After being one of the top-rated commenters on HN for some years, I have not commented in a long while. For what it is worth, here is my two cents on a topic - a wealth tax - that may seem on the surface to be benign but that is in fact just the opposite.
Silicon Valley was founded in a spirit of freedom and flexibility but that spirit is clearly and dangerously on the wane insofar as the political environment surrounding the Valley is concerned.
By the 1970s, American enterprise was in decline, a victim of the "big government/big business/big labor" trends glamorized by establishment types of that day. What this did was take away choice and flexibility.
Tech changed all that and it did so from the heart of Silicon Valley. Tech arose from a spirit of freedom and flexibility. Founders would get an idea and would have countless ways of experimenting with what they could do with it with the aim of building a venture. Many of the most wildly successful ventures came out of nowhere. No central committee could have planned for them. No overlords of big business could have had the imagination or risk-taking fortitude to push them at the expense of their established cash cows of that day. No union could comfortably impose rigid work rules onto such amorphous ventures (the first thing Intel workers did even after the company succeeded was to reject unionization). No minimum wage or overtime rules applied. Benefits packages of the type widely deployed in the analog-based large businesses of that day were unheard of.
Regulators and taxers of that era continually tried to realize their vision of locking people into situations by which they would have guaranteed security, ossifying the mature businesses over which they had control, but tech simply outran them through innovation. And, in time, upended them by disrupting their industries through innovation and risk-taking.
Today, the spirit of Silicon Valley has changed and is yielding to a belief system by which the overlords of politics believe they can dictate outcomes that will give people locked-in security forever. Want to do something as an independent to earn a livelihood? Sorry, AB5 forbids that and will penalize the hell out of any venture that seeks to use fleelancing and flexibility as a foundation for innovation and growth. Your choice to act an an independent is frozen out by dictates that, if you act at all to make a living, you must do it within rigid systems that guarantee minimum compensation, regulate overtime, prescribe minimum guaranteed benefits, and the like. If this kills opportunities, no problem: there will be other rules that guarantee basic income, limit the rent you have to pay, and otherwise regulate society such that people are guaranteed a risk-free existence courtesy of decrees enacted by political proclamation.
This new mindset is precisely the one of the 1970s-era leaders who managed to choke off innovation and growth in old-line businesses and gave a massive opening to tech innovators, particularly those in Silicon Valley.
pg's modeling of the effects of a wealth tax is spot on. And it confirms that such a tax is an innovation-killing idea that would destroy the spirit of Silicon Valley. Of course, tech innovation will not cease. It will just move elsewhere to escape the tax. Europe in the 1990s had a couple of dozen or more countries that imposed wealth taxes. Today it has three, if I recall. There is a reason for that. It is a highly pernicious tax that kills enterprise and that veers from a capitalist (even progressive) philosophy into one that is directly of a Marxist/communist variety that has left so many nations in rubble once fully implemented. Smart, innovative people are not going to stick around for the con game. They will leave.
I have watched Silicon Valley grow and flourish for decades now and have been directly involved in working with thousands of entrepreneurs who have been a part of it. There have been a lot of political changes over those decades but one thing remained constant: the foundational thinking in California always assumed a capitalistic structure. Once that is abandoned, Silicon Valley will be no more.
I know that the vast majority of HN'ers are progressive in their thinking and we all can have our own ideas about what makes for a good and just society. I am not commenting on that here.
There is a line that cannot be crossed, however, without killing the Valley itself and all that it stands for. The wealth tax clearly crosses that line and, if things are allowed to go that way, the consequences may not be what you expect them to be. It doesn't take much to switch from a tax of .4% on assets over $30M (bad as that is in itself) to a tax of a much higher rate on a much lower threshold of assets. Once that monster is unleased, who knows where it will go. It will be fundamental transformation of the Valley, and not a good one.
Someone forgot to model growth in the value of the asset, and/or putting the wealth to use. A wealth tax is, to an approximation, the equivalent of the "management fee" that an ETF charges, but with the revenues going to the government.
If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy? Penalizing static value seems almost reasonable.
But a wealth tax also targets owners of assets that don’t appreciate. It taxes both the winners and the losers, and for the latter it’s nothing but a forced divestiture of their ownership stake.
A capital gains tax, on the other hand, strictly targets those whose assets have appreciated in value.
Wealth is always eventually taxed when it’s liquidated. And if it is never liquidated, then it arguably doesn’t really matter.
Ah yes, the economic argument of "punish savers and people refraining from consumption will lead us to our Centrally Planned Utopia"
>If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy?
Do you and I live in the same reality? When a global pandemic has shown almost every single person on earth that cash balances should have been higher -- enough to sustain unexpected periods of inactivity -- it seems a little tone deaf to say saving money is unproductive. There's already a tax on holding central-bank money -- it's called engineer inflation and it's what's exacerbated the economic repercussions. Your Central ~~Bankers~~ Planners convince you taxing fiat money holdings (price inflation) and artificially reducing the cost of bringing future production to the present (downward interest-rate manipulation) will lead us to utopia when it's actually cause over consumption, over production, and a planned economy on the precipice of collapse.
>If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy
Wealthy people don't just leave their money under a mattress, they invest it in something. Even if they just left it in a bank, the bank is still going to lend that money out and invest it. Taxing wealth just encourages riskier investments, as higher risk is needed to achieve comparable post-tax return.
Modeling the growth does not change the results in any way that makes the tax seem more favorable.
Taxing away 1% of an asset that grows 0% every year leaves 45% of the assets that would be present without the tax after 60 years.
Taxing away 1% of an asset that grows 7% every year leaves 45% of the assets that would be present without the tax after 60 years.
However, to be more realistic, modeling growth makes the taxation even worse, because at times when your equity is at a high valuation, you need to sell some equity and then some extra on top of that in case your equity value crashes before the end of the year/ end of the tax period. You are forced to act defensively.
I don’t think Paul forgot, it’s why he phrased it in terms of stock not dollars. If you start a company and hold on to ownership for 60+ years, you could be forced to sell X% to cover the wealth tax over the years
> If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy? Penalizing static value seems almost reasonable.
We already do that via inflation. Leave your money uninvested and we tax it 2% or more per year, every year.
