20%, or 61.75%. [3]

In the median case, US state politicians talking about adding a "mere 1%" wealth tax are talking about causing the residents of their state to have the highest taxes in the world. That's not the sort of decision you make lightly.

It should be noted that the marginal tax rate for high earners in the USA was higher than 60% from the 1930s through the 1970s.

Chart here: https://www.hrblock.com/tax-center/newsroom/income/the-histo...

I don’t follow the debate and situation in the US that closely but isn’t (part of) the point of wealth tax to offset the fact that rich people are routinely avoiding paying income tax and taxes in general? Thus even if we assume the simplistic conversion here, it’s not that they’re moved from 40->60 bracket but more like <10 -> <30 ?

It's funny, because even though he got the math right, PG got the reasoning completely wrong.

> Each 1% of wealth tax is equivalent to 20% of income tax.

Yes, this is the right part. Taxing wealth at 1% is equivalent to taxing income at 20-25% (depending on which return you count as baseline)

> It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate

On the opposite, they understand it right, and PG is completely wrong here: it's not about adding income tax rate to someone that already pay income taxes, it's about making wealthy people, who don't currently pay this tax rate, pay the same rate as people living from their income.

> So in the median case, a state adding an additional 20% in income tax would have a total marginal tax rate of 37% + 4.75% + 20%, or 61.75%.

Bezos, Musk, Zuck and the likes (or even PG himself, likely) don't pay 40% tax on their wealth growth, they currently pays 0%.

In fact, to make them pay as much tax as their employees, there should be a 2% wealth tax, not 1%. Hence, a “mere 1%” is in fact a very generous proposal by leftists politicians and economists, as it would still mean the wealthy only get half the rate of working people.

I was waiting for him to make some point but then it ended up being that a wealth tax is like increasing regular income taxes by 20% which makes it seem like PG is trying to confuse people about what a wealth tax is designed to target. It's not targeting your wages or salary, or even your interest or dividends. It's primarily targeting unrealized gains on financial securities.

Maybe he should spend his time trying to work with these politicians to design something that is more fair? Like making it actually act as a tax on unrealized gains over $1B (so that it takes cost basis into consideration) OR make it so that if you need to sell some assets to pay the tax, you can writeoff the wealth tax you paid from your regular/capital-gains income so that you aren't taxed twice? There's a lot of actually useful stuff he could write about in this policy area instead of blogging about the financial equivalence between stocks and flows.

I'm not an expert in this, but I thought one of the biggest arguments for why a wealth tax is needed the whole "buy, borrow, die" thing where the ultra rich can use their assets as collateral to take out a never ending series of ultra low interest loans until they die and then have most of the tax burden of selling assets to pay off those loans wiped out because the tax code is much more favorable to selling assets to pay off the debt of someone's estate.

If (big if) I'm remembering that correctly, I don't get why we just go after the problem directly and do something like treat putting down collateral for these type of loans as a taxable event. I'm sure it's not as straight forward as it sounds, but I can't imagine it'd be more convoluted that needing to track the wealth of every high net worth individual.

Maybe I'm in the minority on this, but I actually don't care if Jeff Bezos' net worth went up by $5 billion because Amazon had a good day in the market. If the shares are just sitting in an account doing nothing other than proving ownership it's all kind of just numbers in a computer, IMO. A painting is probably a better example than stock, but if I have a painting on my wall that was worth $1 million dollars yesterday and today it's worth $10 million that change in valuation is essentially meaningless as long as the only thing the painting is doing is hanging on my wall.

What I do care about is when he's able to access the cash value of that $5 billion of Amazon stock without paying the taxes that would come along with selling the stock. If he wants to leave $5 billion in Amazon stock just sitting in his account doing nothing until the day he dies, that's totally fine, but the second he puts it up for collateral we should tax that. I think this has the added benefit of simplifying things by avoiding a lot of questions around fair valuation of assets. If I have a $10 million dollar one of a kind painting on my wall that I'm never planning on selling, it's kind of hard to put a valuation on that and it can be easily manipulated by finding the right appraiser. If I put a painting up as collateral for a $10 million loan it becomes a lot harder for the owner to argue that it's actually worthless or the IRS to argue that it's actually worth $1 billion.

What's wrong with a 20% tax? We who make a living from labor instead of capital pay more than that.

Paul tries to frame it as an increase of 20% in the tax rate, but in reality the increase is from 0% to 20%, and it's hard to see why that's unfair.

The reason I say it's currently 0% is of course that for the wealthy most of these 5% gains are unrealized (e.g. inflation in the value of their assets) and untaxed.

There is a bit more to the story than a 1% wealth being "equivalent" to a 20% income tax. The primary difference is that unrealized gains are taxed by a wealth tax. We need a mechanism for assets to be sold by the richest in society. If those with assets keep accruing more assets the median person will suffer. When we're talking about real assets (housing, retail shops, warehouses, land) we don't need to be concerned about capital flight. The assets are still there on the ground. Reducing the cost of those assets is exactly what we need to help a local economy.

