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OP mentions PG’s article arguing against a wealth tax. That article is short, simple and to the point - Modelling a Wealth Tax (http://www.paulgraham.com/wtax.h

OP mentions PG’s article arguing against a wealth tax. That article is short, simple and to the point - Modelling a Wealth Tax (http://www.paulgraham.com/wtax.html http://www.paulgraham.com/wtax.html). It is so compelling, but also misleading and wrong. Its not easy to spot the sleights of hand he uses. I wrote more about it here - Modelling a Wealth Tax Correctly (https://blog.nindalf.com/posts/wealth-tax/ https://blog.nindalf.com/posts/wealth-tax/). And yet, I think the simplicity of PG’s arguments is going to convince a lot of people. Simplicity sells, even if it deliberately obscures the truth.

pchristensen 6y ago
This is a helpful breakdown of an article that didn’t seem right to me.
teapourer 6y ago
You have a glaring mistake in your very first paragraph: 2% of $60 million is $1.2 million, not $120k. The calculations on your Google sheet look correct though.
- nindalf 6y ago
  You're right. Thanks for pointing it out, I've pushed a fix for this.
imtringued 6y ago
>They assume that the superrich can't just leave. This isn't even a downside. In a savings glut this is actually a desired outcome. Of course we don't want literally everyone to leave, only those on the margin.
- nindalf 6y ago
  This is a downside if your goal is revenue generation.
ElKrist 6y ago
Yes that's very helpful. I cannot imagine any founder being deterred to start a company because of this wealth tax. With or without it you'd be very rich under PG's assumptions
- refurb 6y ago
  It not a matter of a founder not starting a company, it doing it somewhere else than the US. Didn’t some study show a majority of founders are foreigners? They choose to come to the US. They can choose not to in the future.
  - xbpx 6y ago
    Because of a tiny wealth tax that is already lower than in many other countries? You think a relatively well off individual from a less wealthy country facing many systemic problems for business will pass up the opportunity to migrate to the US because they may need to pay a couple percent if they strike gold?
    - refurb 6y ago
      I mean, isn’t that exactly what Singapore did to attract talent and capital? And it worked? And didn’t one of the Facebook founders give up his US citizenship and move there? Sure it’s one case, but it’s evidence at least some are motivated by taxes. Sure, not every founder will make that choice and not right away, but you could see a slow shift over decades to more tax friendly locations.
      - Tepix 6y ago
        You may be right. A small number of startups may be founded elsewhere. But the large income from a wealth tax likely provides a greater benefit. We've had a wealth tax in the past. It worked. The only reason why it got removed was because the super rich used their vast influence. It's not something that's in the public's best interest.
        6y ago
bambax 6y ago
PG's essays have an agenda, which is to defend the rich and the incumbents, disguised as revolutionaries. Because they are young? But they are the same as the robber barons of old.
- courtf 6y ago
  I enjoy his blog posts, primarily because they show just how your brain can turn to pudding when it's more profitable to be willfully ignorant than otherwise. No one can read his recent obtuse entry and come away thinking his conclusions are supported by the carefully selected input. It's mindless at best, a clumsy, dishonest swipe at the poor at worst. He's just a middleman between wealthy investors and children of privilege, and like all middlemen, desperate to demonstrate some kind of value he adds to the process before the actual players catch on to the pointlessness of having middlemen in the first place. It really becomes sad when a layer of entrenched middlemen starts to actually believe in their own necessity, so I honestly hope he is at least being disingenuous. Just not sure he could be so consistently dense if it weren't genuine.
kgantchev 6y ago
I will add one more thing to your analysis of the possible negative outcomes: the market effects of the government selling the stocks of a company. I suspect these two things will happen on the market: 1. You'd need to have a wealthy enough buyer for the assets - it's going to be kinda hard to convince the wealthy to buy back their own assets. 2. In the absence of sufficiently large market makers, the prices of these assets will certainly tank since these assets will have to be liquidated. So where is the government going to find the buyers of the assets? What are the economic effects? Well, we can look to Switzerland for that answer. It is one of the only countries that have wealth taxes, but it's on the canton level (the equivalent of the state level). It has no national wealth taxes. The difference in wealth tax rates makes a huge impact on the behavior of citizens and the wealth distribution: "According to our baseline estimate, a 1 percentage point drop in the top wealth tax rate raises reported wealth by 43%." https://voxeu.org/article/wealth-taxation-swiss-experience https://voxeu.org/article/wealth-taxation-swiss-experience "The evaluations with both datasets lead to similar estimates: an increase in the wealth tax rate by one tenth of a percent, whether this be at the cantonal or municipal level, reduces the amount of declared wealth by around 3%. This implies that the tax elasticity of wealth is at least twice as large as that of personal income.4 In other words, wealth reacts more sensitively to taxes. Our estimates also exceed the wealth tax elasticities of other studies, which is presumably due to the higher quality of the data available to us (panel data) (Seim 2017; Zoutman 2015)." https://www.ifo.de/DocDL/dice-report-2018-2-bruelhart-schmidheiny.pdf https://www.ifo.de/DocDL/dice-report-2018-2-bruelhart-schmid... In essence, it second article highlights your point: the behavior isn't changed much in terms of productivity because wealthy people simply hire competent accountants to minimize their wealth tax burden with better accounting structures. BTW, we do have a wealth tax in the US in terms of private property. Most states have private property taxes which are a form of wealth tax. The effect of that is that each person has to generate an income high enough to afford the tax or else they will get a lien on their assets.
- twic 6y ago
  If this company is growing at the rates PG says it is, then the existing investors should be happy to buy more of the stock.
twic 6y ago
