Monday, September 08, 2008

Wealth and income taxes

Will Shetterly quotes an article about how Americans believe in taxing the rich. But the wording of the article, and/or the people who wrote the study, don't seem to understand what they are writing about.

It begins, "A significant majority of Americans — 56 percent yes, only 40 percent no — want the government to “redistribute wealth by heavy taxes on the rich.”, but the one and only tax- and the only examples of disparity they discuss- is income. What they seemingly fail to understand is that there is a difference between income and wealth. Income taxes do little if anything to redistribute the wealth.

Suppose Bill Gates died today and left his entire fortune to me. I don't know his current net worth and the taxes involved, but the exact numbers don't matter- say I get $250 billion after taxes. I quit my job, and despite the advice of financial pros, put all the money in a non interest bearing checking account just to see people's jaw drop when they run a check on me. Come April 15, 2010, what is my tax burden?

Nothing. I didn't have any income in 2009. No income, no income taxes. Doesn't matter how high the rate is if you have no income. No income, but plenty of WEALTH- I still have my quarter of a trillion. Make the income tax 100%- it's still not going to redistribute my wealth. Even if you taxed 100% of the interest a smarter man than I would have been earning on all that money, the original wealth is still there- enough for a thousand lifetimes. The only way to redistribute the wealth is to tax the wealth, not the income. If you tax the wealth, the high incomes take care of themselves- they disappear next tax year when they become wealth. The key is to tax net worth- wealth- not income.

Any politician who speaks of redistributing the wealth or the disparity between the rich and the poor and doesn't talk about taxing wealth is either a college dropout or a demagogue and a liar. There really isn't a third option that I can see. Oh, I can understand why they don't want to pass a tax on wealth- most of the politicians who are talking about the disparity between the rich and the poor are themselves living off of huge, multi-generational fortunes. They don't want to pay a wealth tax. That just makes them demagogues and hypocrites.


Will Shetterly said...

I completely agree with you about the way people obscure income and wealth. More on this later, maybe!

Xavier Ashe said...

If you did nothing with wealth (i.e. you kept it under your bed), your wealth would diminish. So anyone that want to keep their wealth invests it. Say you had a run-of-the-mill money market account that had 3% APR. That would be close to inflation protection. On $250 billion, your income would be $7.5 billion. Your federal tax burden could be as much as 35% or $2,625 million.

Now your 3% gain has been reduced to a 1.95% gain. Considering that inflation is around 5.5% , You would have earn much more than 3%.

No one that wants to keep or grow their wealth let's it sit. But someone with 250 billion isn't going to let the tax system steal 35% of their earnings. There's better way to make you money work for you.