That being said, the richest are effectively _not_ paying the highest marginal tax rate considering all the tax structuring they do. Claiming that they would be paying the highest income tax in the world is misleading, for one. Secondly, the richest in the world _should be_ paying the highest income tax.

What mostly bothers me is that this is likely to start out as "tax the wealth of the rich" and it will become tax all wealth. Including my pension pot! In the UK the only people safe from that kind of nonsense will be public sector employees. Because guess what, their pension pots don't exist, they are just tax payer / debt funded liabilities.

Heck, it's even started in the UK with labour killing off salary sacrifice pensions, everyone one I know was reliant on those to be able to retire, but who gives a shit, we are private sector and we have no union!

I'm on a rant here, forgive me.

There's a related calculation you can do -- what percent of your net worth is your employability? Take your salary, divide by 0.05 (or multiply by 20) -- if you had that much additional wealth earning 5%, you could replace your job's income.

For most people their ability to earn is by far their largest asset. You can kind of get a feel for how difficult it is to bootstrap into generational wealth if you think about the math -- it takes time to replace that earnings portion of your own balance sheet, and even more to well replace it; a lot has to go right in the interim.

There's a secondary side effect of wealth taxes: they redirect investments (I'm Argentinian and we have wealth taxes).

Investments shift to things whose tax value updates slowly, for example property which typically adjusted more slowly than other financial assets. This tends to rise property prices and concentrate ownership.

It causes other distortions in allocation depending on the tax details, but wealthy people tend to adjust more aggressively to changing conditions.

If you are wealthy enough, you can live off of untaxed loans from your “unrealized” gains, and never pay taxes on that money at any rate. Meanwhile, I am paying an effective tax rate of around 35%.

The principle is simple: if you are spending the money, your gains are realized, and you should pay taxes.

The bigger difference between an income tax and a wealth tax isn't the numbers. A wealth tax, for better or worse requires some realization of paper gains that very wealthy folks normally go to great lengths to avoid because their wealth is largely based on a broadly shared polite fiction. So imposing some realization of that wealth requires accountability that doesn't always pan out.

In any case, pretty much everywhere in the developed world, we desperately need lower burden on people's labour (through salary income tax and related contributions). If wealth tax is a way to get there, so be it.

A much more interesting formula would be how to convert between income and income tax - you'd think it worked according to the superficial bracket system, but in fact, it works along the lines of going to 0 at the top.

P.S. a wealth tax is a property tax. They have existed in the US since before the income tax (which was originally considered unconstitutional by its opponents).

Not everybody uses money to make more money, Paul. Most people work, get paid, and spend the money on their needs. In other words, you are in a position to care about the question, it's OK if you are taxed a bit more.

True enough, but it doesn't address the motivation or the issues presented by California's proposed wealth tax.

It's a big democracy red flag when a majority wants to take a lot from a tiny minority; the moral hazard of the unfairness is that it's unclear where this ends. (Saying "one-time" and "1%" are trying to limit that risk)

It's a democracy red flag when an unpopular minority is vilified as the cause of society's problems. It short-circuits real policy making and distracts from real issues.

The bargain of private wealth is that it's better at innovation that should spread widely -- if it's subject to competition and does not export costs.

One problem is that one of the best investments is to change the law to reduce competition, increase market power, and export costs -- i.e., to weaken politics.

Another is that wealth used to mostly invest locally (information and transaction costs), so locals would see some benefit. No longer.

Finally, as an accelerant, enterprises are made of legions of managers and experts, who now compete more than ever; they would lose that competition by supporting less extractive policies or gentler politics.

Net result is that wealth seems not productive but extractive, and there is no negative feedback to reduce that.

Once the grand gambit of goodwill is lost, it cannot be recovered for at least a generation, but there's no real feedback to prevent that. The political viability of something like a wealth tax is just an early indicator.

As an aside, in Islam, people have to pay a 2.5% wealth tax annually for charity.[1]

This does make retiring a tad bit complicated. Say you've saved $3M and are ready to retire. That means each year you're spending $75K just to satisfy this tax.

[1] Depending on how your wealth is structured. Cash is 2.5%, but if you own, say, a business, you pay the tax on the value of the goods, not on the value of the building, hardware, etc. You don't pay Zakat on the house you live on. Agriculture is actually taxed at 10%, etc.

Isn't PG's conflation of Denmark's high income tax with a proposed wealth tax a clear flaw in his math and argument re: "the highest taxes in the world"? Why wouldn't you instead compare to other countries that also have both income and wealth taxes?

> It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing. [2]

This is the wrong way of thinking about it. It's not adding 20% to an already taxed entity, it's adding taxes where there weren't before. Adding 20% on top of the income tax would indeed be controversial. In his framing the rate of return is effectively untaxed income, so it would be more accurate to say that this is like adding income tax to a currently untaxed income stream.

You don’t need to teach anyone about this. The wealth tax should apply to extremely wealthy people, not everyone.

If you accumulated a fortune, there was some skill at play. There was also considerable luck and some exploitation. The wealth tax is a way of paying back for the luck and exploitation.

