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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

#431

Post by throwaway173738 »

everfrustrated wrote: post #292
Glyptodon wrote: post #220

Earlier quoted context omitted.

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.

30 years is plenty of time to change the law. We change the tax code all the time. In 2020 or so it was recently amended to substantially increase the standard deduction. Slippery slope is a fallacy unless you can prove the pattern already exists.

Re: How to convert between wealth and income tax

#432

Post by whodidntante »

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…

As I commented elsewhere, everyone gets affected by a wealth tax, as it will affect how assets are priced and how businesses operate across the board.

For those who have little hope of the wealth tax applied to them (me for example), but as as someone who has investments and need them for retirement, I need to decide if this will affect bond prices or equity prices in a positive or negative way as their attractiveness will change in relative terms, or if publicly accessible funds will get devalued in favor of private investment opportunities and all public assets get devalued. Oh, wait, I am not wealthy, so I do not have the option of private equity, and cannot participate in what would be an attractive investment opportunity when investments shift towards more opaque assets.

For those that have zero assets, I do not think that a shift by the wealthy to private equity is a good thing, unless you want to work for a private equity company. A government job would be your best bet. And a shift to private equity would have a downward pressure on tax collections, so whatever projections for how much a wealth tax would generate, I am suspect.

A lot of people complain about private equity. This scourge was, to a small or large degree depending on your viewpoint, an unintended side effect of SOX compliance, meant to protect investors, and in the end narrowed down the amount of public companies, and created more opportunities/demand for PE. I think it is debatable how much protection investors actually received.

We live in a system, and making a fundamental change to one part of that system has effects on all parts. Raising the amount of taxes under the current system ? That is one thing. Introducing a whole new tax concept, difficult to predict. Especially if this is done by states, which could cause capital movements with their own unexpected consequences.

Re: How to convert between wealth and income tax

#433

Post by Manuel_D »

madaxe_again wrote: post #374
Manuel_D wrote: post #309

Earlier quoted context omitted.

They have to sell eventually to pay off the loans. And if they die, their estate has to sell the assets to pay off the loans, and then their heir will pay inheritance taxes on top of that. Unless their spouse is still alive. In the US, assets' cost bases are reset when a spouse dies. That is the main way that rich people avoid capital gains taxes. I'd much prefer simply stopping that cost basis reset instead of imple…

Lol nah. The assets are held by a trust. The trust, being a friendly bunch, loan you capital which it gets by liquidating assets, at a rate of 0% with “don’t worry about it” default terms. You’ll probably pay a management fee for each loan. You croak, your heirs become the beneficiaries of the trust. Rinse, repeat.

In this case, the beneficiaries of the trust pay income tax on the money they receive from the trust.

Re: How to convert between wealth and income tax

#434

Post by Manuel_D »

dh2022 wrote: post #412
Manuel_D wrote: post #309

Earlier quoted context omitted.

They have to sell eventually to pay off the loans. And if they die, their estate has to sell the assets to pay off the loans, and then their heir will pay inheritance taxes on top of that. Unless their spouse is still alive. In the US, assets' cost bases are reset when a spouse dies. That is the main way that rich people avoid capital gains taxes. I'd much prefer simply stopping that cost basis reset instead of imple…

Debt is usually rolled over if the billionaire is still rich (banks will do that for fees). The only expenses are the interest charges- which were small 3 years ago but larger now because of how interest rate increased. Re: estate taxes - almost no ultra rich pays them, even without surviving wife. According tom Garry Cohn (former big kahuna at Goldman Sachd and former treasury something or other in the first Trump a…

As per your linked article, they mainly either give away their money to charity, or they set up trusts. When beneficiaries receive money from the trust, it's taxed as income.

Re: How to convert between wealth and income tax

#435

Post by auggierose »

prasadjoglekar wrote: post #415
relium wrote: post #350

Earlier quoted context omitted.

Federal payroll taxes in the US are 15.3% (7.65% for each side).

Social security and Medicare are also payroll "taxes" in that they're not optional and are automatically deducted.

This is called insurance, not tax.

Re: How to convert between wealth and income tax

#436

Post by pzo »

trollbridge wrote: post #387
kccqzy wrote: post #332

Earlier quoted context omitted.

The main implementation issue with a wealth tax is that it doesn’t at all interact with the capital gains tax. It’s easy to fix the implementation issue by integrating the wealth tax into the capital gains tax (call it unrealized capital gains tax for starters), make the tax refundable when an asset loses value, and netting it against the actual capital gains tax. With this framing, the wealth tax isn’t a new tax; it…

Unrealised capital gains tax requires some way to assess the value of assets. This is a lot harder than it sounds. It already exists in the form of property taxes, which are quite unpopular.

at least all financial assets (stocks, etc) are easy to assess value so why not start with that? same with gold, silver etc. Some minimal amount you can make it nontaxable to reduce administrative burden.

Re: How to convert between wealth and income tax

#437

Post by hedora »

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…

Also, this seems to ignore a major problem with how progressive income tax rates are figured in the US.

You can work for years at a startup at a depressed wage, then have a windfall that makes up for it on average.

That windfall (in California) will be taxed at a marginal rate of 52%. The only people that ever pay nearly that much are middle class. Some sort of time averaging would help.

Anyway, the US tax code is complicated. Personally, I’d prefer a flat tax with universal basic income. This could replace income, capital gains and inheritance taxes in their entirety. (Along with a lot of social services bureaucracy).

Re: How to convert between wealth and income tax

#439

Post by closeparen »

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…

Is this situation so uncommon? Almost everyone who lives in a house in California, for example, is living primarily off the unrealized gains on their home equity. Very few have the wage income to qualify for a mortgage on what their lifestyle is worth now.

California contains a lot of houses!

Re: How to convert between wealth and income tax

#440

Post by loglog »

zozbot234 wrote: post #170
shmolyneaux wrote: post #81

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…

When more assets are sold than are bought, that leads to the destruction of assets on a broad scale. It's the economic equivalent of eating one's seed corn. This would not be good for the median person. You can and should tax land (meaning the land value component of real estate in general) and natural resources more generally, but that's an entirely different game: it has next to nothing to do with wealth taxes as g…

This claim is plain malicious. Of course falling asset prices would be excellent for the median person, since they would be less extremely priced out of everywhere. This is one of the central benefits of a wealth tax.
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