Categories:
Taxation
In his State of the Union address on Tuesday night, President Biden stated:
We have to reward work, not just wealth. Pass my proposal for the billionaire minimum tax. You know, there’s [sic] a thousand billionaires in America. It’s up from about 600 at the beginning of my term.
But no billionaire should be paying a lower tax rate than a schoolteacher or a firefighter. I mean it. Think about it.
I have thought about it. I have four thoughts.
The above is from David R. Henderson, “Taxing Wealth Is Taxing Work,” TaxBytes, Institute for Policy Innovation, February 9, 2023.
Read the piece (it’s not long) to see what my 4 thoughts are.
READER COMMENTS
Mark Barbieri
Feb 10 2023 at 10:27am
I agree with your points and dislike the tax. I’m especially annoyed that they are using a sledgehammer to kill a fly.
When I talk to my left leaning friends, they justify this tax by saying that many billionaires avoid ever paying taxes on their capital gains by borrowing against those assets instead of selling them. Then, when they die, their heirs get a stepped up cost basis. But if that is the reason, why not tax the collateralization of an appreciated asset as a sale? Why not have a narrowly tailored solution to the problem rather than institute a wealth tax.
Fortunately, the billionaire tax will only apply to the extremely wealthy and would never, ever end up being applied to regular working people.
Jose Pablo
Feb 10 2023 at 6:25pm
Fortunately, the billionaire tax will only apply to the extremely wealthy and would never, ever end up being applied to regular working people
In a free economy billionaires should be rewarded (on top of what they have already made), not taxed.
Parasites should be taxed. Politicians seems like a good place to start.
And, by the way, capital gains have already been taxed. Various times.
Imagine a world with no taxes:
You earn $100 spend $50 and invest the other $50 in a company with a 10% pretax ROE, the company reinvest the $5 a year earnings with a similar ROE. So, your earnings will grow by 10% a year. So, after 10 years your shares are valued at $80 (earnings have gone from $5 to $8 and I assume the same valuation multiple)
You sell your shares and get $80 that you can spend on goods and services
Now compare this with a world with a 30% tax on personal income, a 30% corporate taxes and a 7% sales tax but NOT capital gains.
You earn the same $100 but now you bring home just $70. Spend $50 and invest $20 with the same 10% pretax ROE. But now you are reinvesting just $1.4 the first year at the same ROE. So your earnings will grow at 7% in this new world. After the same 10 years your shares are valued at $40 ($4 earnings and the same multiple). Now you spend your $40 to get $37 worth of goods and services after the sale tax.
In this “no capital gains tax world” you still get 46% of what you get in a no taxes whatsoever world. A 54% effective tax on your capital gains
Corollary: you don’t need a tax on capital gains to have an extremely high tax rate on capital gains.
In fact, add a 30% tax on capital gains on the “taxed world” and the effective tax rate on capital gains (compare with a no-taxes world) is an astonishing more than 60% tax rate on your capital gains (when properly considered)
Jose Pablo
Feb 10 2023 at 6:37pm
With the math done right is even worse:
In the “no taxes whatsoever” world your earnings go from $5 to $13 (not $8) after 10 years growing at 10%. So, now your valuation is $130. You sell your shares and consume $130 of goods and services.
In the “not capital gains tax” world you still get $37
A 71.5% effective tax on capital gains. Even without a tax on capital gains!!
BC
Feb 11 2023 at 5:04am
“the billionaire tax…would never, ever end up being applied to regular working people.”
David’s third point is that at least part of the tax will come from working people. The alternative to the billionaire tax is that much of the capital will be invested, which will raise working people’s wages. So, as a result of the tax, working people’s wages will be lower, which means some of the tax is incident on them.
vince
Feb 10 2023 at 11:28am
“But no billionaire should be paying a lower tax rate than a schoolteacher or a firefighter.”