You will still be extremely wealthy.

Paul wants to play the fairness card. Life is not fair and those who accumulated massive fortunes won the lottery. Don’t let the massively rich conflate issues. Don’t get fooled.

I think 1% wealth tax should be a replacement for income tax. That way only the wealthy will pay taxes.

I would love, LOVE to pay 20% in taxes! Goes without saying, I work for a living and have far less wealth and power compared to PG.

I think there is kind of a breakdown in social order here. If society allows you to become the chief, it ought to also impose upon you a burden, an obligation, to wield your power over the tribe fairly, generously. To care for the weak, to make sure that everyone benefits, to ensure that things stay stable and safe under your leadership... The standard is higher, not lower. The sacrifice is greater, not lesser.

It is absolutely bizarre and you can see exactly thew way PG, and other like him, are thinking. They all want to have this immense power (and it truly is immense, more immense than ever in modern history!) but they want none of the obligation, none of the responsibility.

Even asking for 20 percent is too much, apparently.

It's really sick.

Wealth and Income taxes are both wrong. What we need is to tax Land and Rents. By taxing land via a Land Value Tax system, and rent seeking monopolistic behavior, this will allow productive labor and productive capital to be exercised for economic growth.

So, if we go with 2% wealth tax(instead of 1%) we can cut income tax offset -20%? Go do it right now.

There's a way to levy a wealth tax that requires no asset liquidation whatsoever. Allow paying taxes with assets. The assets go into a sovereign wealth fund. At scale the fund effectively holds a percentage of the entire economy. Its returns should only be used to reduce income tax.

Anymore I think the question shouldn't be about some kind of economic fairness (the time value of money thing being discussed) but the idea that wealth accumulation is a disease that afflicts society. I don't think anyone should have the level of control or influence on others that having a billion dollars currently allows. If a millionaire gives $100 to a political candidate it probably doesn't require too much thought. It's impressive to note that a 10-billionaire can give $1M just as easily, and so we have a class of folks who can throw around influence, who can order a team of lawyers to do things, can employ their legion of sycophantic followers to harass people, or can threaten the employment of many people not-of-their-class because they can make decisions that threaten someone's employer's bottom line. And note that above I compared a millionaire to the 10-billionaire, but there are plenty of folks, especially around the planet, who economically live several orders of magnitude below the millionaire.

As a bit of an aside, "spending more time with family" is an often-used euphemism around someone being fired, but if you have more money than you know what to do with and you aren't using it to spend more time with those you love, then what on earth is it for?

> You can tell from the way they talk about the subject that they don't understand the momentousness of what they're proposing.

I think that what you can tell is that they think the voting public won't understand the momentousness of what they're proposing (or that their "color" will cheer that very momentousness).

Whether they themselves do or don't understand how impactful the proposal would be is much harder to guess.

This grossly simplifies things.

In the US the max federal tax rate is 20% on capital gains, that is the gains realized when you typically sell an asset. The max tax rate on ordinary income is 37%. Some states don't tax at capital gains at all. Others make also tax capital gains.

There are a myriad of loopholes to defer and minimise capital gains ranging from QSBS (first 10mil in small businesses) to trusts to foundations to offset losses. Billionaires are incentivised to hold their assets and let them accrue rather than deploying that capital.

Yes, you could argue that billionaires have earned his billions. But could you really argue that the tax system should be configured to reward them for sitting on those billions and those gains should be taxed at a rate lower than someone working every day to earn 200k in wage income?

The economy has a fundamental division between those who earn income off the gains on assets, and those who earn an income on wages. Wealth taxes help level the playing field by those who already have a tax system in their favor.

Trickel down economics does not work when you earn more holding on to what you have.

pg seems to think we would be scandalized by this math, when all I feel is “so?”.

The language politicians use to sell to a general public does not have any correlation to their understanding of the mechanics. The people proposing this policy entirely understand the ramifications. That is the point of the policy.

The average person is already subject to something like a wealth tax through property taxes, in addition to also needing to pay taxes on their income. Join the club pal.

The wealth tax that we should have is a federal property tax, in the form of a land-value tax. A property tax is more enforceable and produces much better incentives than an income tax or capital gains tax or death tax or wealth taxes in other forms.

I think it's underestimated how important ease of enforcement is for taxes and laws in general. Laws that are hard to enforce require more powerful law enforcement agencies, more invasion of privacy, more punishment, more restriction of freedom. Enforcing a death tax, for example, necessarily requires limiting and tracking of all transfers of money or assets between people including personal gifts. A property tax merely requires keeping track of land ownership, which is a function governments already do, and in the worst case you can simply physically go to the land and see who is using it or seize it.

If you follow his logic and believe that the ultra-wealthy pay too little tax (as e.g. Warren Buffett does), then a balanced approach is to set the tax rate to: "37% of income or 1.85% of wealth, whichever is higher".

This would close the gap between Buffett's tax rate and that of his secretary, but would not be the "highest taxes in the world" that PG decries.

It's not excessive to charge a 1% wealth tax when the people paying it don't pay any income tax thanks to their financial engineering.