> Someone forgot to model growth in the value of the asset, and/or putting the wealth to use.
It's surprisingly not different.
If you have an asset that is dormant, is $100, and you tax it with 1% for 20 years, you get to $81.79 by calculating 1000.99^20.
Now suppose instead, your asset grows by 10% a year, and you have no tax. That asset grows to 1001.10^20 = $672
Now suppose that prior to the investment each year you tax it with 1% and invest the rest, for 20 years, again at 10%. So you get 1000.99^201.10^20 = $550
That $550 of $672 is exactly the same portion as $81.79 is of $100. In other words, growth or no growth, it has exactly the same effect, either way a 1% tax over 20 years takes 18.2%.
> Penalizing static value seems almost reasonable.
In the philosophy of taxation there's a different approach. Money you own is money you earned. Typically earnings are taxed. You produce X value, and a small portion of X is allocated to a general pot of money to fund general things in society, e.g. infrastructure, rule of law etc. But after that, it's your money. If you then invest it and earn more, again, a portion of those earnings are taxed. But if you don't do anything with the money, for the government to take it, is seen as a form of theft.
The principle why the one form of appropriation is okay and the other isn't, is because when you earn, you benefit. And the government benefits, too. When you just store, you don't benefit, and taking it is a purely negative experience. Many people are willing to share part of their new earnings. Few are willing to give up something that has always belonged to them.
Inflation is a natural penalty on static value anyway. So are opportunity costs. Plus, actually static value is quite rare, money in a savings account is being put to work by the bank. The amount of really static money (like money under your mattress, or a permanently vacant home) is quite a small portion of the financial system and again being penalised by inflation and opportunity costs already.
It doesn't matter how much your shares appreciate. You can't retain control of your company if you have to give up a significant fraction of your votes every year.
> If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy? Penalizing static value seems almost reasonable.
So now we should be penalizing unproductive assets? When did we all decide that was ok?
Based on that logic, wouldn't I be justified in draining someone's savings account in order to invest it more productively in stocks? Maybe it's ok to steal land from people if I will grow more crops on it than they will?
You can justify taking pretty much anything if you say you will use it for something more productive. What about property rights? Why should people who have played by the rules and built wealth in our society, which they were encouraged to do, then have to live in fear that their wealth might be taken from them?
Government Spending is included in GDP and government services have value to a society.
It is not simple just a management fee because instead of being used to purchase a luxury goods it may be used to improve healthcare, infrastructure or regulating industry.
If it wasn’t for government investing into DARPA none of these startups would even exist.
Graham does the classic magician's trick of showing you something shiny so you don't see what he's doing with his other hand.
In this case, the shiny is the scary 45% figure. What he draws your attention away from is the bizarre hypothetical:
> Suppose you start a successful startup in your twenties, and then live for another 60 years. How much of your stock will a wealth tax consume?
Who is this hypothetical 20 year old that becomes indepedently wealthy, and then doesn't work for the rest of her life? And despite being so wealthy, she opts to pay 100% of her taxes by liquidating her stock rather than out of her salary or investment dividends?
Even if we go with Graham's strange hypothetical, oh booh-hooh, this lucky individual can retire in their 20's and dies richer than 99% of the rest of us. But in reality the hypothetical looks more like this:
1. Very lucky 20-something makes it big and now owns $50M of stock in her company
2. She gets $1M per year in dividends, $1M per year in salary, and her stock increases in value by $5M per year (5% annual growth)
3. The first year she pays $1M on a 1% wealth tax, and her net worth increases by $6M. Similar math in following years.
4. She retires sipping martinis on a private island in Florida
The author is playing the typical Rich man's game. Oh woe is me, look at these poor people who this tax will destroy!
The fact that so many people here are defending them, is maddening and disheartening. Arguing that anyone with a value of over 50mm can't pay a higher tax rate on those funds is disengenous at best.
It's easy to dream up scenarios that prove your point. How about this one:
Company has a bad year. Dividends are cut to zero. Founder reduces salary to bare minimum required for her expenses. On paper, she still has $50 million net worth of illiquid non-public stock. Government demands $200,000 wealth tax. How does that play out?
A $50M company that gives $1M in dividends is worth $49M. It would need ~12% growth to be worth $55M. A company deciding to issue dividends does not change the net worth of any shareholder (it can actually have a negative effect due to tax inefficiency).
So to your example: A $50M company grows 5% a year. Lucky 20-something holds a stock+dividend value of $52.5M before tax at year's end. Of her $1M salary, ~$330k goes to federal income taxes, another $30k to FICA. Too bad she's in California, that's another $100k in state income taxes.
Still, she has ~$540K left over in liquid income. Perhaps she can use this to pay off her $500K wealth tax liability and keep full company ownership if she lives modestly.
Next year presents a bigger challenge. Lucky 20-something's company has grown in value by 5%, and so too has her wealth tax burden. However, her salary needs to grow by ~7% to account for income taxes (and a higher growth rate would have made this worse). This is clearly unsustainable and she will need to sell some company shares before her exponentially growing salary eclipses the value of the whole company!
She'll still be rich enough to retire whenever and sip martinis in Florida of course, she just won't hold the majority of the shares of the company she founded.
Edit: I realize that I sort of neglected dividends after the initial bit. A company could pay off 1.2% (to account for capital gains tax) of it's total value as dividends assuming it had sufficient liquid holdings (and it can't sell stock to come up with them, as that would defeat the purpose). In this case, it would cut company growth potential by about 25% but could allow lucky 20-something to retain control, provided the company can always come up with the liquid assets, even in down years. But that's probably the most realistic scenario of this working.
This is not modelling a wealth tax. This is disingenuous whining because it fails to take into account that wealth taxes kick in at the point that where people have become wealthy. Lets say it kicks in at 100 million. So you still get to keep 100 million before you pay any tax on that wealth? Or in other words you still get to be incredibly, obscenely wealthy, you just reduce the chance to become wealthy beyond the dreams of avarice. Not seeing how this is particularly demotivating to people want ting to found startups. Lets say it kicks in at 10 million instead. Again you still have the chance to become extremely wealthy before you have to pay it. And if you don't think being worth £10 million is extremely wealthy that's because youre comparing yourself to billionaires. Even if it kicks in a £1 million you still get the chance to become wealthy! Sure maybe at this point to you're reducing the number if people willing to put in 80 hour weeks in the hope of winning the startup lottery but given the number of people who pour their heart and soul into passion projects without the chance of becoming billionaires I don't see that as a problem. Seriously this idea that if we tax the wealthy to the point where they can only afford a single yacht and a modest private island they'll all go on some terrible Randian strike and well somehow lose the value they create is bollocks.
