
Modelling a Wealth Tax: A Response to Paul Graham - poxwole
https://gist.github.com/konsbn/6bc484d58476c5c36169c7ab4ad49976
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refurb
Some feedback for the author - including statements like "Or how not to be
stupid", "half of your wealth will go to the big bad government", "moronically
ignorant of basic economics" and "apocalypse hasn't happened" really detracts
from their arguments and makes it seem like more of an angry screed rather
than a well thought out argument.

It would have been a fine article without the childish attacks.

~~~
actuator
I personally think even with the language it's a fine post. At least, even If
I don't agree with the language, I would critique the content.

He does a fine job in rebutting that PG post which made no sense and painted a
very bleak picture of wealth tax. IMO this shouldn't have been flagged.

~~~
andreareina
A fine rebuttal would acknowledge that a charitable reading of pg's original
post includes the effect of growth---you're still left with the same fraction
of wealth if not for the tax. It's not even a stretch to say that that's what
pg originally meant, the phrasing in [1] is pretty careful and specific. FTA's
thesis is entirely predicated on an error that arguably isn't there. It would
do much better by acknowledging that yes, even under optimistic growth
conditions the tax will take a big bite out of the final wealth, but that even
under conservative estimates of growth the hypothetical founder will still be
ahead. This is a facile "well-actually".

[1]
[http://web.archive.org/web/20200818133017/http://paulgraham....](http://web.archive.org/web/20200818133017/http://paulgraham.com/wtax.html)

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gnicholas
It looks like this model doesn't account for the fact that when you pay a
wealth tax, you have to liquidate cash — and doing so will generally trigger
taxable gains (which could be taxed at close to 50%, between state and federal
taxes).

As a result, you have to gross up the cash liquidation amount to cover the
income taxes that will be owed, and this can substantially increase the amount
you need to liquidate. For example, if you need $100,000 to pay for your
wealth tax, you might need to liquidate $181,000 to end up with this amount
after taxes (assuming a 45% combined rate). You can get lower rates with
qualified dividends or capital gains, but I imagine if there is the political
will to enact a wealth tax, the capital gains rates will rise up to be the
same as wage rates.

As you can see, accounting for income taxes can nearly double the required
liquidation. Perhaps I missed it, but it would be interesting to see how this
affects the model.

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andreareina
I think pg's original post was a bit tone-deaf, but personal attacks are poor
form. I'd also say that the good-faith interpretation of the argument does in
fact take growth into account -- a 1% wealth tax would leave you with ~55% of
the wealth you would have had _if not for the tax_.

(BTW it seems there've been some changes made to pg's post[1][2])

[1]
[http://web.archive.org/web/20200818133017/http://paulgraham....](http://web.archive.org/web/20200818133017/http://paulgraham.com/wtax.html)

[2] [http://paulgraham.com/wtax.html](http://paulgraham.com/wtax.html)

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coldtea
> _I recently came across the article by Paul Graham on modelling a wealth
> tax. Where with simple mathematics of Geometric progression he makes the
> case against wealth tax because in about 60 years nearly half of your wealth
> will go to the big bad government._

Well, that would be a red flag in PG's argument already. Who said it's bad for
your wealth to go to the govenment (assuming you still have wealth to spare
and take care of all your needs and even your grandchildren up to 3-4
generations, as this is about big wealth)?

In a normal country, the governmnet is not some enemy, it's the public pool of
resources and planning public goods/policy/infrastructure/protection/etc for a
country.

If on the other hand live somewhere where the government is an enemy, then you
have bigger problems than part of your wealth going to them, and you should
fix those first, not the tax.

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lliamander
> Well, that would be a red flag in PG's argument already. Who said it's bad
> for your wealth to go to the govenment

PG didn't say it was bad. That was a motive imputed erroneously by this
author. He simply provided a model of how much it would cost, and what people
might do in response to that cost.

