Zuckerberg’s $1,000,000,000 consumption tax payment

When you study economics you find out that lots of things average people believe just aren’t so.  You learn that inflation is caused by monetary stimulus, not an overheating economy or monopolistic pricing.  You learn that imports from China (or automation or immigration) don’t cause our unemployment rate to rise.  You learn that an economy can’t run both a current account deficit and a capital account deficit.  I e. it can’t import lots more goods than it exports, and simultaneously outsource lots of jobs with overseas investments exceeding foreign investments flowing in.  You learn that legal mandates banning service fees on X, or requiring employee benefit Y, or rent controls, generally hurt the people they are designed to help.

You learn that the fiscal multiplier is roughly zero . . . oops, that’s still a few years away.

And you learn that a wage tax is identical to a consumption tax.  I’ve given up trying to explain why, hopefully someone in the comment section will fill in for me.  In any case, we now have Mark Zuckerberg paying over a billion dollars in consumption tax for 2012:

Facebook’s stock market debut left founder and CEO Mark Zuckerberg with a paper fortune currently valued at $13 billion — and a 2012 tax bill of around $1.1 billion.

Zuckerberg’s whopping tax hit stems from his move last May to increase his stake in Facebook. On the day of Facebook’s initial public offering, Zuckerberg exercised a stock option and purchased 60 million Facebook shares at a “strike price” of 6 cents each.

Even if those shares are never sold, the IRS treats them as ordinary income at the time the options are exercised. The rationale is that such options are a form of compensation, just like regular wages.

A few observations.  Commenters sometimes tell me that a wage tax won’t work, because all the rich guys will disguise wage income as capital income.  Actually, it’s really easy to tax wage income if the government is determined to do so.  Simply put the burden of proof on the income earner to show that the “capital income” is not disguised wage income.  The IRS could greatly simply the lives of 98% of us by making the assumption that capital income earned from sources where the individual is not employed are actually capital income.

If there are currently loopholes in areas such as hedge funds, it’s because Congress wants there to be loopholes in areas such as hedge funds.  The only thing standing between us as a radically simplified, radically more efficient, progressive consumption tax is a corrupt and/or ignorant Congress.

Both parties should declare a ceasefire in 2013, and replace both the personal and corporate incomes taxes with an equally large and equally progressive payroll tax (which taxes both wages and benefits.)  Then in 2014 they can return to battling over how big and how progressive that payroll tax should be.


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34 Responses to “Zuckerberg’s $1,000,000,000 consumption tax payment”

  1. Gravatar of Morgan Warstler Morgan Warstler
    30. March 2013 at 07:41

    “Simply put the burden of proof on the income earner to show that the “capital income” is not disguised wage income.”

    You are starting a newco Delaware C corp, you are looking to hire a COO.

    A. One can be a founder, take $100K salary and have a larger stake of equity.

    B. Another can earn $200K and have smaller stake, maybe not even founder shares.

    No matter, what yu say to them, the rational expectation of both is that the company will fail or have a liquidity event in 36 months, thats just what peeps think.

    You go with A, and you have to sell less of the company to investors.

    You go with B, and you have to give less of the company to the COO.

    This is everyday all around what I see.

    Explain to me how and why they should or should not face the same tax buden. Explain why A’s big equity is capital and not wage income. It’s just three years from now.

    —–

    I get at the macrolevel you kind want to say it all comes out in wash, I don’t care about the wash, I want to know if you grok how the choice between cash and equity as compensation, doesn’t fit into your “I earned money, deferred consumption, and now I invest it for 20 years” mindset.

  2. Gravatar of happyjuggler0 happyjuggler0
    30. March 2013 at 09:08

    Scott,

    CEO Mark Zuckerberg with a paper fortune currently valued at $13 billion “” and a 2012 tax bill of around $1.1 billion.

    Let’s assume that leaves him with about $12 billion, and that it turns out to not be a paper fortune, but a real fortune.