Think about it this way, in a very similar, live example:
It is common practice to pay a fee of 0.5-2% to a wealth manager. In practice for many people this fee is worthwhile and wonderful - the benefit is a safely managed and vigorously growing pool of assets.
Is a wealth tax as described by the author really so different? In one case you pay a fee to the manager, in the other case you pay the fee to a more abstract/distant manager (the social system). In both cases, that small fee (small if everyone is generally competent and the wealth grows) is what empowers further growth.
No sane, logical person complains about paying $0.20 when in return they get an extra $0.30 back. In this case, I suspect the author is trying to justify receiving that hypothetical $0.30 without having contributed their initial $0.20. Embarrassingly simplistic, selfish, and self-centered.
Reading that blog post, I’m reminded of the occasional, deluded person who believes that they alone are responsible for their successes and good fortune. In reality, all successes are collective accomplishments. This is a fundamental fact about human life.
> It is common practice to pay a fee of 0.5-2% to a wealth manager. In practice for many people this fee is worthwhile and wonderful - the benefit is a safely managed and vigorously growing pool of assets.
You pay that fee because the manager supposedly does something that helps your wealth grow faster than their fee.
When Vanguard comes along and shows you can get the same or even better returns with a 0.04% fee instead of a 2% fee, what happens? People take their money and move to where the lower fee is. Why would it be any different for a wealth tax?
I can easily fire my asset manager, or switch to a plethora of low cost options, or manage my capital myself. How exactly will I have those options with the wealth tax if you like you said, I’m not getting that rate of return justifying the tax?
Thinking more about this and taking the wealth manager analogy deeper...
In the case of a wealth tax, I imagine wealthy, powerful people would play a more active role in ensuring the competence of their elected officials. They'd like that tax they're paying to go a long, long way, much as clients expect their fees to a wealth manager to facilitate the best possible work.
This is simplistic to the point of absurdity, and doesn't model how any sensible wealth tax would be implemented or paid.
First, any wealth tax being seriously discussed has a floor and/or has marginal rates, probably starting at 1 or 5 or 10 million (or higher).
Second, taxes don't disappear into nothingness - they pay for civilization. It is clearly beneficial to everyone to live in a society where people are well cared for and have healthcare, public education, welfare, etc. There's a reason failed states and unstable/developing countries generally aren't where people are looking to startup the next big tech company.
Third, any smart founder isn't going to just sell 1% of their stock every year and pay the wealth tax with that. They'll take dividends, or take out a loan against the value of the stock, or use some cash from other investments, or whatever, and maintain control of their company. Yes, over the long term they'll lose some wealth, but not necessarily control of their company, unless that's the decision they make.
Fourth, this effectively ignores that wealth is a thing that grows and compounds. If your wealth is increasing at 4% a year (very attainable for the class of people a wealth tax would affect) a 1% wealth tax really doesn't have as big an impact on your long term wealth as this makes it seem.
Fifth, the idea that people "will just move to another country" is very silly. If some people do leave, or start companies only in other jurisdictions, that just means there's a market opportunity for the many people who remain. Unless this supposes that no one wants to take advantage of one of the richest markets in the world because they might have to pay a small fraction of their wealth to the government. Not to mention that even very wealthy people likely want to live in a good society - we don't see many people starting companies on boats in international waters for a number of reasons (left to the reader).
I suspect that Mr. Graham is wringing his hands over potentially having to cut a large (in absolute terms, but small in relative ones) cheque to the government in the future, and I certainly feel for him, but I'd much rather we have well funded schools and welfare for those who need it.
Perhaps notable: Switzerland has a wealth tax (of up to 0.3%), and there is zero evidence that this has any deterrent effect on wealthy people settling in Switzerland or startups being created in Switzerland.
Other features of the tax system more than offset the 0.3% wealth tax.
Personally, I am a bit disappointed by the lack of depth of the discourse: Wealth taxes and their effect have been studied quite a bit in economics literature, and there are various peer-reviewed papers that attempt to measure the effects, but the Silicon Valley crowd is strangely avoidant of examining evidence or explaining their opposition with real-world data. It's all 101ism and polemics.
I'm highly skeptical of the claim that such tax would discourage startup founders.
Wealth tax proposals I've seen don't kick in until $50 million or $100 million. This means that there is a floor on how "poor" the government can make you via a wealth tax.
This has two implications:
1. Most "successful" startup founders don't break that threshold of personal wealth.
2. For most startup founders, the startup is the only way to get to $50 million. The practical lifestyle difference between $50 million and $1 million is a lot larger than the difference between $50 million and the unicorn-founder $ billion.
Furthermore, as noted by glutamate: money earns money. A conservative drawdown of 3% pay the most commonly proposed wealth tax while still leaving you wealthier at the end of the year.
This is pg's privilege to be able to write such a shallow article and get this much attention. There has been so many studies on this topic. There are places with Wealth Tax. France experimented with it and kind of failed. Switzerland has Wealth Tax. None of that was mentioned. Just a 4th grader math and a basic HTML table. God damn it I wish I was VC. Anything I say would be gold. This is pure @VCBrags material
This ignores the fact that everywhere (including countries where wealth taxes are implemented today), there is a floor below which the tax does not kick in.
I would much prefer a 'cash on hand' tax that would tax yearly the cash on hand that exceeds $1B. That private companies can just sit on all this capital rather than putting it to work in the economy is a real problem. It harms GDP and it harms working class people.
By some estimates its $325B[1]. If we forced companies to invest that cash in new ventures rather than sit on it, it would be a win.
It's important to note that leaving the United States to avoid future taxation is not an option for even upper middle class without serious penalty.
The US is the only country in the world that taxes their citizens who are residing in other countries. Even if you move to another county, you still pay US taxes every year.