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chacham15
To be fair, there isnt much content to this post other than an inflammatory
remark ("he is almost moronically ignorant of basic economics") and some
graphs which can be summarized by "tax rate is offset by growth rate". What
would be more useful would be some discussion of the research about how this
has played out in France, Switzerland, etc.

~~~
pjschlic
One thing I haven't seen in the discussion is the effect of the tax on the
distribution of outcomes.

I'm not sure what the latest numbers are, but if 90% of startups are near 0
return for founders, and 1% are the home run swings which made it worth
starting the company to begin with - then when do proposals affect the
expected value for starting a company. This notebook doesn't show anything
other than 'if you were going to make a bunch, you'll still have more than
zero' which isn't useful.

Startups are in the land of "fat tails" \- so talking about a policy saying
it's fine for for most people since the people at the extreme in the fat tail
are doing fine seems to be thinking under-critically.

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aveni
Isn't this analysis orthogonal to pg's claim that the wealth tax is taking
away X% of your startup equity?

Yes, if your startup is growing by 10% YoY your wealth is still going up even
under the tax. However instead of you owning A% at the end, you only own <<A%
because you've been selling equity every year to pay the government. Just look
at your first plot between 1% and 3% tax. A delta of 2% tax results in losing
70% of your value.

Your post seems to suggest the idea "Since you're making so much anyway it's
ok to take away most of it." Though of course there is a balance, I think this
kind of trade would greatly reduce risk-taking and entrepreneurship.

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compumike
Hypothetically, let's suppose I wholly own a small business. Maybe it's a
SaaS. Maybe it's a restaurant. Maybe it's a plumbing contracting company.
Doesn't matter.

Let's say the business generates $1M/year in free cash flows.

Give me a number: What's my net worth? How much wealth tax should I be asked
to pay?

(With income tax it's relatively straightforward: you're taxing actual
transfers of cash or cash-equivalents from account A to account B that
happened in time period Y. If the societal goal is to achieve more progressive
redistribution of wealth, isn't it much simpler to just modify the income tax
brackets and rates?)

~~~
handmodel
I see it as similar to the land value tax versus property tax. Property taxes
(as I would argue) aren't ideal because it discourages people from making
improvement to their land. It is good (both for the owner and society) if they
improve it and it is bad (both for the owner and society) if they let it stay
empty or rot. Similarly, capital gains taxes discourage people from building
new companies and investing in new ideas. A wealth tax would, instead,
discourage people from hoarding their money in investments that don't produce
new value.

I do think the implementation is difficult with privately owned businesses. I
agree - it seems very difficult to do so but not impossible to do if we figure
that the wealth tax would only be implemented for those individuals holding
stakes in companies worth more than 10M (or whatever)

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scythe
The analysis here compares among wealth taxes between 1% and 5%. It does _not_
include models with wealth taxes below 1%; in particular 0% is not present.
Also, it would have been nice to see a normalized comparison of the ratios
between predicted long-term wealth levels at different growth rates -- this
can be weakly inferred visually from the graphs, but all I can say is "vaguely
similar".

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handmodel
We always hear about lowering capital gains tax because it stops people from
investing in new ideas. I'm sympathetic to this to a degree - and that's why a
wealth tax (if implementable) is superior. Instead of being taxed at what you
end up with you are taxed with what you start with. This would (as long as you
can't get around it) encourage people to actually invest in new ideas instead
of sitting on their money.

The idea that PG "modeled" a wealth tax without factoring in that investments
grow (not just due to increasing their success - but many investments grow
slowly and surely due to boring factors like inflation and population growth)
is intentionally obfuscating the truth.

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ACow_Adonis
I would also note (generally I'm a fan of PG's writing, but as an economist
this one was pretty juvenile), while PG implemented a basic cost calculation
on wealth with an assumption of no growth, aside from not including
growth/returns on his wealth, nowhere did he model the benefits received,
either to himself or others, from the revenue apportioned from the taxation.

That's why its called cost/BENEFIT analysis...

~~~
dantheman
I pay far more in taxes than the benefits in receive; clearly that is the case
for most that are paying; if you factor in the debt and inflation it's even
worse.

~~~
tomrod
If in the US:

Roads

Available utilities due to regulatory planning with normally private companies

Your food supply is generally trustworthy

Social security.