    How much of that is he likely to consume? Note we are talking about “consumption taxes” here.

    I’d say a ceiling of $1 or $2 billion sounds like what he would reasonably be capable of consuming, assuming he had that mindset, which he doesn’t. I think he has a house with essentially no furniture, and a wardrobe that consists of virtually nothing but gray hoodies and blue jeans.

    That means that his consumption in essence is untaxed in economic incidence terms, if not legal incidence terms. Who bears the economic incidence of that $1 billion tax then? It depends on what he does with the unconsumed balance of his net worth over his lifetime of course, which is likely to be some combination of investments and philanthropy.

    His investments, assuming they are economically profitable (as contrasted with personally profitable, which is not the same thing, but probably will have a good deal of overlap), will benefit him 0% (note that he can’t consume it), while some combination of workers and other consumers will derive 100% of the rent from his investments.

    So 100% of the economic incidence of *any* taxation on Zuckerberg is borne by workers, other consumers, and beneficiaries of his philanthropy. In other words, what you claim is a massive progressive consumption tax on Zuckerberg is actually a 0% tax on him and 100% of that tax is regressively paid for by the rest of us.

    Again, for those who are slow on the uptake, I am talking about economic incidence here, not legal incidence.

  3. Gravatar of Lawrence D’Anna Lawrence D'Anna
    30. March 2013 at 09:26

    And you learn that a wage tax is identical to a consumption tax. I’ve given up trying to explain why, hopefully someone in the comment section will fill in for me.

    X = wages earned today
    Y = money paid to merchant at time t
    T = tax rate
    r = interest rate you can earn by saving your money

    under a wage tax:
    Y = e^(rt)(1 – T)x

    under a consumption tax:
    Y = 1/(1+T) e^(rt) X

    multiplication is commutative, so it doesn’t matter if the money is taxed before or after it is invested. Is that right?

  4. Gravatar of Kevin Dick Kevin Dick
    30. March 2013 at 09:49

    @Morgan. My VC firm funded 79 companies last year and will probably do > 100 this year. All very close to the formation stage. I’ve also done founded a few myself. So I am quite familiar with the situation you pose.

    The fact of the matter is that the founder taking less cash salary is investing the foregone cash in the company and the one that takes the full salary is not. The former is foregoing the option to consume while the latter is preserving the option.

    In fact, taxing them at the same rate would _decrease_ the incentive to take the risk. But from a societal macro view, taking risk in formation of new businesses rather than buying goods is what we want here, right?

    So I’d say your example supports rather than undermines Scott’s point.

  5. Gravatar of ssumner ssumner
    30. March 2013 at 10:01

    Morgan, People should pay the same tax for the same work, whether the comp is wages of stocks or stock options. The key is to set thing up in such a way that you aren’t favoring current consumption over future consumption.

    Happyjuggler0, If he doesn’t spend it, but gives it to his heirs, then they pay the consumption tax–which is of course appropriate.

    If he gives the money away he can deduct the charitable contribution. Perhaps he did that–I assumed he didn’t and actually paid the tax.

    Thanks Lawrence. Now let’s see if that answers peoples’ concerns. My hunch is it won’t.

  6. Gravatar of Geoff Geoff
    30. March 2013 at 10:54

    Dr. Sumner:

    I recommend that for this type of issue, because cold hard facts don’t seem to be working, that we go to the abstract, the ideal, the psychological, to get this message through the front door and treated as a colleague rather than an enemy. It’s super difficult to do, but I think it’s the only way.

    For capital and wage income taxation, I can identify at least two broad abstract categories of (flawed) thought that are responsible. One is Marxian exploitation theory, and the other is what I call consumptionist theory.

    1. Most average people believe that profits are an extraction of wealth that morally belongs to the wage earning workers. They have an a priori resentment against “excessive” profit making. The reason they are always clamoring for more capital income taxation is because they believe that taking those dollars away from the capitalists is the morally right thing to do. Taking back what was ill-gotten to begin with is to them justified. As a corollary, too high of profits means capitalists become politically too powerful in the voting/bribery system. The average person wants more power and influence, and reducing the economic power of the wealthy seems to be the only route.

