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How to convert between wealth and income tax

paulgraham.com

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Re: How to convert between wealth and income tax

#291

Post by tclancy »

arh5451 wrote: post #54
ryandrake wrote: post #8

> 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 obtai…

If you mean that a person with 0 savings pays 0 wealth tax, then sure. Most people when they earn income save some of it. Therefore it is wealth taxed.

>Most people when they earn income save some of it. Therefore it is wealth taxed.

This is one of those “check your privilege” moments and one where it is best to look at the median and not just the average when talking about household wealth in the US. Between 57% and 67% of U.S. adults are estimated to live paycheck to paycheck. They aren’t saving it, they’re going into debt because the only local grocery store is a Dollar General and it’s just a clever name nowadays.

Re: How to convert between wealth and income tax

#292

Post by everfrustrated »

Glyptodon wrote: post #220
satvikpendem wrote: post #202

Earlier quoted context omitted.

> 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. That can be quite a lot of people on HN, and also including FIRE people, so I can see why it's unpopular.

Most FIRE people aren't going to have $50 million plus and be hit by this.

It will never stop at $50M. Once the law is created it is sooo much easier to just lower the threshold. Even if not lowered, in 30 years inflation means it will capture a whole different number of people - maybe you. Maybe it will bankrupt your children.

Re: How to convert between wealth and income tax

#293

Post by tclancy »

qzw wrote: post #212
arh5451 wrote: post #54

Earlier quoted context omitted.

If you mean that a person with 0 savings pays 0 wealth tax, then sure. Most people when they earn income save some of it. Therefore it is wealth taxed.

Almost all wealth tax proposal I’ve seen start at the level of 8-9 figures of wealth. Why are we now talking about it as if it’s going to apply to your average person’s savings account? If we’re just going to accept these billionaire-invented narratives around the wealth tax, then there’s really no point in discussing the actual pros and cons of these proposals.

Because it’s the standard playbook for dealing with even the slightest suggestion of fairer taxation. Trot out an old dude in a suit from a Foundation, make sure to avoid anyone knowing exactly what that foundation does or who funds it and have him suggest it’s a really nice idea, but the unforeseen consequences will actually hurt “working people like you and me”. Present as fact, job done.

Re: How to convert between wealth and income tax

#294

Post by everfrustrated »

jdasdf wrote: post #276
notahacker wrote: post #165

Earlier quoted context omitted.

The big flaw in his argument is that a mere 1% which is actually 20% of annual return is still less than the average income tax rate on workers, levied on people who have a lot more money and in some cases don't do anything resembling work. It's trivially true that 1% wealth taxes represent something in the region of a fifth of the average annual return on wealth, it's rather less convincing when it's suggested that…

> The big flaw in his argument is that a mere 1% which is actually 20% of annual return is still less than the average income tax rate on workers This is untrue btw 50% of people in the US pay effectively no net taxes

Or put another way, are subsidized by others.

Re: How to convert between wealth and income tax

#295

Post by SoftTalker »

chasd00 wrote: post #257
Glyptodon wrote: post #217

Earlier quoted context omitted.

Lol, that's still totally feasible for normal FIRE/retirement situations, my understanding is that most proposals only start at $50 million or more. You can still have a super cushy retirement with $3mil+ and 3% withdrawal forever.

> only start at $50 million or more curious how they came to that number. There's probably plenty of voters willing to cast a vote for $0.5M+ and plenty ready to cast a vote for $100M+. How was the line drawn?

The minimum net worth of the top 1% of households is roughly $13.7 million[1]. So at $50 million they can say "we're only taxing the top of the top 1%" as a way to sell it.

"The top 1%" is a popular target for these schemes because 99% of people might be convinced to support it, since it won't affect them (at least not directly).

[1] https://www.investopedia.com/financial-edge/1212/average-net...

Re: How to convert between wealth and income tax

#296

Post by tclancy »

abletonlive wrote: post #243
booleanbetrayal wrote: post #227

Earlier quoted context omitted.

Billionaires gonna billionaire, I guess.

[flagged]

It is less amusing how many of our brethren think the Landed Gentry got there by merit and deserve to live in their castles untroubled by the rabble.

Re: How to convert between wealth and income tax

#297

Post by zzrrt »

someguydave wrote: post #285
voidhorse wrote: post #268

Earlier quoted context omitted.

I don't think anyone is simply envious. People mean to point out that allowing individual accumulation of wealth to extreme degrees lead to runaway structural problems. Billionaires and companies existing and providing wages are not inextricably intertwined. It's entirely possible to have one while preventing the other. The idea that the only way you can incentivize individuals to start companies is to allow them to…

this post drips with envy

If they were saying that kings shouldn't have the unchecked right to execute people, this response would be akin to "Oh, you just wish you could kill anyone. Your argument is invalid."

Re: How to convert between wealth and income tax

#298

Post by [deleted] »

jppope wrote: post #97
__turbobrew__ wrote: post #64

> 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 pe…

> Wealth accumulates with no input once established. This is incorrect, historically you'll pay a ~2%-3% loss via inflation if you keep your money in cash. If you invest (making it capital) in bonds or securities then you will see accumulation, but thats actually a risk premium. > Additionally, wealthy people can use securities as collateral for near zero interest lifetime loans which also bypass having to pay income…

[deleted]

Re: How to convert between wealth and income tax

#299

Post by Galanwe »

throw310822 wrote: post #289

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%.

No, he's disingenuously talking specifically about income tax, on interests.

Capital gains are on realized gains. Based on the difference between purchase price and selling price.

The thing is, wealthy people don't have interests bearing investments, because they don't need the cash right now. They either have unrealized gains (shares, real estate, etc), or interest bearing products wrapped in marked to market vehicules with reinvestment (ETFs, life insurance, mutual fund, etc).

Unrealized gains are not taxed as long as you don't sell them. If you need cash, you can borrow against them, so problem solved.

As for interest bearing investments, most companies nowadays use buybacks instead of dividends to avoid withholding taxes.

Re: How to convert between wealth and income tax

#300

Post by stymaar »

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.

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