Biden is demagoguing. Average teacher salary is $65k (not bad for summers off, generous Holidays, and pensions like no one else–except other government employees). For a single filer, the marginal tax rate is 22% and the effective rate is 17%.
One way to reward work is to shift to a consumption or national sales tax.
Jose Pablo
Feb 10 2023 at 7:37pm
Cochrane seems to agree
https://www.wsj.com/articles/the-fair-tax-is-the-shock-our-broken-system-needs-income-consumption-estate-reform-economy-11675372440
Jose Pablo
Feb 10 2023 at 6:02pm
But no billionaire should be paying a lower tax rate than a schoolteacher or a firefighter. I mean it. Think about it.
What is Biden talking about? the top 1% pays 40% of all federal income taxes.
And why should them? I mean in a free market you become a billionaire because people freely by the products you produce (getting a huge consumer surplus while doing so, by the way). Why should you tax more the people contributing more to our wellbeing? To redistribute the money to people not contributing at all? (which is the reason why they need to be in the receiving end of this distribution).
This is a definition of fair that is far from being universal as Biden pretends
vince
Feb 11 2023 at 11:23am
“the top 1% pays 40% of all federal income taxes.”
How bad that is depends on how you look at it. The top 1% obtain about 20% of AGI. AGI doesn’t include unrealized gains on appreciating assets, which may continue to appreciate and escape taxation when passed to heirs, at which time the cost gets adjusted to market value and all that appreciation escapes tax.
I intentionally didn’t say the top 1% earned their AGI. Investment income isn’t considered earnings.
Peter Gerdes
Feb 10 2023 at 10:14pm
I find this framing pretty odd, especially from an economics blog.
The ultimate goal is to increase overall societal utility (how good is life for people). To do that we need to both incentivize people to do things that benefit everyone and allocate resources to alleviate suffering as a result of insufficient resources (since utility is sublinear in money this csn increase overall utility).
The question of how much we should tax billionaires should be decided by balancing the harms from reducing the incentives to accomplish more. Given that billionaires have more money than they or any descendents they’ll know can ever directly consume it seems likely that beyond some point the psychological motives of being seen as successful come to dominate. Indeed, my understanding is that’s also what we tend to see in the data (increasing the marginal tax rate at the high end does little to reduce the amount the very rich work).
john hare
Feb 11 2023 at 2:17am
Part of that incentive should be that you don’t produce for anyone and you get nothing from anyone. There are some that need and deserve help. There are far more that live off of the system by creating their own suffering. Rewarding that is wrong.
Other people deciding how much to take from the productive is a problem. The rich may work just as has, but create less as their resources to work with are taken away. Plus how much of their work becomes stemming the red ink from those increased taxes.
Jose Pablo
Feb 11 2023 at 8:32am
“The ultimate goal is to increase overall societal utility”
That is simply impossible. Having a “knows it all” philosopher king pushing “utility” (which is a creation of the mind that does not exist in any meaningful way in “reality”) around is not even desirable.
Be aware that the end goal of every dictator that has been and will be, has always been “to increase the utility of his people”. Listen to any speech from Mao to Fidel to Chavez to Putin. They all want the same you want.
Sure you believe your methods are the right ones. But so did (do) they!
I wouldn’t be very comfortable being in agreement with this sort of guys.
Trying to vaccinate you against this “using utility as an excuse to pursue my favorite policies”, I would remind you of De Jasay brilliant statement on this topic:
“The long and short of it is that objective and procedurally defined interpersonal comparisons of utility… are merely a roundabout route all the way back to the irreducible arbitrariness to be exercised by authority… [T]he two statements “the state found that increasing group P’s utility and decreasing that of group R would result in a net increase of utility,” and “the state chose to favor group P over group R” are descriptions of the same reality.”
or
“Nobody can define values for others; only the consent of all individuals is acceptable. In this approach, the arbitrary aggregation of individual utility into some concept of social welfare can only produce an arbitrarily defined “public interest”
Sure you have your own arbitrariness regarding other people “utility”. But why should the rest of us care about your arbitrariness?.