    The best way to counter these myths is twofold:

    A. Profits, not wages, are the original and primary income. That the onset of capitalists was the onset of wage payments, not profits, and that wage payments are deducted as costs from what would otherwise be all profit income. No capitalists -> no wage payments, all profits. Capitalists -> wage payments, reduced profits.

    B. The capitalist role provides value to the production process. Workers are not the only people who are adding value. Capitalists add value in the form of intellectual direction of labor, capital allocation, coordination, and all the other work that needs to be done other than operating machinery, using one’s hands, and so forth. Capitalist income is earned through the value capitalists provide in the production process.

    2. Most average people, because they tend to consume most of their earnings, believe that consumer spending is the most important spending, and that it, not saving and investment spending, drives the economy and generates economic progress. They falsely believe that most spending in the economy over any given year is primarily consumer spending. You hear the myth all the time: “The economy is 70% consumer driven”. Couple this with the very prevalent Keynesian myth that savings are dangerous/destructive, while government “spending” is stimulative, and we have a situation where the seeming goal of a healthy economy is to maximize consumption spending.

    The best way to counter these myths is twofold:

    A. Point out that most spending in a modern economy is in fact financed by saving. 70% of the economy is not consumer driven. It’s more likely it’s 30%. For consider: $0.70 of consumption leaves just $0.30 of investment spending for every dollar exchanged. That means the rate of profit in the economy should be (Aggregate Revenues – Aggregate Costs)/(Capital Invested) = ($1.00 – $0.30)/$0.30 = 233%. HELLO! Clearly something is wrong with the 70% claim. And so there is. If the rate of profit averages around 10%, then it means investment spending vastly exceeds consumer spending in any given year. But how can that be? Wouldn’t it mean that costs are vastly greater than revenues every year? No. The missing link here is that the costs of investment spending are spread out over time, primarily through depreciation. Investment spending can consistently exceed consumption spending, while costs are consistently lower than revenues. In short, the idea is that the role of saving and investment must be understood as the most important and most significant spending in the economy.

    B. We have to eliminate the pathological fear, attacks, and obsession over the concept of saving. It comes in many forms: We are hurting because people are holding cash instead of “spending” it. We are hurting because consumer spending is falling. We are hurting because too much money is going to derivatives and stocks, and not enough to consumer goods. Etc.

    Once you get to the core philosophies that average people have, and get them to see the errors at this fundamental level, THEN you will open their minds to the technicalities of other tax systems.

    You will not win if you try to approach them with facts, statistics, and so on. You have to address their morals, their beliefs about the world, their sense of power, the philosophical influences they have been exposed to in the media, literature, movies, art, those kinds of things.

  7. Gravatar of Jon Jon
    30. March 2013 at 11:39

    Scott, you are right. Plus we already have the rules and mechanisms to manage these regime: IRAs. We just need to eliminate the contribution cap and the early withdraw penalty.

  8. Gravatar of johnleemk johnleemk
    30. March 2013 at 11:58

    Agree with Jon. Also reposting my earlier comment on how I realised payroll (i.e. labour income only) taxes are equivalent to consumption taxes:

    Any regular income tax is already a consumption-ish tax, because a good proportion of income goes to consumption. To the extent that we reduce any tax leveled on the proportion of income which is saved/invested, we are making the income tax more like a consumption tax.

    If we change the income tax into a pure payroll tax on income earned from wage (non-capital) sources, then we have eliminated all taxes leveled on the proportion of income which is saved/invested. We are only taxing the income which is consumed. By definition, we have turned the income tax into a consumption tax.