What if the founder borrows against their stock to pay the wealth tax? Or uses a sale-and-repurchase agreement? That way, they can use the present value of the stock to pay their taxes, while hanging on to the upside. You need to account for interest in this situation, but that should be less than the growth of the company. PG's story doesn't even hold water in dollar terms.
- zeckalpha 6y ago
  Or stocks would be expected to issue dividends proportional to the wealth tax.
vekker 6y ago
Simplicity is also often an indicator of truth. I think you completely missed another important point hidden in PG's article, besides the obvious compounding effect, and that is that unrealized gains would be taxed under a wealth tax regime. To simplify with a ridiculous example: suppose I have $0 to my name and I inherit a family art piece from my grandmother that happens to be valued at $2 million. The next year, under a wealth tax regime of 2% above $1 million, I owe $20,000 to the tax man even though I don't have the money in my account. That is why I think a wealth tax is a stupid idea. Why not just impose greater capital gains and dividend taxes above a certain threshold, for example? That's where wealth is realized. Until then, you're talking about taxing "imaginary" wealth. (edit: or more generally speaking, taxation should happen on transactions, not on an assumed wealth "state")
- nindalf 6y ago
  Let's say you inherited a home in the US valued at $2 million. You would pay 2% of that ($40,000) as property taxes, every year. If you can't afford to pay the tax, you would sell the house and pocket the $2 million. Is this so terrible? Doesn't seem to have stopped people investing in property.
  - vekker 6y ago
    Uh, if that's true then yes, that seems really awful, but the market probably also makes it so the real estate prices are adjusted to that taxation regime, because buyers and sellers can take that into account before settling the transaction. With a wealth tax, you can't escape it. You would have to liquidate (parts of) your own company or other illiquid property (which might not even be possible depending on how illiquid it really is) in order to pay a tax. That doesn't seem right to me at all. Again, why would you do that, if there are much better alternatives possible (like I said, higher capital gains taxes as an example). (For context: I'm not from the USA and property taxes are not calculated on a percentage of the value of your property where I live. I'm just using USD in my example because I know there are mostly Americans here.)
  - MikeUt 6y ago
    That's buying a new house every 50 years. That's re-building all of the wealth your family spent generations accumulating, every 50 years. That's a direct disincentive to saving money and frugality - the more you save, the bigger your tax gets, while your income stays the same.
timwaagh 6y ago
In the Netherlands we already have wealth tax (capital gains tax, but doesn't care whether you gained or not). It's nothing particularly disruptive. We still have the most wealth inequality in all the world. It might be a bit pointless to tax wealth in addition to capital gains though. You could just raise the former instead.
- Bootvis 6y ago
  The Netherlands really has most? I honestly don’t believe that without any supporting evidence.
  - csomar 6y ago
    A bit surprising, huh? According to this Wikipedia page: https://en.wikipedia.org/wiki/List_of_countries_by_wealth_equality https://en.wikipedia.org/wiki/List_of_countries_by_wealth_eq... The Netherland, indeed, is the worst. It's close to having a minority own everything while everybody else has 0 (a 1.0 coefficient).
    - Bootvis 6y ago
      I’m really surprised. It went up a lot from 2018 and 2019 so I don’t fully trust the result but that might be bias talking.
      - goos 6y ago
        Our friendly Australian economics man made a concise video about it a couple of months ago[1]. [1]: https://www.youtube.com/watch?v=Ot4qdCs54ZE https://www.youtube.com/watch?v=Ot4qdCs54ZE
        singron 6y ago
        TL;DW Very liberal mortgage policy that encourages very low or negative wealth on the low end, and very old money that remains concentrated despite recent income equality.
ashtonkem 6y ago
One of the best satirical articles on SV I’ve ever read[0] nailed this exact subject perfectly: > Having figured out a font and mastered Altman’s Ratio, your next step is to find something to say. For outsiders this can seem daunting, but it’s very easy, since every one of Silicon Valley’s self-styled radicals thinks exactly the same way. In fact, when you study their output carefully, you’ll find endless variations on the same three ideas: > Free speech is under attack. > A wealth tax is a bad idea. > To beat China, America must not become France. 0 - https://thebaffler.com/salvos/how-to-become-an-intellectual-in-silicon-valley-timms https://thebaffler.com/salvos/how-to-become-an-intellectual-...
- jdauriemma 6y ago
  That was a fantastic read, thanks for the link!
ameister14 6y ago
Part of your article is a bit confusing to me - when you say this: "Strange. No one is proposing a tax that would apply to all your assets." Are you saying that the wealth tax proposed does not apply to assets and only applies to actual liquid cash holdings?
- beervirus 6y ago
  That is, of course, exactly what Warren et al. are proposing.
- nindalf 6y ago
  That wouldn’t apply to all your assets, meaning the tax would be assessed only on wealth above the threshold. PG “simplifies” this in his example by asking you to consider a tax that would have a threshold of 0.
  - ameister14 6y ago
    Got it, that makes sense.
boringg 6y ago
Interesting article. I have difficult time grasping how the US government would every implement this with any real effect - even with their demanding reporting requirements. It looks like a colossal effort to gather that information and tax it appropriately. I don't see the IRS staffing up entire high specified units to go after and audit the super rich for wealth tax... the implementation of this would be painful and probably more money would go dark (my glass half full take). Simple example that I use to wrap my head around: What are the implications on equities? If you hold a lot of stock in a hot market you have to pay taxs on that stock this year (?) What would happen if next year the stock went to half of that? Imagine there was a wealth tax during the dot com era. Maybe it would curb speculative markets? I also think your point on first order and second order effects is also interesting. The ramifications of something like this, while appearing to be quite fair and simple is likely to be anything but once implemented. Also - I don't disagree with fixing wealth inequality - but a wealth tax is a fundamental shift in how everyone thinks the government derives money from the population.