So make income tax a deduction on a wealth tax, and avoid penalizing people who do indeed pay top marginal rate income tax on a large salary/bonus.

Given that the ultrarich pay very little to no income tax then Paul’s argument is “don’t increase my income tax from unnoticeable to 20%”

So 5% wealth tax would be the same as 100% income tax, 6% would de 120% AND 100% wealth tax would be the same as 2000% income tax.

I think some relevant factors are missing. What is the polite way of putting it... Ah right! You are a clown!

How about instead of trying to take earnings from those who work or assets from those who earned them, we reduce government size and spending?

It's not excessive to charge a 1% wealth tax when the people paying it don't pay any income tax thanks to their financial engineering.

Here is a cool website showing Wealth, shown to scale.

https://wealth.ronnycoste.com

Are there serious proposals to just add a wealth tax on top of the existing income tax that would apply to the sort of people who actually pay much in income tax vs capital gains? It's an honest question; I haven't seen proposals of that sort, so I'm skeptical that the arguments are meaningful here. For an individual like Jeff Bezos, he's paying virtually no tax under the normal income tax rates referenced in the article, but rather capital gains tax, which tops out at 20%, not 37%.

The conversion would be more accurate if it compared wealth and capital gains taxes, no?

A defining feature of wealth taxes is that they only tax those that make most of their income through capital gains. This is why they're popular among much of the population.

Now the question is, if we lowered capgains tax rate by 20% but instituted a 1% wealth tax, would that be better or worse? My guess would be worse because wealth taxes are nearly unenforcable, but I wonder if there are good arguments for the other position.

Wealth tax is highly impractical. Very high and inescapable death taxes is what we need. Like 80% after an initial exemption amount. https://www.yesigiveafig.com/p/the-summer-slide-part-3-the-t... https://m.youtube.com/watch?v=mX5U5DNUfBc

Wow, I like to actually see the numbers laid out like this. Most of the ultra-wealthy pay almost nothing on their income taxes from investments because they have found ways to avoid capital gains, and even if they were paying long term capital gains rates of 15%, pg’s assertion that the wealth tax adds another 20% doesn’t seem unreasonable at all. If anything, it makes me think 1% is not nearly enough of a wealth tax!

Lots of confusion and misunderstanding in these comments. Not surprising, given the highly charged nature of the subject. I highly recommend Ray Madoff's book The Second Estate [1] to learn more about the topic.

[1] https://press.uchicago.edu/ucp/books/book/chicago/S/bo256019...

I think a lot of ink has been spilled on the problems with the proposed California Wealth tax, the main points being:

1- Is this in fact a 1-time tax or is that a dishonest narrative to make the proposal easier to swallow?

2- How do you prevent capital flight to other states?

3- How do those with paper money or more voting shares than equity shares cover their tax bill?

That being said, I think more creative energy needs to be spent on the problem itself.

What do we do about individuals with $100M+ of unrealized capital gains that through various methods will never have to realize those gains to live an extraordinary lavish lifestyle, and their children will inherit the money with a step-up in basis? For those who make all their money from W2s, they pay very high tax burdens, while those who strictly have capital gains generally pay at most around ~20% for LTCG.

To those criticizing the California Wealth Tax, how do we solve this? How do we make billionaires pay more and lawyers/doctors/software engineers pay less?

Whenever I've seen anyone suggesting a wealth tax, it is specifically to address the very wealthy who pay an effective 0% tax rate, because they use the "buy, borrow, die" strategy. These are not wage earners, working a regular job, these are folks who own enough assets that they can borrow their way through life, living lavishly, never contributing meaningfully to the common good, the roads they are chauffeured over, the infrastructure and laws they benefit mightily from, the police who protect their assets, etc.

Since a lot of billionaires pay practically nothing in taxes, relative to their wealth, a wealth tax that equates to a 20% income tax would be entirely reasonable, and they'd still pay a much smaller percentage than the taxes I pay from my wages. It closes a loophole, it doesn't punish the very rich. And, nobody is suggesting the average 401k or Robinhood portfolio should be subject to a wealth tax.

I think the post is correct in a one-period sense, though I’m not sure the equivalence survives once you model long-term compounding, additional capital gains taxation and liquidity constraints.

This seems to be willfully eliding that proposed wealth taxes tend to either be taxes on wealth above a certain amount, or (such as California’s) a one-time tax on people with wealth over a certain amount. If I were a mere millionaire -- technically, I am, with a net worth of just over $1.1M, but this would be true if that were $5M or $10M or even $50M -- then under any proposal I’ve seen, my wealth tax would be $0. (Note that if someone were to have $50M, then under Graham’s risk-free rate of return of 5%, they would literally have to do nothing to pay themselves an “income” of $2.5M annually.)

If I were an actual billionaire -- say, my net worth was $2B -- then my one-time tax under California’s proposal would be $100M, leaving me with a net worth of $1.9B. Under that 5% risk-free rate of return, I would recover that amount of money within one year even if my income were $0, which seems exceedingly unlikely.