  9. Gravatar of Lawrence D’Anna Lawrence D'Anna
    30. March 2013 at 13:26

    The equivalence of wage and consumption taxes is so darn obvious that I’m a bit embarrassed I didn’t realize it until you pointed it out. It kind of reminds me of the Monty Hall problem. Your brain just immediately jumps to a unshakable belief in the wrong answer, but if you actually sit down and write the equations then the correct answer is trivial.

    Scott: Aren’t there still difference between the two in terms of their administrative costs though? Which is more of a problem: wages disguised as job perks or wages disguised as capital gains?

  10. Gravatar of John John
    30. March 2013 at 14:11

    Payroll taxes are insipid. It goes back to the idea that the objective of tax policy is to take as much as possible while generating the fewest complaints. If people had to pay their payroll taxes on one day along with their income taxes, they would understand how bad taxation really is and desire lower taxes and smaller government.

  11. Gravatar of Morgan Warstler Morgan Warstler
    30. March 2013 at 14:11

    Kevin of course I agree with you. Scott knows this.

    I understand the choice. And I want everyone to take the equity, I want the tax code to favor sweat equity as basically zero capital gains… even outside conventional start ups, I want SMB owners to be able to pass cash thru from one SMB to another without having a taxable event (like a 1031).

    But, Scott’s being very specific here, he’s saying two things:

    1. That taxing the capital gains is double taxation.

    2. His mental image is a long time horizon where the average guy, like Scott, earns % returns per year, and suffers from inflation of Y% per year.

    And the reality is there’s a entire class of entrepreneurs that it’s all basically equity and SELL in 18-36 months, and do it again, and again, and again.

    And I want to publicly favor them, but I don’t want to pretend they paid taxes on that money already. I want Scott to SAY they shouldn’t pay taxes!

    BTW, we’re doing a unique app accelerator in Austin w/ newt as co-founder.

  12. Gravatar of Ram Ram
    30. March 2013 at 17:08

    In a competitive financial market, a series of expected future cash flows, CF(t), is priced so that its net present value equals zero (this follows from the Fundamental Theorem of Asset Pricing). The present value of the expected time-t cash flow is CF(t) / (1 + r)^t, where r is the risk-adjusted discount rate. The price of such a series, therefore, is the sum of the above expression over t (from the present forward).

    Suppose a worker earns wage W at present, and must decide how much of W to consume, and how much to save, in each period going forward. Her planned consumption path is tantamount to a series of expected future cash flows, and thus if the market price of her after-tax consumption path is the same under two tax schemes, then the schemes are economically equivalent (that is, from the perspectives of efficiency and distribution). Under a (linear) wage tax, she pays T * 100% of W to the government, leaving her with (1 – T) * W at the outset. Under a (linear) consumption tax, she pays T * 100% of her planned consumption (C), leaving her with (1 – T) * C(t) in each period. The present value of the latter series is the sum over t of (1 – T) * C(t) / (1 + r)^t. The present value of the former series is (1 – T) * the sum over t of C(t) / (1 + r)^t. Since T is constant over time, it can be moved in and out of the summation. Hence, the market price of the two consumption paths is the same; QED.

    Things get more complicated if we consider non-linear taxation. The intuition, though, is the same: whatever one does with one’s wage in the present, in the fullness of time it is consumed in its entirety. The confusion stems, I think, from the fact that if one saves, then consumes, it seems that one is consuming more than one otherwise would, when in present value terms (that is, adjusting for opportunity cost) one is consuming exactly the same amount. Thus, whether the tax man takes your money beforehand or afterwards, he takes the very same amount if money at different points in time are compared on an apples-to-apples basis.

  13. Gravatar of Benjamin Cole Benjamin Cole
    30. March 2013 at 19:46

    “When you study economics you find out that lots of things average people believe just aren’t so.”—Scott Sumner.

    I told my wife I love Scott Sumner, but I dislike it when he dismisses non-economists as “average people.”

    She said,”Don’t worry, love. Sumner is not talking about you. You are not ‘average.’ You are below average.”

    But as for a wage tax being the same thing as a consumption tax, I will quote my uncle: “Even if it is true, I still don’t believe it.”