If you'd like to renounce your citizenship to avoid that, the US has that covered. There is also an expatriation tax for people making above 120k a year or have a net worth over 2 million dollars. 30 percent of your wealth is much more than any of this being discussed.
The US is in a position to enforce this, too, because all banking in the world reports to the US on their citizens' holdings. This is unique to only US citizens. As such, it's hard to even get a foreign bank to accept you as an American holder knowing the amount paperwork that causes them.
Taken together, it's not a possibility for the rich to just leave if they don't like the way they are being taxed. Americans are financial prisoners of their country.
This is somewhat misleading, especially the "30% of your wealth bit". What the expatriation tax does is tax you as if you had sold all your property for cash on the day you renounce your citizenship, though it does apply a $600k+ exclusion to the proceeds of the "sale".
Put another way, it's the US saying "you don't get to accumulate wealth in the US and then leave without paying taxes on it." It's not great (I'm an expat, so if I ever considered relinquishing my citizenship, it might affect me), but it's certainly not as terrible as you made it sound.
That said, it is pretty annoying that the US taxes you on worldwide income, independent of residence. And a lot of people who give up their citizenship do so because that plus the enforcement regimes imposed by the US on foreign banks mean that it's very hard to actually live abroad as a US citizen.
Luckily, a wealth tax isn't constitutional so the socialist can stomp their feet as much as they like they are going to need to gain a lot more power than currently feasible to make it a reality.
Oh my, more state money would mean probably a more equal society - more money for roads, schools, teachers, research labs, health care, infrastructure and much more.
All things by the way any entrepreneur is happy to "take" or accept as given.
Forgive me, but watching extremely privileged people's viewpoint, that they are so genius is so much missing the point (of luck, and of course a society that nourishes and carries these individuals).
PG is talking about investing in companies, not general funds.
For a founder to invest (eg., $1m) in starting a company, there is of them losing their total investment. The expected ROI needs to be fairly high to offset that.
The only people who /could/ make money under such a scenario are super-rich investors making many bets that average out risk. And they wouldnt, given -- as you say -- general equity would perform better.
Any policy implemented in this way, over trivial amounts (eg., over 0.5%), would destroy investment & the business opportunities of a generation.
Perhaps there's a different policy behind "wealth tax".
Those figures include reinvested dividend income with respect to equity and reinvested rental income with respect to housing. In fact the return attributable to capital gains is only about 40% of of your 7% (page 25). Income is already taxed, at a significantly higher rate than any of the propsed wealth taxes.
That’s on average, yes. But for those owners of business where equity value is either flat, or moderately decreases, a wealth tax is essentially a forced divestiture scheme.
Exactly. And people with wealth typically do not stop after their initial fortune they are continue increasing it. Problems are hundred years old family fortunes which are currently not successfully managed.
Every proposal I have seen kicks in after $100m. That's a level of wealth where even paying a 5% tax is likely to result in an annual net increase in wealth, as when you have that amount of money to invest achieving 5%+ returns is not unusual. The net result is that wealth would still increase, just at a slower rate.
Additionally, even amongst the general population, let alone startup founders, the number of people with wealth in excess of $100m is tiny. Numbers are hard to come by but I've seen estimates of 5,000 people in the US. What this means is that people arguing against a wealth tax are happy to disadvantage 330m people to protect the wealth of a low number of thousands.
>What this means is that people arguing against a wealth tax are happy to disadvantage 330m people to protect the wealth of a low number of thousands.
By not giving 1% of your wealth to Africa you're disadvantaging a billion people to protect the wealth of one. It's not a disadvantage to someone that they're not getting a part of somebody else's wealth; we're not born with some divine right to other people's money.
I know it's cliche, but these arguments always seem to boil down to the - Americans don't view themselves as poor, merely temporarily embarrassed millionaires. Though, I would make that 'billionaires' in today's world.
This seems to me to be a very weird and overly simplistic modelling.
Where I live has a wealth tax, and it's in exchange for a capital gains tax, dividend tax, withholding tax, that sort of thing.
The way it works here is that it's a tax based on fictitious returns from you having invested your money, i.e. based on your wealth, a certain return is assumed and you're taxed on that. The first €30k is ineligible for tax, then there are a few bands: €0-€72k, €72k-€99k, €99k+ (numbers rounded.) The effective tax for these bands ends up being 0.58%, 1.34%, and 1.68%. These are last year's numbers, I'm not sure if they're different this year.
The idea is that if you have more than €30k sitting in a savings account, you ought to be doing something with it to get a return on investment. The issue I have with it is that it's not very responsive to changing markets, like at the moment where savings interest rates are near enough to zero and the stock market is complicated, it doesn't account for that sort of thing well compared to a regular withholding tax.
There are also exemptions, I think the value of your primary residence isn't counted for example, though I haven't yet had to deal with it, so I'm not totally sure.
This post completely ignores that even safe investments are going to earn a return over 1% on wealth. So even a founder who liquidated all her stock and parked it in a prime money market fund would have earned 1.3% over the past year — and that’s at a time of near record low interest rates.
A founder with any sizable wealth and a long time horizon (>15yrs) would earn much better than 1%. Even conservative retirement calculators given such a horizon will steer you toward a real return of 3%, or 5-6% after inflation. That’s an estimated return in stock heavy index funds. Someone with most of their net worth in a successful startup — precisely the person Paul frets about — will do much much better than that for at least several years earning startup returns. (Those not so successful won’t have much wealth to tax.)
Basically I think it’s a little silly to wring hands over the compound impact of a wealth tax and at the same time give no acknowledgment to the compound returns available to the average long term investor to say nothing of the very wealthy. A wealth tax has a real impact but it’s more about dragging down returns on wealth than eroding wealth per se.
Inflation has a very similar compound impact on any given sum.
Further, Paul does not acknowledge the benefits to a person AND a tech company of being based in the US over other countries, or past crucial investments by our people in basic research enabling many if not all YC and other Valley startups.
I'm not necessarily in favor of a wealth tax, but this essay is deeply flawed for the many reasons identified in other comments.
What struck me is that I showed it to my partner who has no formal finance training and she quickly identified the major flaw that seems to have escaped Paul Graham: a wealth tax is a percentage of the dollar value of wealth, not a percentage of the number of shares of stock you own. The dollar value of shares tend to increase over time, a basic fact not reflected in this model.