pchristensen 6y ago

This is a helpful breakdown of an article that didn’t seem right to me.

teapourer 6y ago

You have a glaring mistake in your very first paragraph: 2% of $60 million is $1.2 million, not $120k. The calculations on your Google sheet look correct though.

nindalf 6y ago
You're right. Thanks for pointing it out, I've pushed a fix for this.

imtringued 6y ago

>They assume that the superrich can't just leave. This isn't even a downside. In a savings glut this is actually a desired outcome. Of course we don't want literally everyone to leave, only those on the margin.

nindalf 6y ago
This is a downside if your goal is revenue generation.

ElKrist 6y ago

Yes that's very helpful. I cannot imagine any founder being deterred to start a company because of this wealth tax. With or without it you'd be very rich under PG's assumptions

refurb 6y ago
It not a matter of a founder not starting a company, it doing it somewhere else than the US. Didn’t some study show a majority of founders are foreigners? They choose to come to the US. They can choose not to in the future.
- xbpx 6y ago
  Because of a tiny wealth tax that is already lower than in many other countries? You think a relatively well off individual from a less wealthy country facing many systemic problems for business will pass up the opportunity to migrate to the US because they may need to pay a couple percent if they strike gold?
  - refurb 6y ago
    I mean, isn’t that exactly what Singapore did to attract talent and capital? And it worked? And didn’t one of the Facebook founders give up his US citizenship and move there? Sure it’s one case, but it’s evidence at least some are motivated by taxes. Sure, not every founder will make that choice and not right away, but you could see a slow shift over decades to more tax friendly locations.
    - Tepix 6y ago
      You may be right. A small number of startups may be founded elsewhere. But the large income from a wealth tax likely provides a greater benefit. We've had a wealth tax in the past. It worked. The only reason why it got removed was because the super rich used their vast influence. It's not something that's in the public's best interest.
      - 6y ago

bambax 6y ago

PG's essays have an agenda, which is to defend the rich and the incumbents, disguised as revolutionaries. Because they are young? But they are the same as the robber barons of old.

