Newspapers love the “rich guy doesn’t pay taxes” story, so inevitably it leads to discussion about how we can make rich guy to pay taxes. This results in a realization that rich guy is rich because he owns big company. Which then leads to inevitable discussion about unrealized capital gains.
If rich guy sells his stake in big company, he’ll have to pay taxes on the capital gains. But a clever work around is rich guy using the ownership of big company as collateral to borrow money cheaply, delaying the tax bill.
The proposals address this problem (?) by taxing the rich guy’s unrealized capital gains. So if you own big company worth $1 billion, you owe taxes on that $1 billion paper wealth as though you had sold it.
The proposals going around would only affect those that have a net worth of over $100 million (0.01% of the population) and impose a minimum 25% tax on their capital gains.
It’s pretty easy to see the appeal. I’m as optimistic about my future as the next red blooded American, but realistically I don’t see myself ever falling into this $100 million net worth bucket. And if I did, seems like a good problem?
Others have rightly mentioned that this is how all taxes get introduced. The truth is there isn’t much money taxing the top 0.01%. Proponents of this tax use that as a way to mock those opposed to unrealized capital gains as delusional about their own lot in life. But what that really signals is that such a small tax base doesn’t make sense. For instance, alternative minimum tax. Consider the alternative minimum tax:
Although the AMT was originally enacted to target 155 high-income households, it grew to affect 5.2 million taxpayers each year by 2017, raising $36.2 billion, or 2.4% of federal income tax revenue. The passage of the TCJA for tax year 2018, reduced the affected number to about 0.1% of all taxpayers.
But even if you take at face value that you think the wealthy should be paying more taxes, this proposal still doesn’t make sense.
Let him cook
The poster-boy of most tax the rich proposals is Elon Musk. But let’s think about what this would mean. Here is his net worth over the last ten years.
2014: $11 billion
2017: $20 billion
2020: $24 billion
2021: $151 billion
2022: $220 billion
2023: $146.5 billion
2024: $237 billion
There’s two things certain in life: death and taxes. And we tax the dead. So Elon will have to pay taxes on his wealth eventually. He may be able to set it up into a charitable trust or something to avoid it, but then presumably it’ll be doing some good. In that case if the mission is aligned with government objectives its still a good bargain as the government would get $1 for every $0.25 of foregone revenue.
So its really about timing. But suppose you started taxing his unrealized capital gains in 2014.
Here is a back of the envelope calculation of his net worth and taxes paid. This makes a lot of charitable assumptions, like selling that large of a stake in (mostly) Tesla doesn’t materially impact the stock price, that Musk had enough money to invest in the new companies he started in that time and his involvement in those companies would be exactly the same with his reduced ownership.
If the tax were applied in 2024, the tax bill would be $59.25 billion, or 69% (nice) higher than if you taxed him from 2014.
The government is essentially earning carried interest on Musk’s investments. You can argue that the return from government spending is higher than the growth in Musk’s wealth, but his growth is much higher than the government’s internal cost of borrowing, at least during that time period.
Which makes sense. The richest people are the most productive members of society. The idea that the wealthiest earn their wealth through conspicuous consumption is just wrong. The government eventually gets its pound of flesh from the wealthy, but in the meantime, we should let them cook.