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"Wealth Tax" vs. "Income Tax"


DonRocks

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I could, quite literally, spend every working hour for the rest of my life writing both pros and cons to the notion of a "Wealth Tax" versus an "Income Tax" (and most certainly, there are many pros and cons to both).

But instead of doing that, I thought I'd let others do it.

Please frame all arguments in terms of economics, sociology, humanity, etc., rather than partisan politics: This website officially doesn't care if you self-identify as a Republican, a Democrat, a Totemist, or a Wiccan, i.e., treat the issue as an issue; and not as a party line.

I'll start with a question that popped into mind: How can you find out how much people are worth? Who knows how many people have a billion dollars stuffed into a mattress? (That is allegory, of course, but you get the point - and that is but one legitimate question of about a million legitimate questions.)

"It's Time for the Wealthy To Watch Out" by Christine Emba on washingtonpost.com

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Generally I agree that people who can afford to should pay more tax, whether it be wealth or income tax.  Perhaps the time has come for a wealth tax in addition to income tax because many wealthy people pay no income tax.  On the other hand, I believe in small government and I don’t believe in wealth redistribution.  

Setting the tax rate to maximize revenue is an economic issue - using tax to redistribute wealth is a political issue.

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I tend to be pretty pragmatic.  Assessing wealth is simply too hard to do - as you alluded to in your opening question.  Rather, I firmly believe that the capital gains tax rate - as a concept - should not exist.  If it's new money to you, you should owe taxes on it.  Wealth tends to dissipate absent advantaged treatment (or so I believe), so as long as you equally tax the monetary benefits of wealth, you're creating an equal system.  

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50 minutes ago, DonRocks said:

What are your thoughts on estate taxes?

I firmly believe one is entitled to earn whatever their individual talents allow.  That being said, I don't believe the fruits of my parents' labors are mine.  Therefore, it's new money to me.  Tax it.

Again, I believe in pragmatism, so it makes sense to allow nominal transfers to be tax free.  And I'm ok with a debate over what a nominal transfer is: $100k?  $500k?  $1m? $5m?

The key is that treating the individual or single generation family as a unit makes it self-limiting.  It's Rousseau meets Locke.  Otherwise you begin to validate Paris Hilton's existence and that is a slippery slope indeed.

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8 hours ago, zgast said:

I firmly believe one is entitled to earn whatever their individual talents allow.  

1- I would love to think that the majority of wealth (aside from inherited) is accumulated via “individual talent”.  However,  I think that, instead, quite a bit of it is “earned” thru the ability to put other peoples’ talent (& general labor) to work for individual benefit.

2- Is this belief absolute or is there room for it to be relative to how these “earnings” affect the rest of the pack?

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I believe that lower capital gains tax rates should be eliminated and a limit on how much money should pass free of inheritance taxes (say $1M per individual) and no avoidance of taxes based solely on trust ownership of assets.  And in counter to an argument that estate money has already been taxed, it's mostly not true in large estates.  The money was invested, wealth grew untaxed because there was no sale and there was dividend reinvestment and splits, etc.,, and then rolls over to the next generation at the current purchase price and not the original purchase price.  So Granddad's $1k purchase of a stock that has grown to $100k moves to the next generation with no tax paid on that $99k gain.  

Interesting article on distribution of wealth worldwide:

"Are 26 Billionaires Worth More than Half the Planet? The Debate, Explained." by Dylan Matthews on vox.com

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1 hour ago, Steve R. said:

1- I would love to think that the majority of wealth (aside from inherited) is accumulated via “individual talent”.  However,  I think that, instead, quite a bit of it is “earned” thru the ability to put other peoples’ talent (& general labor) to work for individual benefit.

2- Is this belief absolute or is there room for it to be relative to how these “earnings” affect the rest of the pack?

I think that marshaling other people's talents is an individual talent.  Some (most) people don't want to be entrepreneurs or take risk so they want to work for someone who takes more risk to earn more reward.  If it all dissipates when you die, it's inherently self-limiting.