One can argue about the specifics of various proposals -- the Tax Foundation, for example, thinks California’s proposal has “aggressive design choices and possible drafting errors” that could lead to somewhat bonkers results, although I haven’t seen any critiques of their analysis yet -- but a wealth tax cannot be converted to income tax in a reasonable manner any more than a VAT could be converted to property tax. They’re both taxes, but they’re simply not the same kind of tax. And while I don’t mean to cap on Paul here, there’s a distinct “woe, pity the poor billionaires who will surely be driven to bankruptcy” subtext I find to be risible nonsense.

You are always so progressive up to the point you meet a progressive tax

This blog post is incredibly tasteless. Really Paul should take it down and get the butler to wipe the egg off his face

The argument is plausible - that you can treat wealth taxes as equivalent to income taxes if you treat wealth taxes as a tax on the ostensible income generation of the wealth.

Of course there's more complexity than this, but that aspect is a plausible reductive lens.

But the conclusion is silly. We all know the extremely wealthy who'd be subject to a wealth tax basically don't pay taxes and that a 20% tax is totally right around what the typical overall tax burden is for the middle class or median households. The 1% example equating to 20% is basically saying the wealth tax would be in line with a flat tax, not even with a progressive rate tax. The wealthy have turned the tax system into one that's functionally regressive for the most wealthy and then PG complains that a proposal that makes it more like a flat tax is "not understood" by lawmakers?

It sounds ridiculous to me.

Or maybe I'm missing something.

I appreciate PG's writing as always.

I'm skeptical that the super-rich are only generating 5% on their money. My anecdotal experience is that it's usually north of 15%. They have access to investments that main-street does not.

If we plug in 15% instead of 5% in PG's reasoning, the effective income tax increase is quite a bit lower.

Man, as a young programmer coming up I really looked up to Paul Graham, but now as a seasoned vet in the industry, it's remarkable (and disappointing) to see him publish an article based on such a false equivalency. I mean this level of missing the forest-for-the-trees is the type of thing that routinely prevents senior engineers from getting promoted to staff because they're pedantically fixated on the wrong details. And that's on top of failing to read the room as to why people are even calling for a wealth tax in the first place.

The more obvious reason to not tax wealth is because it's hard to measure, and if you try to do it you will incentivize hiding it. Meanwhile, there are obvious obvious loopholes that the ultra-wealthy enjoy which could be reasonably closed. Namely, close the buy-borrow-die loophole, don't allow step-up basis for inherited wealth, and tax capital gains at least as much as income. Now people with a lot of money can afford to fund a lot of premium think tanks to come up with fancy economic reasoning why those ideas are Really Bad™, but at this point it's clear that's bullshit propaganda and the unintended consequences are exceedingly unlikely to be worse than the current unchecked consolidation of wealth and power enabled by the current loopholes.

Why choose the median state tax? The proposed wealth tax is in California, where the top tax rate is 13%. Also relevant would be Medicare (1.45% or 2.35% depending on your employment income) and presumably for billionaires, the Net Investment Income Tax, another 3.8%.

I understand why he simplifies things, but it doesn’t really jive with saying politicians don’t understand how taxes work.

I think politicians have a better understanding of taxes than Paul does, and they have a better understanding of how politics work - basically as in all things political, if you convince the majority that you’re dumping on minorities (billionaires, immigrants, trans people) you’ll do well.

This is a transparently misleading framing.

The very wealthy are paying very low effective rates on their investment gains. Various billionaires have publicly described the truth of this. This is not 20% on top of 35%. They are paying a marginal rate of 35% of deliberately minimized taxable income and zero on deliberately maximized unrealized gains. Then 20% when realized, but as we all know by now there are ways to make sure it’s never realized.

I don’t know what the best approach is here, but I know this framing is nonsense.

Just going to put this here to open up discussion: https://en.wikipedia.org/wiki/Georgism

His math is correct, but the conclusion is wrong.

Income is money that comes from actually laboring and contributing to society. Wealth tax is tax from sitting on your ass doing nothing.

Also, taxes don’t have to be a flat percentage. Like income tax, a good wealth tax would be progressive. Only wealth beyond a certain amount would be taxed, and the percentages would scale.

This is why we should have income taxes that are as low as possible, but still progressively scaled. We should similarly have a progressive scaling wealth tax, but it should be much harsher than the income tax because we want people to work.

Oligarch argument. Tax anything over $999m in assets, stocks, wealth at 100%. No more billionaires.

You obviously can’t convert between the two directly and suggesting that is disingenuous.

Income tax doesn’t affect unrealized capital gains (where the rich “hide” most of their income).

A wealth tax (even without a minimum threshold) doesn’t apply to the poorest who can’t accumulate enough to even have any savings.

This conversion only works for income that is entirely saved and reinvested, which the majority of people can’t afford to do.

Is this Graham accidentally revealing his contempt for working people?

Paul doesn't mention that these aren't exclusive. The California "Billionaires Tax" (which will likely soon become a "Millionaires Tax" after all the Billionaires exit the state), is levied on top of the regular state income tax.