courtf 6y ago
I enjoy his blog posts, primarily because they show just how your brain can turn to pudding when it's more profitable to be willfully ignorant than otherwise. No one can read his recent obtuse entry and come away thinking his conclusions are supported by the carefully selected input. It's mindless at best, a clumsy, dishonest swipe at the poor at worst. He's just a middleman between wealthy investors and children of privilege, and like all middlemen, desperate to demonstrate some kind of value he adds to the process before the actual players catch on to the pointlessness of having middlemen in the first place. It really becomes sad when a layer of entrenched middlemen starts to actually believe in their own necessity, so I honestly hope he is at least being disingenuous. Just not sure he could be so consistently dense if it weren't genuine.

kgantchev 6y ago

I will add one more thing to your analysis of the possible negative outcomes: the market effects of the government selling the stocks of a company. I suspect these two things will happen on the market: 1. You'd need to have a wealthy enough buyer for the assets - it's going to be kinda hard to convince the wealthy to buy back their own assets. 2. In the absence of sufficiently large market makers, the prices of these assets will certainly tank since these assets will have to be liquidated. So where is the government going to find the buyers of the assets? What are the economic effects? Well, we can look to Switzerland for that answer. It is one of the only countries that have wealth taxes, but it's on the canton level (the equivalent of the state level). It has no national wealth taxes. The difference in wealth tax rates makes a huge impact on the behavior of citizens and the wealth distribution: "According to our baseline estimate, a 1 percentage point drop in the top wealth tax rate raises reported wealth by 43%." https://voxeu.org/article/wealth-taxation-swiss-experience https://voxeu.org/article/wealth-taxation-swiss-experience "The evaluations with both datasets lead to similar estimates: an increase in the wealth tax rate by one tenth of a percent, whether this be at the cantonal or municipal level, reduces the amount of declared wealth by around 3%. This implies that the tax elasticity of wealth is at least twice as large as that of personal income.4 In other words, wealth reacts more sensitively to taxes. Our estimates also exceed the wealth tax elasticities of other studies, which is presumably due to the higher quality of the data available to us (panel data) (Seim 2017; Zoutman 2015)." https://www.ifo.de/DocDL/dice-report-2018-2-bruelhart-schmidheiny.pdf https://www.ifo.de/DocDL/dice-report-2018-2-bruelhart-schmid... In essence, it second article highlights your point: the behavior isn't changed much in terms of productivity because wealthy people simply hire competent accountants to minimize their wealth tax burden with better accounting structures. BTW, we do have a wealth tax in the US in terms of private property. Most states have private property taxes which are a form of wealth tax. The effect of that is that each person has to generate an income high enough to afford the tax or else they will get a lien on their assets.

twic 6y ago
If this company is growing at the rates PG says it is, then the existing investors should be happy to buy more of the stock.

twic 6y ago

What if the founder borrows against their stock to pay the wealth tax? Or uses a sale-and-repurchase agreement? That way, they can use the present value of the stock to pay their taxes, while hanging on to the upside. You need to account for interest in this situation, but that should be less than the growth of the company. PG's story doesn't even hold water in dollar terms.

zeckalpha 6y ago
Or stocks would be expected to issue dividends proportional to the wealth tax.

vekker 6y ago

Simplicity is also often an indicator of truth. I think you completely missed another important point hidden in PG's article, besides the obvious compounding effect, and that is that unrealized gains would be taxed under a wealth tax regime. To simplify with a ridiculous example: suppose I have $0 to my name and I inherit a family art piece from my grandmother that happens to be valued at $2 million. The next year, under a wealth tax regime of 2% above $1 million, I owe $20,000 to the tax man even though I don't have the money in my account. That is why I think a wealth tax is a stupid idea. Why not just impose greater capital gains and dividend taxes above a certain threshold, for example? That's where wealth is realized. Until then, you're talking about taxing "imaginary" wealth. (edit: or more generally speaking, taxation should happen on transactions, not on an assumed wealth "state")