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Let me touch on the political side, though not from a partisan perspective.  Existing tax laws are inherently political.  I have a fair understanding of the tax advantages for real estate and commercial real estate.  The latest tax laws provided even more benefits.  They were passed for political reasons.

Roughly some of it works as follows:

You can build a building for roughly 90% or so borrowed money.

You get depreciation on that building.  (my old accounting lessons tell me that depreciation is a reasonable and appropriate deduction).  If you borrow 90% of the cost of the development you still get 100% of depreciation.  The lender doesn't get it.  Then there are increasingly more favorable tax rulings for accelerating that depreciation. 

Bingo!!!   You have tax write offs up the kazoo.  There are many tax write offs that are both favorable and favor the very wealthy.  An amazing amount.  It has always struck me as "amazing" that you can get darned great write offs with borrowed money.  On one basis borrowing money is one of the best investments one can make.

Anyway;  all these discussions about taxing income or established wealth, whether to tax more or less, who to tax, where and how you are going to spend the money;  who decides it and on what are fortunately discussions above my pay scale.  

Politically all this is in the discussion phase.  It is crazy preliminary.  Moreover based on the Presidential election of 2016 I was astonished and stupified at the results and never would have imagined them.  I have no idea where these tax ideas are going to go.   Regardless how they play out is inherently political.  if something does go into play that is dramatically different from the way things are done now...I have no idea how it will play out.

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1 minute ago, Al Dente said:

I think there's something deeply wrong with an economic system that creates billionaires. How can any one citizen be worth $140,000,000,000? 

Because that one citizen developed something that fundamentally changed commerce (or infrastructure, or finance, or or or).

This is a slippery slope that inevitably ends in these statements- no one person should be worth (insert arbitrary number here), or make (insert another arbitrary number) - and less innovation across the board.

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I think a healthy and large middle class that is able to buy goods at places other than dollar general, would promote our economy and American invention and American goods, which in itself breeds more invention and jobs.  I think paying our teachers, providing our children with tools for innovation and learning far beyond what we have been doing is essential, and building infrastructure, and addressing fundamental flaws in our infrastructure- such as solutions to rising waters, roads, trains, sewers, water treatment, have been overlooked and are fundamentals we absolutely have to invest in.  Those things require large investment, so I think to provide some of the essentials that we as a country are going to need to stay competitive in a global world, we are going to have to tax people differently than we currently are.  I think the estate tax brings in so little, who cares.  I think being able to structure your wealth in ways to avoid paying income taxes exacerbates obvious problems.  That is just my two cents.

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58 minutes ago, Keithstg said:

Because that one citizen developed something that fundamentally changed commerce (or infrastructure, or finance, or or or).

That may be so, but at what expense? What is the cost of environmental damage? What's the cost of underpaid employees receiving gov't benefits? What's the cost to future generations? 

I read a book by Umair Haque called "The New Capitalist Manifesto". I think some of what he writes is overly simplistic, but what really struck me is how he describes costs shifting to other people and groups. That $3 hamberder from McDonald's should cost much more than $3.

I'm sorry, but the old Horatio Alger narrative is dead-- or should be, anyway. 

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4 hours ago, Al Dente said:

That may be so, but at what expense? What is the cost of environmental damage? What's the cost of underpaid employees receiving gov't benefits? What's the cost to future generations? 

I read a book by Umair Haque called "The New Capitalist Manifesto". I think some of what he writes is overly simplistic, but what really struck me is how he describes costs shifting to other people and groups. That $3 hamberder from McDonald's should cost much more than $3.

I'm sorry, but the old Horatio Alger narrative is dead-- or should be, anyway. 

Haque’s work is indeed overly simplistic, which is why critics (academic and non) have had a field day with it in general, and with the New Capitalist Manifesto in specific.

I heard him attempt to interview an actual business person in person at SX - unimpressive. Half the crowd or more was exasperated and walked out.

Re: Alger, I think hard work, courage, determination and honesty are useful narratives, regardless of politics.

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3 hours ago, DonRocks said:

This is a common claim, but I'm not convinced it's true.