Unless, obviously, you want to impose it upon us … as your “friends” did/do.
Vivian Darkbloom
Feb 11 2023 at 2:44am
“Given that billionaires have more money than they or any descendents they’ll know can ever directly consume…”
What is that wealth doing if not supporting current consumption by those billionaires? People almost always forget that that money deposited in bank accounts or invested in all sorts of businesses indirectly benefits the rest of the population in the form of more job opportunities, more funds and lower interest rates, etc, etc, that allow greater current consumption for those “less fortunate”.
What it boils down to, I think, is “who is better at allocating that capital to productive use—those billionaires or government? That’s the real economic test of “overall societal utility”.
In this respect, I’m reminded of an insightful post by Steven Landsburg regarding Ebenezer Scrooge:
https://slate.com/human-interest/2004/12/what-i-love-about-scrooge.html
vince
Feb 11 2023 at 11:36am
“… money deposited in bank accounts or invested in all sorts of businesses indirectly benefits the rest of the population in the form of more job opportunities, more funds and lower interest rates, etc, etc, that allow greater current consumption for those “less fortunate”.”
Haven’t the benefits of trickle down theory been shown to be overstated?
It doesn’t help when people see and hear stories of great wealth spent, many would say, ridiculously and frivolously. The problem, of course, is the government spends it even more ridiculously and frivolously.
Jose Pablo
Feb 12 2023 at 7:51am
Landsburg’s post is just brilliant!
Thanks Vivian
Jose Pablo
Feb 11 2023 at 8:36am
“Taxing Wealth Is Taxing Work,”
Well I would say it is precisely the other way around.
“Taxing work is taxing wealth” since wealth is created out of work “saved” so it was already taxed when first “earned”.
Actually, I think I have borrowed this idea from you, David
vince
Feb 11 2023 at 11:16am
Sure, you can say taxing work is taxing wealth. One way to define income is the increase in wealth that hasn’t been consumed within the year. But at the lower end where most income has been consumed, that increase in wealth is very low. IOW, it may be a highly regressive wealth tax.
Philo
Feb 11 2023 at 2:45pm
You write: “Occasionally, for example, governments heavily subsidize consumers to buy particular products. . . . But the solution is not to tax those businesses more; it’s to end the subsidies.” But, actually, nobody is proposing to impose especially heavy taxes on the practitioners of subsidized businesses: that would at least partially undo the (desired) effect of the subsidies. The U.S. government seems to consider that insofar as profits are merited, it is for satisfying the wants of consumers *as corrected by government subsidies*; but that such profits are only *partly* merited, and should be partly confiscated by the government, through taxes.
Joseph Smith
Feb 13 2023 at 3:31pm
David, thank you for this short but excellent summary of a topic that is often misunderstood or deliberately ignored. I found some of the additional data available at the links within the article(s) to be very noteworthy.
This link https://home.treasury.gov/policy-issues/tax-policy/office-of-tax-analysis
appeared in Biden’s Billionaire Tax at https://www.cato.org/blog/bidens-billionaire-tax
I found the data—pdf files and excel sheets prepared by the US Treasury on various items to be very revealing and easy to understand.
This is the first pdf /table you can click on.
https://home.treasury.gov/system/files/131/Overview-Distributional-Analysis-01202023.pdf
In figure2, Transfer income appears. It is not defined in Figure 2, but appears to be defined in a separate pdf—Summary of Treasury’s Distribution Methodology. That document does not list EITC (Earned Income Tax Credit as a Transfer payment. The Treasury reports may be understating the amount of cash received from Transfer payments.
I suggest that your readers also look at two other pdfs:
https://home.treasury.gov/system/files/131/Distribution-of-Tax-Burden-Current-Law-2023.pdf
https://home.treasury.gov/system/files/131/Distribution-of-Income-by-Source-2023.pdf
The data is very revealing.
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