  14. Gravatar of Joe Eagar Joe Eagar
    30. March 2013 at 20:49

    Inflation is caused by monetary stimulus? Not an overheating economy? Overheating is certainly one possible cause (that’s why it’s called “overheating”), as is currency devaluation, central bank financing of deficits, and a great many other things (monopolistic pricing by labor unions can certainly create inflation, though countries usually create institutions to prevent that).

  15. Gravatar of Lawrence D’Anna Lawrence D'Anna
    30. March 2013 at 22:35

    Joe: a central bank has absolute power to create and nearly absolute power to destroy its own currency. The only thing that can create inflation is the central bank’s choice to create inflation. Anything else can only alter relative prices.

  16. Gravatar of ssumner ssumner
    31. March 2013 at 02:46

    Steve, That’s right, although the payroll tax is still far better than an income tax with IRAs, because it’s much simpler, people don’t have to waste lots of time doing tax forms.

    Lawrence. I’m not sure which is more easily evaded, but I’d guess that a “half and half” approach is better than putting all your eggs in one basket. A 20% tax rate on each (VAT and payroll), is superior to 40% on one. It’s harder to evade two very different taxes. The progressivity could be done via a payroll tax, plus a exclusion of poverty level consumption on the VAT–through rebate.

    Morgan, Read Lawrence and Ram’s comments–they get it.

    Ram, Good comment.

    Ben, Yes, “average people” was unfortunate terminology.

    Joe, Currency depreciation and monetizing of deficits are examples of monetary stimulus. (Or at least can be an example—for depreciation.)

    The economy was far more overheated in 2000 than 1980, but inflation fell from more than 13% in 1980 to less than 3% in 2000.

  17. Gravatar of Morgan Warstler Morgan Warstler
    31. March 2013 at 07:36

    Gah! Be honest!

    Scott, Instagram had 11 employees and sold for $1B after 15 months.

    The founder made $400M.

    Show me how his $400M capital gain was previously taxed as income.

    It wasn’t.

    And that’s a good thing. It’s GREAT that we are willing to reward entrepreneurs with lower taxes, on the return of their sweat equity.

    What’s more… Sweat equity returns > investment returns – we should favor the first over the second.

    What’s not a good thing is that you keep trying to shoe horn a specific reality, a specific example, into your macro rule.

    We’ve done this once before, you finally argue Instagram isn’t normal. And caveats don’t win arguments. Just fork it over Sumner. :)

  18. Gravatar of libertaer libertaer
    31. March 2013 at 08:02

    Arn’t wages just returns on human capital investments, some done by yourself, most done by your parents?

    If you don’t want to tax the returns on inherited real or financial capital, why tax the returns on inherited human capital?

  19. Gravatar of Jon Jon
    31. March 2013 at 08:37

    Morgan,

    That’s not how It works. Instagram was suddenly bought out by FB. Usual capital gains rules apply: own the stock for at least a year, or it is ordinary income. If you get actual stock, you are taxed at the market value at the time of the grant as if it were ordinary income.

    The usual course if business is the insiders have shares but need investors. Those investors swamp out the insiders. These then get paid back with new shares. This is considered wage compensation under the tax law an it is…

    So almost everything the employees get they get as ordinary income unless they go through a long period where the value of the company is stagnant and they already own the shares. Most employees won’t be in this class because they lack the investable funds to exercise their options or buy stock. All of those stock acquisitions need to be paid out of labor income just as Scott says. You cannot just give employees stock and avoid payroll tax.

  20. Gravatar of Morgan Warstler Morgan Warstler
    31. March 2013 at 08:58

    “That’s not how It works. ”

    And then you repeat what I said. I promise you I 110% understand how it works. I’m on my 9th venture funded start up, most of my professional friends are serial entrepreneur, founders, big equity small pay guys.

    —–

    The $400M was not previously taxed as income. It is definitely MAY BE a return from forgone cash, and it is money the company didn’t have to raise.