> It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing. [2]

I am fully against any wealth tax but 'Don't get this'?

Who says they don't get it. It doesn't serve their purpose so of course (like anyone selling) they are not going to disclose it.

There are numbers in this post, but only in the technical sense.

My read of this is "the discussion of taxing wealth makes me anxious. i will do a tap dance, please become mired in watching / discussing my tap dance so that we can put off the inevitable and ultimately necessary a little longer"

To the "conversion rate": maybe, but who cares? The answer here is: apply the tax, see if we still have billionaires afterwards. If we do, then keep doing it.

Isn't this argument simply confusing income tax with capital gains tax? Because that's the tax you pay on your investment returns, and it's actually capped (in the US) at around 20%.

This argument strikes me as massively disingenuous. The central problem of the US tax system is caused by a combination of:

- high net wealth individuals essentially being indifferent to income tax.

- income tax and short term capital gains are taxed at much higher rates to long term capital gains.

- lower net wealth folks (ie. the general public) receiving most of their income as income.

- high and ultra high net wealth individuals now making most of their money through dynastic trusts and inheritance.

This combination ends up making it so that, as Warren Buffet would put it, he ends up paying a lower effective tax rate than his secretary.

I effectively don't really care if it's a wealth tax or some other more targeted technical fix, but it's not sustainable to have the very wealthiest individuals taxed at a lower effective tax rate than everyone else and also able to pass on their wealth directly to heirs without significant estate taxes.

As others have mentioned this is wrong. Here's 3 accounts on how it is so:

1- Fundamentally, they are magnitudes of different units, one is tax/income, the other is tax/wealth/time. Not only is the denominator different, one being calculated over income, the other over wealth, but there is an additional inverse time factor.

In income tax, whether the period is yearly or monthly or hourly, is an administrative matter that doesn't materially change the rate, 1%/month is the same as 12%/month, however in wealth tax, 1% wealth tax per year is not the same as 1% wealth tax per month. In many respects one might consider wealth tax to be a second order derivative of income with respect to time. Which is again very similar to a progressive income tax. Anyone that studied polynomials knows that there is no such equivalence between ax and bx^2, they are irreducible mathematical forms.

2)Trivially, in the scenario Paul proposed, Wealth tax is comparable to income tax only with respect to capital gains. That is, if he did find an equivalence between income tax and wealth tax for capital gains (which he didn't), income tax would still apply non capital gain taxes. But I will concede that there may be an argument that, if such an equivalence were found, it could be considered that there exists an Income Tax which will always yield more tax than another specific wealth tax.

3) The equivalence between wealth and income tax cannot be linear. The example given applied to 1% wealth tax and was compared to 20%, and a risk free interest of 5%. If the wealth tax were of 2%, 5% or 10%, would that be equivalent to 40%, 100%, and 200% income tax respectively? The last one is especially ridiculous.

Because billionaires accumulate wealth through assets and unrealized gains, many of them skip taking a traditional income and pay. If the numbers in the links below are to be believed, according to paulgraham's calculations, this might bump them into a ~fair range (when comparing to average/median earners).

https://www.nber.org/papers/w34170 https://www.propublica.org/article/how-we-calculated-the-tru...

You need to understand the "Buy/Build, Borrow, Die" cycle that the ultra rich use to avoid basically any taxes.

Explained here: https://gemini.google.com/share/e230bcecaaeb

But income from most comes from labor, whereas wealth is passive.

I don't want to do math, but they aren't the same.

And people aren't investing 100% of their income in risk free 5% assets.

The thing that all these asshole billionaires don't want anyone to think about is that not taxing wealth means that a person who primarily accumulates non-income capital only ever pays taxes on what they spend while the rest of us pay taxes on approximately everything we get regardless of whether we spend it.

This treats all income like Labor income and completely ignores Investment income and long-term capital gains and losses.

How I pay tax on my labor income doesn't have a lot to do with how Paul pays taxes on his investments. Paul makes his money from investment income.

Stop thinking about taxes as a way to fund the government.

Money in the long run can buy anything, including political influence. There are no regulations that can effectively preclude this. (And empirically, America over the past 40 years has seen moneyed entities successfully re-align politics and economic policy with their interests -- this was entirely predictable). An unequal society therefore cannot be a democracy. If you believe in democracy, then you necessarily must believe in wealth redistribution. (In fact, I argue that any person who believes that the American Revolution was justified, for any non-trivial reason, will likely find that those the same non-trivial reason could be invoked to reallocate wealth away from today's wealthy.)

Counterarguments to this view (i.e. a different top-level value than democracy / meaningful sovereignty over the society in which one lives) might invoke utilitarianism: an unequal society potentially produces "better" outcomes if capitalism is allowed to run unrestrained.

But a problem this argument encounters is who gets to decide what "better" is? All systems are economic in the long term, including political ones. A good framework for understanding is that a society in the long term is not "one person one vote" but rather "one dollar one vote." Today's preferences are dollar-weighted. Those with money decide what is better. The economy serves the average dollar's interests. And the average dollar's interest are the wealth-weighted preferences of society's members.