It’s easy to not be convinced, but consider the fact that nearly every innovation or groundbreaking technology in our lifetime came principally from one place, and was furthered by that same place's capital structure and financial markets. Not an accident.

Taxes, wealth, etc are nuanced topics and in general I sum my thoughts up thusly - I support programs that provide for equality of opportunity, not equality of outcome. We clearly have a long way to go re: equality of opportunity and should do more via legislation and taxes where appropriate. I’m also intrigued with the idea of universal basic income and it’s applicability in the U.S.

So much of this issue is dominated by specious and false claims on both sides that it’s hard to separate wheat from chaff.

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5 hours ago, Keithstg said:

This is a slippery slope that inevitably ends in [...] less innovation across the board.

4 hours ago, DonRocks said:

This is a common claim, but I'm not convinced it's true.

3 hours ago, Keithstg said:

It’s easy to not be convinced, but consider the fact that nearly every innovation or groundbreaking technology in our lifetime came principally from one place, and was furthered by that same place's capital structure and financial markets. Not an accident.

Before, you said "innovation"; now, you're adding "technology" into the mix - the two terms are only marginally related. If you're going to claim a tautology, I'd ask you to (please?) carefully review your words.

A conjecture can be disproved with a single counterexample - Here's one (both composer (Prokofiev), and performer (Richter), with the final movement of the 7th Piano Sonata (1942, Soviet Union)).

(As an aside, Richter had been formally studying piano for *five years* when he performed the world premier of this piece. Five years!)

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1 hour ago, DonRocks said:

Before, you said "innovation"; now, you're adding "technology" into the mix - the two terms are only marginally related. If you're going to claim a tautology, I'd ask you to (please?) carefully review your words.

Uh, ok. So much for typing away on a ski lift. Would you dispute that "technological innovation" has been the greatest generator of wealth over the course of our lifetimes, and that "technological innovation" has been, to be charitable, disproportionately housed in one nation, and furthered through the same nation's capital markets?

I suppose the musical example you link to above is an example of innovation, and that's great - I honestly have no knowledge of classical music. Of course, not the kind of innovation we are talking about, and Russia's economy is down to basically  being a Citgo with a gun store attached to it. 

Also, strikes me that the discussion has moved from wealth tax vs. income tax and if that's not useful, my bad. In sum for me, income tax - sure. I'd even pay more than I currently do. Wealth tax - no thanks. Prudent estate planning will allow much, if not all, of the estate tax to be avoided, and other "wealth tax" methods seem to serve as campaign rhetoric (for and against) as opposed to actionable policy principles.

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13 minutes ago, Keithstg said:

Uh, ok. So much for typing away on a ski lift.

That's forgivable. :)

Honestly, if we're going to have a serious conversation, I'm going to need you to go back and define your terms ("wealth," for example). It's probably best if I moderate this discussion, rather than nitpick and parse every single word - I'm here to learn; not to be a douche, and I don't want to get sucked into a debate.

PS - "Technological innovation" is probably going to be responsible for destroying the human race. 🙁

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7 hours ago, Al Dente said:

That $3 hamberder from McDonald's should cost much more than $3.

It does! 😀  To say nothing of the environmental costs of producing beef.....

Big Mac Index

7 hours ago, Al Dente said:

I think there's something deeply wrong with an economic system that creates billionaires. How can any one citizen be worth $140,000,000,000? 

That problem will be alleviated soon. He's getting divorced........

6 hours ago, Keithstg said:

. I’m also intrigued with the idea of universal basic income and it’s applicability in the U.S.

So much of this issue is dominated by specious and false claims on both sides that it’s hard to separate wheat from chaff.

Finland, AFAIK the only country that has so far experimented with it, is discontinuing,

Universal Basic Income

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Our laws show a poor or at least incomplete understanding of what spurs innovation and creativity. In the field of music this is especially glaring. Is there anybody other than lawmakers and judges who really thinks what made Louis Armstrong creative, for example, was the prospect of his family holding monopoly on his works for 70 years after his death?

