Modeling a Wealth Tax

> The reason wealth taxes have such dramatic effects is that they're applied over and over to the same money. Income tax happens every year, but only to that year's income.

Ah, but that is not even true. Because you spend some of your income during the year. When you spend your income, it becomes someone else's income. Then they also spend during the year.

If we could put a trace on a given specific dollar, we would find that it changes hands a few times in a given year, and is counted as income more than once for the purposes of taxation.

That dollar could pass through the same hands, even. I pay you to fix my plumbing. Then you buy from my grocery store. From the bartering point of view, we broke even. From the government point of view, we both have income to declare, even though my "income" is just getting back the money I gave you for the plumbing job.

The idea that income tax is "just that year's income" is dangerously misleading. It's that year's income, N times over again.

Inequality in your country has risen dramatically the past 30 years. That's what your legislators are trying to address. A lot of value is created in the early stages. Should that be exempt? Remember, companies don't exist primarily to pay back investors, their first objective is to contribute to society.

My €0.05

@thomasdullien Re: "Other features of the tax system more than offset the 0.3% wealth tax.". Yes, but the problem is the other countries contemplating implementing a wealth tax want to have their cake and eat it. They want to implement a wealth tax whilst not making any tweaks elsewhere. All take and no give does not make for an attractive environment, especially in this globalised world where resettlement of people and businesses elsewhere is not as difficult or time consuming as it might have once been.

Taxation is theft and slavery. That is the discussion we should be having.

Some politicians are proposing not to have wealth taxes, but only income taxes. Let's try modeling the effects of zero wealth tax to see what they would mean in practice for a wealthy individual and for a startup founder.

Suppose you inherit a large amount of money or found a startup in your twenties and then live for another 60 years. What will be the impact of a small or zero wealth tax on your holdings?

Suppose the wealth tax is 1%, the long-term capital gains tax rate for large incomes is 20%, and the annual growth of stock value is 8.25%[1]. That means that each year the wealthy individual experiences an 8.25% growth split into 1.65% growth paid in taxes and 6.6% gain, of which 1% goes to pay wealth taxes, for an annual gain of 5.6%. Which means after 60 years the net worth of the wealthy individual will have grown by 1.056^60 or over 26x growth. By comparison, a 0% tax rate would result in a net worth growth of 46x.

It may at first seem surprising that lowering wealth taxes to 1% or even 0% would produce such dramatic effects. The reason lack of wealth taxes have such dramatic effects is that the growth is applied over and over to the same money. Income tax happens every year, but only to that year's income -- having a higher after-tax income can make someone rich, but more in proportion to their income. Whereas if you live for 60 years after acquiring some asset, the growth in value of that asset will compound 60 times. Ownership of assets compounds.

It is also worth considering that the startup founder who never diversified their holdings, never accepted funding or joined y-combinator, and also never spent their salary buying additional stock, but simply retained ownership of the company other than paying wealth taxes, the percent ownership of the company would drop from 100% to 0.55% at a 1% wealth tax or remain flat at 100% with a 0% wealth tax.

Of course, with modern financial tools no startup founder need experience this: they can simply create different classes of stock, including some founders stock that has enormously overweighed voting power and then sell off only their regular shares to pay for the wealth tax. We already see this with major world companies like Google, Amazon, and Facebook that remain entirely under the control of their founders.

Surely a tax rate as low as 1% (or even, shockingly, 0%) would lead to rampant wealth inequality and an out-of-control Gini coefficient.

[1] The assumption of a return that is consistent across different stocks or even consistent from year to year is highly inaccurate. But if we remove this assumption then all calculations become irrelevant and the only conclusion we can draw is "some people get lucky, others don't". That isn't useful, so we'll assume it is consistent. For the source of the 8.25% figure, see https://advisor.visualcapitalist.com/historical-stock-market...