> The dollar value of shares tend to increase over time, a basic fact not reflected in this model.
This is not reflected in the model because the price of the shares cancels out: a higher price means a higher tax in absolute dollars, and a lower price means a lower dollar amount in tax. For a given tax rate you end up with the same fraction of the shares regardless of any appreciation or depreciation in their value.
A 1% wealth tax means that you cannot remain a majority owner of your own startup for longer than 70 years, at least not without sacrificing other assets above and beyond their own share of the wealth tax. At that point the government has claimed over 50% of the startup's value, regardless of any change in the share price.
A 2% wealth tax means you will lose your majority ownership within 35 years.
At a 5% wealth tax we're down to 14 years of owning your own startup.
> "Even a .5% wealth tax would start to keep founders away from a state or country that imposed it."
This sounds absolutely absurd. The last twenty years of entrepreneurs not fleeing the "tax" of Bay Area salaries seems like proof that they are a lot more interested in maximizing the chance of their start-up's success than maximizing the equity they keep if it does succeed.
[+] [-] grellas|5 years ago|reply
Silicon Valley was founded in a spirit of freedom and flexibility but that spirit is clearly and dangerously on the wane insofar as the political environment surrounding the Valley is concerned.
By the 1970s, American enterprise was in decline, a victim of the "big government/big business/big labor" trends glamorized by establishment types of that day. What this did was take away choice and flexibility.
Tech changed all that and it did so from the heart of Silicon Valley. Tech arose from a spirit of freedom and flexibility. Founders would get an idea and would have countless ways of experimenting with what they could do with it with the aim of building a venture. Many of the most wildly successful ventures came out of nowhere. No central committee could have planned for them. No overlords of big business could have had the imagination or risk-taking fortitude to push them at the expense of their established cash cows of that day. No union could comfortably impose rigid work rules onto such amorphous ventures (the first thing Intel workers did even after the company succeeded was to reject unionization). No minimum wage or overtime rules applied. Benefits packages of the type widely deployed in the analog-based large businesses of that day were unheard of.
Regulators and taxers of that era continually tried to realize their vision of locking people into situations by which they would have guaranteed security, ossifying the mature businesses over which they had control, but tech simply outran them through innovation. And, in time, upended them by disrupting their industries through innovation and risk-taking.
Today, the spirit of Silicon Valley has changed and is yielding to a belief system by which the overlords of politics believe they can dictate outcomes that will give people locked-in security forever. Want to do something as an independent to earn a livelihood? Sorry, AB5 forbids that and will penalize the hell out of any venture that seeks to use fleelancing and flexibility as a foundation for innovation and growth. Your choice to act an an independent is frozen out by dictates that, if you act at all to make a living, you must do it within rigid systems that guarantee minimum compensation, regulate overtime, prescribe minimum guaranteed benefits, and the like. If this kills opportunities, no problem: there will be other rules that guarantee basic income, limit the rent you have to pay, and otherwise regulate society such that people are guaranteed a risk-free existence courtesy of decrees enacted by political proclamation.
This new mindset is precisely the one of the 1970s-era leaders who managed to choke off innovation and growth in old-line businesses and gave a massive opening to tech innovators, particularly those in Silicon Valley.
pg's modeling of the effects of a wealth tax is spot on. And it confirms that such a tax is an innovation-killing idea that would destroy the spirit of Silicon Valley. Of course, tech innovation will not cease. It will just move elsewhere to escape the tax. Europe in the 1990s had a couple of dozen or more countries that imposed wealth taxes. Today it has three, if I recall. There is a reason for that. It is a highly pernicious tax that kills enterprise and that veers from a capitalist (even progressive) philosophy into one that is directly of a Marxist/communist variety that has left so many nations in rubble once fully implemented. Smart, innovative people are not going to stick around for the con game. They will leave.
I have watched Silicon Valley grow and flourish for decades now and have been directly involved in working with thousands of entrepreneurs who have been a part of it. There have been a lot of political changes over those decades but one thing remained constant: the foundational thinking in California always assumed a capitalistic structure. Once that is abandoned, Silicon Valley will be no more.
I know that the vast majority of HN'ers are progressive in their thinking and we all can have our own ideas about what makes for a good and just society. I am not commenting on that here.
There is a line that cannot be crossed, however, without killing the Valley itself and all that it stands for. The wealth tax clearly crosses that line and, if things are allowed to go that way, the consequences may not be what you expect them to be. It doesn't take much to switch from a tax of .4% on assets over $30M (bad as that is in itself) to a tax of a much higher rate on a much lower threshold of assets. Once that monster is unleased, who knows where it will go. It will be fundamental transformation of the Valley, and not a good one.
As I said, just my two cents.
[+] [-] paulhart|5 years ago|reply
If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy? Penalizing static value seems almost reasonable.
[+] [-] bhupy|5 years ago|reply
A capital gains tax, on the other hand, strictly targets those whose assets have appreciated in value.
Wealth is always eventually taxed when it’s liquidated. And if it is never liquidated, then it arguably doesn’t really matter.
[+] [-] DINKDINK|5 years ago|reply
Ah yes, the economic argument of "punish savers and people refraining from consumption will lead us to our Centrally Planned Utopia"
>If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy?
Do you and I live in the same reality? When a global pandemic has shown almost every single person on earth that cash balances should have been higher -- enough to sustain unexpected periods of inactivity -- it seems a little tone deaf to say saving money is unproductive. There's already a tax on holding central-bank money -- it's called engineer inflation and it's what's exacerbated the economic repercussions. Your Central ~~Bankers~~ Planners convince you taxing fiat money holdings (price inflation) and artificially reducing the cost of bringing future production to the present (downward interest-rate manipulation) will lead us to utopia when it's actually cause over consumption, over production, and a planned economy on the precipice of collapse.
I'll keep the "unproductive" savings, thanks.
[+] [-] logicchains|5 years ago|reply
Wealthy people don't just leave their money under a mattress, they invest it in something. Even if they just left it in a bank, the bank is still going to lend that money out and invest it. Taxing wealth just encourages riskier investments, as higher risk is needed to achieve comparable post-tax return.