We started with an income tax to fund the government. But today our most pressing issue is not funding the government, but not having an oligarchy. Wealth is the thing that most needs to be taxed in order to allow for any semblance of democracy. Analogies drawn to income, though interesting, are meaningless.

Paul the billionaire ignoring that billionaires often don't pay any income tax at all. Come on man, we're not stupid just because we don't own superyachts.

https://www.propublica.org/article/the-secret-irs-files-trov...

Yet... an entire industry (financial advisors) will happily charge you a 1% "wealth tax" to manage your money. And you don't see lengthy articles from luminary venture capitalists about that.

Feel free to just tell the masses to eat cake since bread is so expensive while you dine on your mega-yacht. Just like the market can stay irrational longer than you can stay solvent, you may or may not be able to outlive the eventual violent outburst from the rest of the 99%. Scott Galloway is right on that the anti-data center backlash is just a proxy for anger at wealth inequality.

Here's a crucial mechanism that Paul Graham did not mention:

With a wealth tax using his calculation, the higher your returns, the lower the comparable income tax would be. If your returns are 10% you'll pay $1 on $10 capital gains which is 10% and you end up with $109. Conversely someone achieving a mere 1% cap gains would be essentially taxed for 100% of his return.

With income taxes it's usually the opposite: the more you earn, the higher the tax bracket you will be put into.

Somebody like Paul Graham surely has higher than 10% capital gains, otherwise he'd not be exactly a great investor.

Personally I'm against wealth taxes, I think capital gains taxes are a much more appropriate and fairer tool. I also think taxes in general are way too high, if you are part of the middle class and add up everything you pay in taxes, fees, insurance, duties and whatnot you can end up losing 70-90% of whatever you earn. It's extremely hard to actually accumulate wealth for the vast majority of people.

Completely ignores the true distinction between wealth and income taxes.

Person A has one billion dollars. Holds it in cash in a vault deep in a mountain he owns. He does not earn any wages.[1]

20% income tax: $0.00

01% wealth tax: $10,000,000.00

[1] Every billionaire controls their taxable income. Unlike wage earners, billionaires have 100% control over how much taxable income they have each year. They make choices.

They can have the vault in the cave. Or they can put money into artwork that grows in value and only generates income upon sale. Or a million other ways they can choose to control taxable income.

> None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing.

I sure would, if I was talking about someone who makes more money in a week than most of us will make in our entire lives.

I think pg has forgotten that most people aren't rich.

Here is a better algorithm to edify the masses: if someone is such a massive billionaire as to have the boldness to teach the public basic 5th-grade math, their wealth tax rate should be set at 10%. From that point on, the rate goes in proportion to their level of condescension.

>It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing.

His core point seems to be that taking $20 from him is mathematically equivalent to taking $20 from a homeless girl's hat.

I guess mathematically it is the same number if you dont normalize for that, which he wont.

> It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing.

Uh … sure I would? Why not? The top bracket was 70% in the 80s. So that 61% is still a fair bit short of what it was then. (And the 80s isn't the highest point, either.)

IDK if it would be a good idea or not, but I'd entertain the debate, certainly. To state that this is unarguable, though, well…

I used to be against wealth taxes but as inequality gets out of hand I've more and more felt like they are the right move.

Hell, I'll be the first in line to pay the damn tax so long as billionaires are right in line with me too.

> So in the median case, a state adding an additional 20% in income tax would have a total marginal tax rate of 37% + 4.75% + 20%, or 61.75%

Good! It should still be higher!

There's nothing more tone deaf than an uber wealthy man arguing he shouldn't pay more in taxes to the system that allows him to be uber wealthy and to be deliberately misleading at the same time.

> That's why I think few politicians currently understand how to convert between wealth and income taxes. You can tell from the way they talk about the subject that they don't understand the momentousness of what they're proposing. But I'm optimistic that we can teach them. The answer's not hard to understand, once you realize the question exists.

What a pompous and uninformed "I am smarter than others" way to think. And very 'parental' (ie 'we can teach them').

Note that Politicians (in order to remain in their job) need to think in terms of the people they represent and getting re-elected by those people. You may not like it it may not be good for you but understand that in the position they are in why they do it.

Yeah this ignores at least three things:

1. Most people do not derive even a fraction of their income from interest on wealth.

2. Earning income from interest on wealth requires zero effort. That isn't true for salaries.

3. Income and wealth are totally different things. You can find a way to equate them in one contrived example but there are so many other factors involved in the real world.

Billionaires gonna billionaire.

The real problem is our politicians aren't representing our people. All these other issues of wasteful spending and money printing and inflation and whatnot are downstream of that main crux of problem. People don't hate wealthy perse but when laypeople aren't provided proper means of living, they will try anything as a solution, even throwing a wrench in the system. That's how we got Trump.

I think Paul thinks people care about the distinction, or think that a 20% marginal increase to the nation's wealthiest is something the public would find "unfair".

Rich people need to stop hanging out with other rich people.

Cool, now I just need: "How to convert between silicon valley bloviating and normal human dialog."

> None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing.