    But IF the founder wanted some more salary and sold off a bit of equity (he’s not really forgoing it to help company), AGAIN, the strike price – value of entity when he started was near zero and in 15 moths its worth $400M.

    Scott can’t tell a story that’s not macro level, where that $400M comes from already taxed income thats been invested.

    If he could tell that story, he’d tell it.

  21. Gravatar of Jon Jon
    31. March 2013 at 09:35

    Morgan, I don’t get your point. Some investments payoff at many times the risk adjusted average return. So it must be because some do the opposite. The capital is still bought by using wages.

    We can even pay the tax incidence game here and you will still get back to wages. The reason is definitional.

    We could choose to tax other points in the economy: eg through a vat and reach the same end. So Scott’s claim that all income is wage income is a choice, but it is a choice he made under the principle that deferred consumption and present consumption should be taxed the same–and certainly that deferred consumption should not be taxed more.

  22. Gravatar of Morgan Warstler Morgan Warstler
    31. March 2013 at 09:59

    Again, Scott make s very specific claim that only works in the macro. That capital gains is double taxation, because the income was already taxed.

    The moment Scott used himself as a high saver example, he became responsible for explaining why my $400M example.

    Scott thinks he’s making an argument that’s strong, but it weakens my stronger argument: we should favor start up equity gain entrepreneurs and do so by ADMITTING they haven’t paid income tax already on their gains.

    I’m making a very real point about the plank / platform of true free market guys – favoring and having a bias towards certain kinds of economic players is actually GOOD for free markets.

    Since Big Biz = Big Govt and Big Govt. has negative externalities, favoring SMB entrepreneurs keeps markets free.

    This is about my larger argument about #distributism.

    It actually no different than Scott’s arg about NGDPLT.

    Its the lesser evil argument.

  23. Gravatar of Philo Philo
    31. March 2013 at 14:52

    “[L]ots of things average people believe just aren’t so. . . . [Contrary to what average people believe,] a wage tax is identical to a consumption tax.”

    I fear I may be the average person who, by a previous comment, prompted this post, in which case I apologize for my ignorance. But in partial self-defense: it seems to me that the distinction between *consumption* and *saving/investment* is clear-cut, while the difference between *wages* and *non-wage income* is very fuzzy. For example, I think it is unclear whether some of hedge-fund managers’ income is *really* wages or not. I think it would be reasonable to consider some of a doctor’s or lawyer’s salary or fee income to be a return on his/her previous *investment in human capital*, thus not really “wages.” How can a principle based on such a fuzzy concept (‘Tax wages’) be equivalent to a principle based on a clear concept (‘Tax consumption’)?

  24. Gravatar of ssumner ssumner
    1. April 2013 at 06:08

    libertaer, That’s a good point, and suggests that human capital investments should not be taxed, or that subsidies should offset the taxes.

    Philo, No, I didn’t single you out. You example suggests that both are fuzzy concepts. Consider education. If education is consumption then it should be taxed, if it is investment then it should not be taxed. (It is some of each.) If we don’t tax education because we view it as investment, then the wages earned because you are better educated should be taxed, for the same reason that money pulled out of a 401k plan should be taxed–you didn’t pay taxes when you made the investment.

    In practice, education in the West is heavily subsidized, which somewhat offsets the tax bias against human capital formation.

  25. Gravatar of JL JL
    1. April 2013 at 07:47

    Scott,

    Your main gripe with taxes on capital is always the double taxation.
    What do you think of a system with no income taxes, only taxes on capital?
    That would solve the issue of double taxation.

    In fact, I think a good way to achieve a more equal and wealthier society would be to allow people to build up sizeable investment accounts, say up to $1M, totally tax-exempt: contributions are tax deductible; capital gains are tax-exempt if reinvested; and I would even allow dividends paid to these accounts to be deductible as expenses.
    The only tax is an income tax on money taken out of the fund.
    And the fund can be passed on to your heirs, tax-free, to ensure intergenerational wealth building.