[+] [-] weatherman2|5 years ago|reply
Taxing away 1% of an asset that grows 0% every year leaves 45% of the assets that would be present without the tax after 60 years.
Taxing away 1% of an asset that grows 7% every year leaves 45% of the assets that would be present without the tax after 60 years.
However, to be more realistic, modeling growth makes the taxation even worse, because at times when your equity is at a high valuation, you need to sell some equity and then some extra on top of that in case your equity value crashes before the end of the year/ end of the tax period. You are forced to act defensively.
[+] [-] rel2thr|5 years ago|reply
[+] [-] hajile|5 years ago|reply
We already do that via inflation. Leave your money uninvested and we tax it 2% or more per year, every year.
[+] [-] IkmoIkmo|5 years ago|reply
It's surprisingly not different.
If you have an asset that is dormant, is $100, and you tax it with 1% for 20 years, you get to $81.79 by calculating 1000.99^20.
Now suppose instead, your asset grows by 10% a year, and you have no tax. That asset grows to 1001.10^20 = $672
Now suppose that prior to the investment each year you tax it with 1% and invest the rest, for 20 years, again at 10%. So you get 1000.99^201.10^20 = $550
That $550 of $672 is exactly the same portion as $81.79 is of $100. In other words, growth or no growth, it has exactly the same effect, either way a 1% tax over 20 years takes 18.2%.
> Penalizing static value seems almost reasonable.
In the philosophy of taxation there's a different approach. Money you own is money you earned. Typically earnings are taxed. You produce X value, and a small portion of X is allocated to a general pot of money to fund general things in society, e.g. infrastructure, rule of law etc. But after that, it's your money. If you then invest it and earn more, again, a portion of those earnings are taxed. But if you don't do anything with the money, for the government to take it, is seen as a form of theft.
The principle why the one form of appropriation is okay and the other isn't, is because when you earn, you benefit. And the government benefits, too. When you just store, you don't benefit, and taking it is a purely negative experience. Many people are willing to share part of their new earnings. Few are willing to give up something that has always belonged to them.
Inflation is a natural penalty on static value anyway. So are opportunity costs. Plus, actually static value is quite rare, money in a savings account is being put to work by the bank. The amount of really static money (like money under your mattress, or a permanently vacant home) is quite a small portion of the financial system and again being penalised by inflation and opportunity costs already.
[+] [-] loourr|5 years ago|reply
If I have a 100 shares they'll take 1 share year one, slightly less year 2, etc regardless of the price of a share.
[+] [-] jp555|5 years ago|reply
77% of Google is owned by mutual funds & other institutional investors.
62% of Apple is owned my mutual funds & other institutional investors.
79% of Facebook is owned by mutual funds & other institutional investors.
[+] [-] mac01021|5 years ago|reply
[+] [-] twblalock|5 years ago|reply
So now we should be penalizing unproductive assets? When did we all decide that was ok?
Based on that logic, wouldn't I be justified in draining someone's savings account in order to invest it more productively in stocks? Maybe it's ok to steal land from people if I will grow more crops on it than they will?
You can justify taking pretty much anything if you say you will use it for something more productive. What about property rights? Why should people who have played by the rules and built wealth in our society, which they were encouraged to do, then have to live in fear that their wealth might be taken from them?
[+] [-] supercanuck|5 years ago|reply
It is not simple just a management fee because instead of being used to purchase a luxury goods it may be used to improve healthcare, infrastructure or regulating industry.
If it wasn’t for government investing into DARPA none of these startups would even exist.
[+] [-] m463|5 years ago|reply
[+] [-] coryfklein|5 years ago|reply
In this case, the shiny is the scary 45% figure. What he draws your attention away from is the bizarre hypothetical:
> Suppose you start a successful startup in your twenties, and then live for another 60 years. How much of your stock will a wealth tax consume?
Who is this hypothetical 20 year old that becomes indepedently wealthy, and then doesn't work for the rest of her life? And despite being so wealthy, she opts to pay 100% of her taxes by liquidating her stock rather than out of her salary or investment dividends?
Even if we go with Graham's strange hypothetical, oh booh-hooh, this lucky individual can retire in their 20's and dies richer than 99% of the rest of us. But in reality the hypothetical looks more like this:
1. Very lucky 20-something makes it big and now owns $50M of stock in her company
2. She gets $1M per year in dividends, $1M per year in salary, and her stock increases in value by $5M per year (5% annual growth)
3. The first year she pays $1M on a 1% wealth tax, and her net worth increases by $6M. Similar math in following years.
4. She retires sipping martinis on a private island in Florida
[+] [-] marakv2|5 years ago|reply
The author is playing the typical Rich man's game. Oh woe is me, look at these poor people who this tax will destroy!
The fact that so many people here are defending them, is maddening and disheartening. Arguing that anyone with a value of over 50mm can't pay a higher tax rate on those funds is disengenous at best.
[+] [-] imgabe|5 years ago|reply
Company has a bad year. Dividends are cut to zero. Founder reduces salary to bare minimum required for her expenses. On paper, she still has $50 million net worth of illiquid non-public stock. Government demands $200,000 wealth tax. How does that play out?
[+] [-] paconbork|5 years ago|reply
So to your example: A $50M company grows 5% a year. Lucky 20-something holds a stock+dividend value of $52.5M before tax at year's end. Of her $1M salary, ~$330k goes to federal income taxes, another $30k to FICA. Too bad she's in California, that's another $100k in state income taxes.
Still, she has ~$540K left over in liquid income. Perhaps she can use this to pay off her $500K wealth tax liability and keep full company ownership if she lives modestly.
Next year presents a bigger challenge. Lucky 20-something's company has grown in value by 5%, and so too has her wealth tax burden. However, her salary needs to grow by ~7% to account for income taxes (and a higher growth rate would have made this worse). This is clearly unsustainable and she will need to sell some company shares before her exponentially growing salary eclipses the value of the whole company!
She'll still be rich enough to retire whenever and sip martinis in Florida of course, she just won't hold the majority of the shares of the company she founded.