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15 hours ago, MC Horoscope said:

Our laws show a poor or at least incomplete understanding of what spurs innovation and creativity. In the field of music this is especially glaring. Is there anybody other than lawmakers and judges who really thinks what made Louis Armstrong creative, for example, was the prospect of his family holding monopoly on his works for 70 years after his death?

I don't think that's what lawmakers and judges believe. That's more in the domain of IP law than tax policy.  Creativity encompasses a broad spectrum. 

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7 hours ago, DonRocks said:

Bill Gates on Taxing the Rich on cnbc.com:

  • Gates says tax policies should focus on taxing wealth rather than income since the super rich tend to have more of their wealth tied up in assets instead of income.

Reading what he actually said, I got a smile when he focused on the same two things I suggested!  I would point out, though, that 'hedge fund guys' can't really avoid paying income tax rates on their earnings - that's really the purview of private equity and commercial real estate, mostly because few holdings at hedge funds last a year and no short position qualifies for capital gains at all.

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9 hours ago, DonRocks said:

Bill Gates on Taxing the Rich on cnbc.com:

  • Gates says tax policies should focus on taxing wealth rather than income since the super rich tend to have more of their wealth tied up in assets instead of income.

Gates "sort of understands this".   Being old, recalling when microsoft came out, when pc's started to take off, (actually having leased a lot of the early computer stores in the early to mid 80's, having bought some microsoft way back and having followed microsoft, I believe a share of msn, issued in 1986 was split and exploded to 288 shares by '99 ( a mere 13 years) and the face value of a share of msn in '99 was a good bit higher than its issue price (maybe 2-3 times).     Gates made beaucoup bucks.  And then when he sold shares the tax was on a capital gains, favorable basis.   that man made $$$ and his accumulated worth is outta this world.  

1 hour ago, zgast said:

Reading what he actually said, I got a smile when he focused on the same two things I suggested!  I would point out, though, that 'hedge fund guys' can't really avoid paying income tax rates on their earnings - that's really the purview of private equity and commercial real estate, mostly because few holdings at hedge funds last a year and no short position qualifies for capital gains at all.

Considering Gates above, if you consider ownership as a form of private equity...then Gates would be included in that group.

Frankly I think the reality gap between the current suggestions and ideas from the progressive wing of the Dem party and real changes are vast indeed.  But time will tell on this and so many other proposals.  

I suppose to be fair different proposals from the Progressive wing should each stand on their own.  As I looked at the vaguely defined "green" proposals including high speed trains across the US, I was stunned at its lack of reality.  After I left Commercial Real Estate I worked for a year as a "consultant" for a transit engineering firm that dealt with rail etc.  It was interesting.  I learned a lot.  At the time, opportunities for development at transit stops  (the model in the US being Arlington, VA along the Orange Silver line) was highly relevant and my experience with commercial real estate and development was of value for the transit consultants.   In any case the complexities and expenses with building rail in the US are so complex, and expensive that to build rail in the US as in other nations would require a sea change of social and political worlds...such that it is virtually impossible for me to imagine it taking place.  Currently the governor of California just severely cut back funds on the proposed high speed train between LA and San Fran.  Of note between its original planning stage and today costs have ballooned from $25-75 billion.   Per the most recent political announcement by California's governor--it aint going to happen. 

Between these currently popular proposals and current reality...there are thousands of miles and thousands of hurdles.   but heck I guess they are interesting to discuss.

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41 minutes ago, Count Bobulescu said:

I've seen use of the stat that the top 1% pay 40% of all taxes. What I haven't seen, even allowing that it has been reduced to the legal minimum, is what % of all income the top 1% earn. Plus, that 40% presumably includes more than just income tax. I hope the poor are not also paying wealth taxes.

Top 1% earn about 20% of national income.  Bottom 50% earn about 13%.  That is essentially reversed from 1980.  Source: Chicago Tribune

The change from 40 years ago in both wealth and incomes is astonishing.  Middle class angst isn't just a mirage - median incomes are stagnating relative to inflation.  Averages keep moving up, up, up.

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