Income tax is progressive. So, not really.

yawn hack writer issues wealth-hoarding and inequality apologia.

Economics is simple. Resources are finite, and money plus markets preserve that finitude as an invariant (that's why it works as a store of value). If you sit on more money and accumulate more money a natural consequence is that someone else has less access to the finite resources available (either in actuality or in potentia), period, because you can accumulate enough to begin to dictate how much they can access (by having decision power around wages). There is no reason to assume private individual wealth-hoarders have public interest in mind, and indeed they have often proven that they don't. They want to maximize value at specific points in the system, which is the literal definition of instability and eventual collapse in chaos theory. You need to bring the system back to stability through structural intervention and regulation. Tax the rich. Cap individual accumulation. It's that simple. The world does need or benefit from kings, whether minted through politic or finance.

Imagine, poor person, if you had to pay an additional 20% in income tax! That would not be fair!

Fuck off paul. Billionaires aren’t paying anything in income tax when they should be paying 60 or even 90.

So, yes, let’s hit them with a 5% wealth tax.

> In the median case, US state politicians talking about adding a "mere 1%" wealth tax are talking about causing the residents of their state to have the highest taxes in the world. That's not the sort of decision you make lightly.

The missed point is that a 1% wealth tax 'only for a select group' can easily become later a 1% (or higher) wealth tax 'for a less select group'.

This is misleading and not the point of the wealth tax.

If you’re lucky enough that you don’t need to work for your income, you should be taxed. A lot. How much? Enough to make sure you don’t become so rich that your children don’t need to work.

Being rich is not fair, it’s very rarely deserved, and it needs to be taxed unfairly.

Utter nonsense. You can't convert between a wealth tax and an income tax in any manner as simple as this, unless the wealth tax and the income tax were implemented in a simplistic way unlike any actual proposal. Most obviously, there is no such thing as "the" income tax rate, because different people pay different rates; those rates depend most obviously on the amount of income but also on various kinds of accounting gimmicks that allow wealthy people to pay less. Similarly, no one is proposing a flat wealth tax that would tax 1% of everyone's wealth.

The "example" discussing paying income tax on your $5 of return on your capital is similar nonsense. You don't pay anything on that gain unless it's income, which it isn't unless it's realized. So (assuming the various parameters of a wealth tax meant this mythical $100 person would indeed pay a wealth tax), the comparison is between zero income tax and some nonzero amount of wealth tax.

> None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing.

Plenty of politicians (e.g., Bernie Sanders, AOC) have pointed out that the top income tax rate during the 1950s was over 90%, and have suggested raising rates back or near to that level, which would be well more than a 20% increase in the income tax rate.

This is wrong. You can’t convert between the two because it’s possible to have a lot of wealth with very little (even zero) income. Billionaires can completely avoid income taxes by paying themselves a very low salary and instead borrowing money against their assets (usually stock), which is not taxed as income.

Source: The Second Estate by Ray Madoff (2025)

Hahaha this is so bogus.

Americans really struggle to understand how tax work outside of their country.

First, the whole premise of income to wealth tax equivalence is non sensical, because interests are rarely literally in the form of coupons/payments, but rather left as compounding value. This is the whole point of share buybacks, reinvested ETFs, etc; and Paul Graham knows that of course. If you are rich, you don't need the cash of your investments, so you don't want to trigger taxable events, so you are effectively at 0% tax rate and just let it compound.

> Currently the country with the highest marginal income tax rate is Denmark, at 60.5%

This is the most BS statement ever, and would only be believable to Americans with no understanding of how foreign country do taxes. Which is at best very naive of him, or highly disingenuous. This is because "tax" in the US is essentially employee paid, whereas most other countries split the bill between employer and employee at a higher proportion. The result is the same, but the employee part only is labeled "tax", the employer part being often called "contribution".

When comparing across countries, you have to look at the tax wedge (super gross to net), not the tax rate (gross to net).

And if you do that, well the US has a lower tax wedge than even the most generous European countries (Ireland).

In France for instance, the tax wedge is close to 70% for the higher bracket. Yes, that means if your employer pays $100, you get $30. And that's in a country with 20% VAT compared to US ~8%.

Not to mention, except super rich little little business-hub countries (Hong Kong, Singapore, Ireland, Malta, Cayman Islands, etc), pretty much all _developed_ countries have some form of wealth tax, it's just common sense.

If you want to understand why someone would even propose taking from the rich and complain about inequality, this post titled "Inequality Talk Is About Grabbing " is illuminating: https://www.overcomingbias.com/p/inequality-is-about-grabbin...

Always a pleasure to hear capital explain to labor why taxing capital is bad, but this seems like a giant red herring. I don't want a wealth tax so I can cut my income tax, I want a wealth tax to address inequality. Our existing policies have produced a very bad bad outcome - wealth inequality exceeding that of pre-Industrial England led by a small, essentially randomly-selected group of people so wealthy that they effectively run everything who have entirely captured a corrupt government and are very close to making the situation permanent - and a wealth tax is the only policy idea I know of with any chance of changing that.