    For the past decades the top 0.1% have avoided a lot of tax through legal loopholes, which has given them ownership of a vastly disproportionate part of total wealth.

    So we need to start creating opportunities for the middle-class to compete on equal footing, in order to maintain a strong middleclass.

  26. Gravatar of Floccina Floccina
    1. April 2013 at 09:07

    I think that best way to educate people about this is to:

    1. Talk about tax incidence.

    2. Remind people that for Government to consume more (or rather to transfer consumption to others), someone needs to consume less. For example, assuming that Warren Buffet will actual follow though and give his fortune charity, it is impossible at any reasonable level of taxation to tax Warren Buffet!

  27. Gravatar of myb6 myb6
    1. April 2013 at 10:58

    I’m really tired of this talking point. Your faulty assumption here is that the wealthy will EVER consume in the fashion we currently recognize and tax as “consumption.” They won’t. How do you measure the consumption value of paying above-market to acquire a controlling stake in a company? How do you tax the consumption value of not-actually-charitable “charitable” donations? How do you tax the consumption value of political donations? How do you tax the consumption value of corporate expenses in flights/offices/entertainment? Is art an investment or consumption? Land?

    Yes, for >95% of us shifting to a consumption-only taxation system makes sense. No labor or capital taxes. Great. But you completely lose me when you assert, without any support whatsoever, that a consumption-only taxation with progressivity is remotely realistic.

    I’d also like you to address that, far more than is the case with labor, with its cultural lumpiness and income effects, the price of capital has the taxation baked in. Reducing capital taxation thus creates a giant windfall for the incumbent holders of capital. This effect is considerably more apparent than any prophesized economic growth.

    About those prophesies, why don’t they seem to materialize historically? Singapore, Japan, Germany, Switzerland all have <= US income but considerably larger capital accumulation. This suggests to me that quantifiable capital, the kind you can encourage through lower taxation, is at best a secondary driver of economic growth. Some forms of capital accumulation may even have negative social value due to systemic effects.

    The final problem is more cultural than economic. It doesn't bother me in the slightest that Bill Gates can afford luxury consumption. My problem is the power his wealth grants, a problem I don't think regulation can realistically solve. It is thus rational for me to support taxing the elite as much as possible until it starts seriously undermining overall growth, a point which I don't think the US has ever approached.

    Professor Sumner, I've learned a great deal from you on monetary policy, and your influence on that issue's zeitgeist is extremely impressive. I don't think you've invested as much thought on HNWI taxation, nor do I believe straightforward technical analysis is as useful. Thus I'm requesting you keep a more open mind for those who disagree with you, without trying to establish a false equivalency with people who ignore environmental costs. I'm very suspsicious of taxation or social spending, and thus don't appreciate the culture-war tone you're taking here.

  28. Gravatar of dtoh dtoh
    2. April 2013 at 03:46

    Scott,
    1. Morgan is right. It’s too hard to distinguish between the return on capital and the return on work. If you followed your advice and taxed as wage income any returns from a business where there was actual work performed. People would just become passive investors….why would you want to encourage smart, successful, entrepreneurial people to not work?

    2. Human capital is no different than any other kind of capital. Why should it be taxed.

    3. Please stop being stubborn and just give up this idea of any kind of wage tax. A straight PCT is much better.

    And don’t say the PCT rates can’t go high enough. That’s simply because they always exist in conjunction with wage or income taxes. Get rid of wage and income taxes and a PCT can go a lot higher.

  29. Gravatar of ssumner ssumner
    2. April 2013 at 05:29

    JL, I oppose that, as a tax on consumption is much more efficient. The problem isn’t that capital income is double taxed, the real problem is that future consumption is taxed at a higher rate than current consumption. Your proposal doesn’t eliminate that problem.

    Floccina, Good point.

    myb6, All of those problems are equally true for an income tax system. Should charity be tax deductible? How about corporate jets? The problem doesn’t go away if you switch from a consumption tax to an income tax.