nindalf 6y ago
Let's say you inherited a home in the US valued at $2 million. You would pay 2% of that ($40,000) as property taxes, every year. If you can't afford to pay the tax, you would sell the house and pocket the $2 million. Is this so terrible? Doesn't seem to have stopped people investing in property.
- vekker 6y ago
  Uh, if that's true then yes, that seems really awful, but the market probably also makes it so the real estate prices are adjusted to that taxation regime, because buyers and sellers can take that into account before settling the transaction. With a wealth tax, you can't escape it. You would have to liquidate (parts of) your own company or other illiquid property (which might not even be possible depending on how illiquid it really is) in order to pay a tax. That doesn't seem right to me at all. Again, why would you do that, if there are much better alternatives possible (like I said, higher capital gains taxes as an example). (For context: I'm not from the USA and property taxes are not calculated on a percentage of the value of your property where I live. I'm just using USD in my example because I know there are mostly Americans here.)
- MikeUt 6y ago
  That's buying a new house every 50 years. That's re-building all of the wealth your family spent generations accumulating, every 50 years. That's a direct disincentive to saving money and frugality - the more you save, the bigger your tax gets, while your income stays the same.

timwaagh 6y ago

In the Netherlands we already have wealth tax (capital gains tax, but doesn't care whether you gained or not). It's nothing particularly disruptive. We still have the most wealth inequality in all the world. It might be a bit pointless to tax wealth in addition to capital gains though. You could just raise the former instead.

Bootvis 6y ago
The Netherlands really has most? I honestly don’t believe that without any supporting evidence.
- csomar 6y ago
  A bit surprising, huh? According to this Wikipedia page: https://en.wikipedia.org/wiki/List_of_countries_by_wealth_equality https://en.wikipedia.org/wiki/List_of_countries_by_wealth_eq... The Netherland, indeed, is the worst. It's close to having a minority own everything while everybody else has 0 (a 1.0 coefficient).
  - Bootvis 6y ago
    I’m really surprised. It went up a lot from 2018 and 2019 so I don’t fully trust the result but that might be bias talking.
    - goos 6y ago
      Our friendly Australian economics man made a concise video about it a couple of months ago[1]. [1]: https://www.youtube.com/watch?v=Ot4qdCs54ZE https://www.youtube.com/watch?v=Ot4qdCs54ZE
      - singron 6y ago
        TL;DW Very liberal mortgage policy that encourages very low or negative wealth on the low end, and very old money that remains concentrated despite recent income equality.

ashtonkem 6y ago

One of the best satirical articles on SV I’ve ever read[0] nailed this exact subject perfectly: > Having figured out a font and mastered Altman’s Ratio, your next step is to find something to say. For outsiders this can seem daunting, but it’s very easy, since every one of Silicon Valley’s self-styled radicals thinks exactly the same way. In fact, when you study their output carefully, you’ll find endless variations on the same three ideas: > Free speech is under attack. > A wealth tax is a bad idea. > To beat China, America must not become France. 0 - https://thebaffler.com/salvos/how-to-become-an-intellectual-in-silicon-valley-timms https://thebaffler.com/salvos/how-to-become-an-intellectual-...

jdauriemma 6y ago
That was a fantastic read, thanks for the link!

ameister14 6y ago

Part of your article is a bit confusing to me - when you say this: "Strange. No one is proposing a tax that would apply to all your assets." Are you saying that the wealth tax proposed does not apply to assets and only applies to actual liquid cash holdings?

beervirus 6y ago
That is, of course, exactly what Warren et al. are proposing.
nindalf 6y ago
That wouldn’t apply to all your assets, meaning the tax would be assessed only on wealth above the threshold. PG “simplifies” this in his example by asking you to consider a tax that would have a threshold of 0.
- ameister14 6y ago
  Got it, that makes sense.

boringg 6y ago

Interesting article. I have difficult time grasping how the US government would every implement this with any real effect - even with their demanding reporting requirements. It looks like a colossal effort to gather that information and tax it appropriately. I don't see the IRS staffing up entire high specified units to go after and audit the super rich for wealth tax... the implementation of this would be painful and probably more money would go dark (my glass half full take). Simple example that I use to wrap my head around: What are the implications on equities? If you hold a lot of stock in a hot market you have to pay taxs on that stock this year (?) What would happen if next year the stock went to half of that? Imagine there was a wealth tax during the dot com era. Maybe it would curb speculative markets? I also think your point on first order and second order effects is also interesting. The ramifications of something like this, while appearing to be quite fair and simple is likely to be anything but once implemented. Also - I don't disagree with fixing wealth inequality - but a wealth tax is a fundamental shift in how everyone thinks the government derives money from the population.