Edit: I realize that I sort of neglected dividends after the initial bit. A company could pay off 1.2% (to account for capital gains tax) of it's total value as dividends assuming it had sufficient liquid holdings (and it can't sell stock to come up with them, as that would defeat the purpose). In this case, it would cut company growth potential by about 25% but could allow lucky 20-something to retain control, provided the company can always come up with the liquid assets, even in down years. But that's probably the most realistic scenario of this working.
[+] [-] throwaway936482|5 years ago|reply
[+] [-] arthurofbabylon|5 years ago|reply
Think about it this way, in a very similar, live example:
It is common practice to pay a fee of 0.5-2% to a wealth manager. In practice for many people this fee is worthwhile and wonderful - the benefit is a safely managed and vigorously growing pool of assets.
Is a wealth tax as described by the author really so different? In one case you pay a fee to the manager, in the other case you pay the fee to a more abstract/distant manager (the social system). In both cases, that small fee (small if everyone is generally competent and the wealth grows) is what empowers further growth.
No sane, logical person complains about paying $0.20 when in return they get an extra $0.30 back. In this case, I suspect the author is trying to justify receiving that hypothetical $0.30 without having contributed their initial $0.20. Embarrassingly simplistic, selfish, and self-centered.
Reading that blog post, I’m reminded of the occasional, deluded person who believes that they alone are responsible for their successes and good fortune. In reality, all successes are collective accomplishments. This is a fundamental fact about human life.
[+] [-] imgabe|5 years ago|reply
You pay that fee because the manager supposedly does something that helps your wealth grow faster than their fee.
When Vanguard comes along and shows you can get the same or even better returns with a 0.04% fee instead of a 2% fee, what happens? People take their money and move to where the lower fee is. Why would it be any different for a wealth tax?
[+] [-] misun78|5 years ago|reply
[+] [-] arthurofbabylon|5 years ago|reply
In the case of a wealth tax, I imagine wealthy, powerful people would play a more active role in ensuring the competence of their elected officials. They'd like that tax they're paying to go a long, long way, much as clients expect their fees to a wealth manager to facilitate the best possible work.
[+] [-] patmcc|5 years ago|reply
First, any wealth tax being seriously discussed has a floor and/or has marginal rates, probably starting at 1 or 5 or 10 million (or higher).
Second, taxes don't disappear into nothingness - they pay for civilization. It is clearly beneficial to everyone to live in a society where people are well cared for and have healthcare, public education, welfare, etc. There's a reason failed states and unstable/developing countries generally aren't where people are looking to startup the next big tech company.
Third, any smart founder isn't going to just sell 1% of their stock every year and pay the wealth tax with that. They'll take dividends, or take out a loan against the value of the stock, or use some cash from other investments, or whatever, and maintain control of their company. Yes, over the long term they'll lose some wealth, but not necessarily control of their company, unless that's the decision they make.
Fourth, this effectively ignores that wealth is a thing that grows and compounds. If your wealth is increasing at 4% a year (very attainable for the class of people a wealth tax would affect) a 1% wealth tax really doesn't have as big an impact on your long term wealth as this makes it seem.
Fifth, the idea that people "will just move to another country" is very silly. If some people do leave, or start companies only in other jurisdictions, that just means there's a market opportunity for the many people who remain. Unless this supposes that no one wants to take advantage of one of the richest markets in the world because they might have to pay a small fraction of their wealth to the government. Not to mention that even very wealthy people likely want to live in a good society - we don't see many people starting companies on boats in international waters for a number of reasons (left to the reader).
I suspect that Mr. Graham is wringing his hands over potentially having to cut a large (in absolute terms, but small in relative ones) cheque to the government in the future, and I certainly feel for him, but I'd much rather we have well funded schools and welfare for those who need it.
[+] [-] thomasdullien|5 years ago|reply
Other features of the tax system more than offset the 0.3% wealth tax.
Personally, I am a bit disappointed by the lack of depth of the discourse: Wealth taxes and their effect have been studied quite a bit in economics literature, and there are various peer-reviewed papers that attempt to measure the effects, but the Silicon Valley crowd is strangely avoidant of examining evidence or explaining their opposition with real-world data. It's all 101ism and polemics.
See also https://twitter.com/halvarflake/status/1295283922117566464?s... - I tried to ask @rabois for the source of a claim, and got crickets in return.
I'd like to see a more nuanced and thorough discussion, to be honest. Perhaps that's a bit much to ask.
[+] [-] bitcurious|5 years ago|reply
Wealth tax proposals I've seen don't kick in until $50 million or $100 million. This means that there is a floor on how "poor" the government can make you via a wealth tax.
This has two implications:
1. Most "successful" startup founders don't break that threshold of personal wealth.
2. For most startup founders, the startup is the only way to get to $50 million. The practical lifestyle difference between $50 million and $1 million is a lot larger than the difference between $50 million and the unicorn-founder $ billion.
Furthermore, as noted by glutamate: money earns money. A conservative drawdown of 3% pay the most commonly proposed wealth tax while still leaving you wealthier at the end of the year.
[+] [-] msoad|5 years ago|reply
[+] [-] Lavery|5 years ago|reply
[+] [-] ChuckMcM|5 years ago|reply
By some estimates its $325B[1]. If we forced companies to invest that cash in new ventures rather than sit on it, it would be a win.
[1] https://www.investors.com/etfs-and-funds/sectors/sp500-compa...
[+] [-] throwaway13337|5 years ago|reply
The US is the only country in the world that taxes their citizens who are residing in other countries. Even if you move to another county, you still pay US taxes every year.
If you'd like to renounce your citizenship to avoid that, the US has that covered. There is also an expatriation tax for people making above 120k a year or have a net worth over 2 million dollars. 30 percent of your wealth is much more than any of this being discussed.
The US is in a position to enforce this, too, because all banking in the world reports to the US on their citizens' holdings. This is unique to only US citizens. As such, it's hard to even get a foreign bank to accept you as an American holder knowing the amount paperwork that causes them.
Taken together, it's not a possibility for the rich to just leave if they don't like the way they are being taxed. Americans are financial prisoners of their country.
[+] [-] afthonos|5 years ago|reply
Put another way, it's the US saying "you don't get to accumulate wealth in the US and then leave without paying taxes on it." It's not great (I'm an expat, so if I ever considered relinquishing my citizenship, it might affect me), but it's certainly not as terrible as you made it sound.