Social safety net hospitals.

Generally clean and monitored environment to avoid carcinogens (less more
recently).

Well defended.

I wonder if taxes are so high that anyone's income taxes, capital gains taxes,
and consumption taxes are higher than the mulitipicative benefits from the
above.

~~~
dantheman
Sure great, you've described a tiny percent of the US taxes.

There are some assumptions built it to this - that if the US government didn't
do it, it wouldn't get done.

But some areas:

1\. Extremely high housing costs due to zoning restrictions and government
subsidized mortgages. 2\. Extremely high medical costs due to regulation and
central planning 3\. Extremely high educational costs due to subsidized
student loans. 4\. Over 1 million people in jail 5\. Involved in military
actions and destabilizing actions around the world. 6\. The war on drugs

But even with that, based on the things above - is there any point at which
taxes are too high? Why not make them 100% and then the government can provide
food, shelter, and spending money?

~~~
tomrod
The things I described are not a tiny percent of taxes. You should revisit
your assertion here.

[https://en.wikipedia.org/wiki/United_States_federal_budget#/...](https://en.wikipedia.org/wiki/United_States_federal_budget#/media/File:US_Federal_Budget_Comparison_2016_vs._2015.png)

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wyldfire
Note that the ipy notebook is not rendered on mobile AFAICT. Switch to
"desktop site" if you're having trouble.

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hartator
Isn’t 2% just the inflation? So back to the Paul’s model if you take account
of it.

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cosmotic
This all assumes the tax payer isn't generating any additional income, which I
think is a big omission.

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cosmotic
The original PG post deserved to a rebuttal but I think this falls short.

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rich_sasha
This post is also missing so much. It's almost worse than PG's one, which
didn't really pretend to be an in-depth analysis. Some starting points:

\- Taxes are guaranteed, but growth isn't. It also doesn't come for free, it
takes work. You can't just say "hey S&P returned 10% last year, I'll assume
that for a given". Also wealth is often non-diversifiable - Elon Musk's or
Jeff Bezos' wealth are tied to their companies. They could feasibly take a 50%
tumble in a year (can't see how but it's totally possible). Of course these
two will still be very rich even then, but what about 'minor' millionaires?

\- People with these levels of wealth already pay, or should pay, high taxes
on other things: CGT, VAT, income tax, corporation tax, land / real estate
taxes. If they don't, then this is the real problem, you shouldn't fix it by
just adding another patch on top of a stack of leaky patches. Already, in all
developed economies I know of, a huge chunk of income tax comes from the top
earners.

\- And further to that, taxation isn't simply about maximal resource
extraction from a productive population. Tax is a societal commitment to fund
things we all care about. It is generally widely understood and accepted that
wealthier people pay more, because the poor can't. But when the rhetoric
becomes "let's extract as much as we can from the rich, look here's a notebook
that shows we can", I'm not surprised people start looking at tax avoidance.
As the rich person, you become dissociated from the society - they are only
there to shear you, so why should you make an effort to give back?

\- And it's not inherently wrong to be rich, also. Sure, some people are rich
and abuse other people, possibly with some strong ties between one and the
other. But the solution isn't a punitive tax. In a way, that makes it worse -
makes it feel like you paid your dues and now you're really above the law.

\- The point of wealth is that it should be productive. So the business of
being rich is to have money, have it return an interest higher than inflation
(on which you already pay CGT usually), and consuming the excess. It's not
enough for the tax to be below average growth rates.

Perhaps I should explain, that I write this from (a) outside US where there
doesn't seem to be such a toxic inequality in the society (and not simply
because of wealth taxes...), and (b) I'm not rich, but hey, I'm working hard
to maybe be there one day. I don't want my hard work to then turn around on
someone's misguided notebook.

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sam_lowry_
Why is that flagged?

~~~
maxharris
Read the other comments here. The author is driving people away with messages
like "how to not be stupid", and misses the mark with his assumptions.

Example: he doesn't take into account the fact that investments can and _do_
go down in value, and you have to sell to pay taxes, even when the value
drops.

