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Wealth is not taxed. If you have a large amount of wealth, you don't need income, and it's likely that — if you do have income — your income represents a very s

Wealth is not taxed. If you have a large amount of wealth, you don't need income, and it's likely that — if you do have income — your income represents a very small percentage of your net worth growth over time. Most of it is capital gains, which: 1. Are taxed at a much lower rate, and, 2. Are only taxed when the gains are "realized," e.g. when you sell at a profit. As a result, if you have a large amount of wealth, your net worth can increase dramatically while being untaxed (if you don't sell) or taxed very low (if you sell some percentage of the gains — and only the sold percentage gets taxed, the rest doesn't). Depending on your investment strategy you can also play games with taxes, e.g. when rebalancing your portfolio, try to mostly sell your shares that have lost value, so that you put a loss on the books rather than a gain and are thus untaxed (or even get tax credits). That's why Warren Buffett talks about paying less in taxes than his secretary.

paulddraper 7y ago
It does't make sense to take wealth though. The only way wealth can increase (in a usuable liquid form at least) is through income, which is already taxed. If I eat beans and rice for 10 years to help save for a awesome retirement, I should be able to save that money.
- reissbaker 7y ago
  I agree that wealth taxes seem difficult to enforce at the least. However, income is not the only way wealth increases: as I mentioned, the primary way wealth increases for the very wealthy is capital gains via investment, which are taxed at a lower rate, and are only taxed on "realization," aka sale (your net worth can increase by a billion dollars, but if you only sell $100k of it, you're taxed on the $100k). Taxing upon realization also makes sense to me, but the very low long-term capital gains tax makes less sense to me. If you made a million dollars, I don't care if you made it via investment or by working for someone — you should support society in the same degree.
  - paulddraper 7y ago
    Yes, capital gains are taxed as income (as soon as there is something you can actually pay taxes with). That they are taxed at a reduced rate is true but doesn't invalidate the fact they are still income.
    - reissbaker 7y ago
      No, they're not taxed as income. They're taxed as capital gains. There's a set of taxes called "income taxes," and the rules are the same for anything classified as income. Long-term capital gains are not classified as income. Even short-term capital gains are not classified as income, although they're taxed at the same rate as income. And regardless of semantics, the original point still stands: relative to their wealth, Rich people, effectively, don't even pay income tax. This is trivially true: if your liquid net worth increases by $1 billion dollars, and you made that money via income, you would be taxed (depending on state) up to nearly 50% of those gains. If you made it via capital gains, you would be taxed at zero. Since very rich people make most of their money via capital gains, what little net worth increases they make via "income" pale in comparison to the gains from capital investments. Thus, they pay effectively no income tax relative to their wealth, which is large. If they make 1.2 billion dollars in liquid net worth, and only 0.2 billion is classified as income, they're paying an effective tax rate of about 12% in CA instead of 49.3% (what they would pay in CA if their gains were categorized as income). If only 0.1 billion was income, they're paying 6%. If they "only" made 50 million dollars of income that year, and the rest was classified as long-term cap gains, they're paying 3% tax. For the record — I'm not saying we should tax unrealized capital gains! This is a very complex subject and changing the tax code in that way could have far-reaching, potentially very negative side effects on the US economy; for example: we wouldn't tax unrealized illiquid asset gains, right? That would be unfair: if it's illiquid, you may literally be unable to pay the taxes on your supposed gains. But that encourages mass migration of high-net-worth individuals' assets into illiquid assets like real estate (since by and large they don't need immediate access to the capital), and out of liquid assets like company stocks, which would drive up housing costs and reduce available capital for US companies. Not only that — it prioritizes illiquid assets over liquid ones, which is good for rich people who can park money on illiquid assets and don't need to spend it short-term, but bad for everyone else who actually may need to spend their money. Not exactly the outcome we want! In general tax is super hard and rich people will pay very smart people to game the tax code for them. But capital gains being only up to 18% compared to income at up to 37% at the federal level (with similar breakdowns by state) seems pretty off.

paulddraper 7y ago

It does't make sense to take wealth though. The only way wealth can increase (in a usuable liquid form at least) is through income, which is already taxed. If I eat beans and rice for 10 years to help save for a awesome retirement, I should be able to save that money.

reissbaker 7y ago
I agree that wealth taxes seem difficult to enforce at the least. However, income is not the only way wealth increases: as I mentioned, the primary way wealth increases for the very wealthy is capital gains via investment, which are taxed at a lower rate, and are only taxed on "realization," aka sale (your net worth can increase by a billion dollars, but if you only sell $100k of it, you're taxed on the $100k). Taxing upon realization also makes sense to me, but the very low long-term capital gains tax makes less sense to me. If you made a million dollars, I don't care if you made it via investment or by working for someone — you should support society in the same degree.
- paulddraper 7y ago
  Yes, capital gains are taxed as income (as soon as there is something you can actually pay taxes with). That they are taxed at a reduced rate is true but doesn't invalidate the fact they are still income.
  - reissbaker 7y ago
    No, they're not taxed as income. They're taxed as capital gains. There's a set of taxes called "income taxes," and the rules are the same for anything classified as income. Long-term capital gains are not classified as income. Even short-term capital gains are not classified as income, although they're taxed at the same rate as income. And regardless of semantics, the original point still stands: relative to their wealth, Rich people, effectively, don't even pay income tax. This is trivially true: if your liquid net worth increases by $1 billion dollars, and you made that money via income, you would be taxed (depending on state) up to nearly 50% of those gains. If you made it via capital gains, you would be taxed at zero. Since very rich people make most of their money via capital gains, what little net worth increases they make via "income" pale in comparison to the gains from capital investments. Thus, they pay effectively no income tax relative to their wealth, which is large. If they make 1.2 billion dollars in liquid net worth, and only 0.2 billion is classified as income, they're paying an effective tax rate of about 12% in CA instead of 49.3% (what they would pay in CA if their gains were categorized as income). If only 0.1 billion was income, they're paying 6%. If they "only" made 50 million dollars of income that year, and the rest was classified as long-term cap gains, they're paying 3% tax. For the record — I'm not saying we should tax unrealized capital gains! This is a very complex subject and changing the tax code in that way could have far-reaching, potentially very negative side effects on the US economy; for example: we wouldn't tax unrealized illiquid asset gains, right? That would be unfair: if it's illiquid, you may literally be unable to pay the taxes on your supposed gains. But that encourages mass migration of high-net-worth individuals' assets into illiquid assets like real estate (since by and large they don't need immediate access to the capital), and out of liquid assets like company stocks, which would drive up housing costs and reduce available capital for US companies. Not only that — it prioritizes illiquid assets over liquid ones, which is good for rich people who can park money on illiquid assets and don't need to spend it short-term, but bad for everyone else who actually may need to spend their money. Not exactly the outcome we want! In general tax is super hard and rich people will pay very smart people to game the tax code for them. But capital gains being only up to 18% compared to income at up to 37% at the federal level (with similar breakdowns by state) seems pretty off.