That said, it is pretty annoying that the US taxes you on worldwide income, independent of residence. And a lot of people who give up their citizenship do so because that plus the enforcement regimes imposed by the US on foreign banks mean that it's very hard to actually live abroad as a US citizen.
[+] [-] AnimalMuppet|5 years ago|reply
OK, but if the "wealth tax" applies to the upper middle class, that's a serious policy failure.
(Of course, the income tax rates the upper middle class pay were originally intended only for the very wealthy, so...)
[+] [-] pyronik19|5 years ago|reply
[+] [-] throwaway7281|5 years ago|reply
All things by the way any entrepreneur is happy to "take" or accept as given.
Forgive me, but watching extremely privileged people's viewpoint, that they are so genius is so much missing the point (of luck, and of course a society that nourishes and carries these individuals).
[+] [-] glutamate|5 years ago|reply
EDIT: Source: https://www.frbsf.org/economic-research/files/wp2017-25.pdf. The precise number is real returns of 6.89% on equity, 7.05% on housing
[+] [-] mjburgess|5 years ago|reply
For a founder to invest (eg., $1m) in starting a company, there is of them losing their total investment. The expected ROI needs to be fairly high to offset that.
The only people who /could/ make money under such a scenario are super-rich investors making many bets that average out risk. And they wouldnt, given -- as you say -- general equity would perform better.
Any policy implemented in this way, over trivial amounts (eg., over 0.5%), would destroy investment & the business opportunities of a generation.
Perhaps there's a different policy behind "wealth tax".
[+] [-] JackFr|5 years ago|reply
[+] [-] bhupy|5 years ago|reply
[+] [-] dmichulke|5 years ago|reply
And if you think that's a bad idea, why should individuals do it in order to stay above the wealth tax?
[+] [-] oaiey|5 years ago|reply
[+] [-] AussieCoder|5 years ago|reply
Additionally, even amongst the general population, let alone startup founders, the number of people with wealth in excess of $100m is tiny. Numbers are hard to come by but I've seen estimates of 5,000 people in the US. What this means is that people arguing against a wealth tax are happy to disadvantage 330m people to protect the wealth of a low number of thousands.
[+] [-] logicchains|5 years ago|reply
By not giving 1% of your wealth to Africa you're disadvantaging a billion people to protect the wealth of one. It's not a disadvantage to someone that they're not getting a part of somebody else's wealth; we're not born with some divine right to other people's money.
[+] [-] Loughla|5 years ago|reply
It's just the strangest thing to me.
[+] [-] eythian|5 years ago|reply
Where I live has a wealth tax, and it's in exchange for a capital gains tax, dividend tax, withholding tax, that sort of thing.
The way it works here is that it's a tax based on fictitious returns from you having invested your money, i.e. based on your wealth, a certain return is assumed and you're taxed on that. The first €30k is ineligible for tax, then there are a few bands: €0-€72k, €72k-€99k, €99k+ (numbers rounded.) The effective tax for these bands ends up being 0.58%, 1.34%, and 1.68%. These are last year's numbers, I'm not sure if they're different this year.
The idea is that if you have more than €30k sitting in a savings account, you ought to be doing something with it to get a return on investment. The issue I have with it is that it's not very responsive to changing markets, like at the moment where savings interest rates are near enough to zero and the stock market is complicated, it doesn't account for that sort of thing well compared to a regular withholding tax.
There are also exemptions, I think the value of your primary residence isn't counted for example, though I haven't yet had to deal with it, so I'm not totally sure.
[+] [-] nabla9|5 years ago|reply
The wealthiest top 0.1 percent is fewer than 200,000 families. source:
> Warren would put a 2 percent tax on every dollar of net worth above $50 million and a 3 percent tax on every dollar of net worth above $1 billion.
https://www.wealthypersons.com/paul-graham-net-worth-2020-20... https://www.politifact.com/factchecks/2019/jan/31/elizabeth-...
IMHO wealth tax is not optimal way to distribute wealth, but it's not as pad as PG tries to make it.
[+] [-] mapgrep|5 years ago|reply
A founder with any sizable wealth and a long time horizon (>15yrs) would earn much better than 1%. Even conservative retirement calculators given such a horizon will steer you toward a real return of 3%, or 5-6% after inflation. That’s an estimated return in stock heavy index funds. Someone with most of their net worth in a successful startup — precisely the person Paul frets about — will do much much better than that for at least several years earning startup returns. (Those not so successful won’t have much wealth to tax.)
Basically I think it’s a little silly to wring hands over the compound impact of a wealth tax and at the same time give no acknowledgment to the compound returns available to the average long term investor to say nothing of the very wealthy. A wealth tax has a real impact but it’s more about dragging down returns on wealth than eroding wealth per se.
Inflation has a very similar compound impact on any given sum.
Further, Paul does not acknowledge the benefits to a person AND a tech company of being based in the US over other countries, or past crucial investments by our people in basic research enabling many if not all YC and other Valley startups.
[+] [-] hkhanna|5 years ago|reply
What struck me is that I showed it to my partner who has no formal finance training and she quickly identified the major flaw that seems to have escaped Paul Graham: a wealth tax is a percentage of the dollar value of wealth, not a percentage of the number of shares of stock you own. The dollar value of shares tend to increase over time, a basic fact not reflected in this model.
[+] [-] nybble41|5 years ago|reply
This is not reflected in the model because the price of the shares cancels out: a higher price means a higher tax in absolute dollars, and a lower price means a lower dollar amount in tax. For a given tax rate you end up with the same fraction of the shares regardless of any appreciation or depreciation in their value.
A 1% wealth tax means that you cannot remain a majority owner of your own startup for longer than 70 years, at least not without sacrificing other assets above and beyond their own share of the wealth tax. At that point the government has claimed over 50% of the startup's value, regardless of any change in the share price.
A 2% wealth tax means you will lose your majority ownership within 35 years.
At a 5% wealth tax we're down to 14 years of owning your own startup.
[+] [-] mundo|5 years ago|reply
This sounds absolutely absurd. The last twenty years of entrepreneurs not fleeing the "tax" of Bay Area salaries seems like proof that they are a lot more interested in maximizing the chance of their start-up's success than maximizing the equity they keep if it does succeed.