    Singapore actually has higher income than the US in PPP terms, but I’d add that capital taxation is only one of many factors influencing income. Germany has high labor taxes relative to the US, which reduces work effort and is the main reason their overall GDP/person is lower.

    I’d much rather have Bill Gates give his money away in foreign aid to Africa’s poor, than the US government finance jets for the Pakistani, Israeli and Egyptian militaries. I prefer power to be decentralized, not centralized.

    However I do favor weakening IP protections, which would reduce the wealth of the ultra-rich.

    dtoh. I’m not sure it’s that hard. You can simply let firms expense capital investments, and then tax all income. Human capital can be dealt with by not taxing education, treating it as an investment. BTW, you face the same problem with a VAT—should education be taxed? How about a corporate jet?

  30. Gravatar of myb6 myb6
    2. April 2013 at 12:10

    P1: Classification is inherent to consumption taxation, whereas income taxation has at least the possiblity of being agnostic, we just choose to create a bunch of deductions.

    The crux of your system is that investment shouldn’t be taxed. My critique is that, for the elite, it is impossible to distinguish between investment and consumption. You haven’t addressed this at all.

    P2: You’ve agreed with my point that financial capital accumulation is only a secondary driver of growth, then. Thus, it should not be given policy priority by default, and even with small government taxes must come from somewhere. That was as far as I was trying to reach here.

    P3: I prefer decentralized power too, which is why I prefer the democracy to plutocracy, and why I prefer those who have gained the most from our institutions to pay for their maintenance. Specific critiques of government expenditures are besides the point, as are specific critiques of the consumption habits of wealthy individuals.

    Other: I don’t expect you to cover every possible point, but I feel the baked-in pricing effect of capital taxation is pretty important, as far as merit relative to labor taxation and the distributional effects of any tax changes, yet non-academic discussions seem mute here.

  31. Gravatar of dtoh dtoh
    2. April 2013 at 20:27

    Scott,

    You said, “I’m not sure it’s that hard. You can simply let firms expense capital investments, and then tax all income. Human capital can be dealt with by not taxing education, treating it as an investment. BTW, you face the same problem with a VAT””should education be taxed? How about a corporate jet?”

    You’re making it too complicated.

    Tax all consumption (by individuals)…education, life saving medicine for impoverished children… everything. Anything that’s paid for by a business and is a legitimate business expense is exempt from taxation.

    Any asset purchases by individuals not for business use over $75k (houses, Ferraris, jets, beach property, etc., etc.) are subject to an annual fixed asset tax (which ideally would be administered by the states as serve as the sole form of revenue for state and local governments). (Might allow some usage charges also).

  32. Gravatar of Bob Bob
    4. April 2013 at 09:25

    At the very least, consumption taxes and wage taxes are different if the wage earning and the consumption happen in different jurisdictions. This is especially different if those jurisdictions have different tax schemes.

    Imagine the US switches to consumption tax only, while wages are the only thing taxes in Freedonia. If I retire in Freedonia, or have very expensive vacations in Freedonia, I am either avoiding taxes, or at the very least, deciding that the US gets a lot less taxes from me than it would if the tax schemes were the other way.

    Even without changing jurisdictions, unless the expectation is to have a tax scheme that will never change at all, one can also still use the capital/consumption divide to speculate on future tax changes. The expectation that we’ll move to a consumption-only scheme would surely affect today’s consumption rate.

  33. Gravatar of dtoh dtoh
    4. April 2013 at 18:35

    Bob,
    Not that much of a problem. Charge the consumption tax to US residents on their worldwide consumption.

  34. Gravatar of Steve Roth Steve Roth
    6. April 2013 at 10:47

    Scott, what would you think of Milton Friedman’s suggestion from Capitalism and Freedom, page 174 in my edition: Tax all corporations like S-corp pass-throughs. Shareholders pay taxes on the year’s corporate profits (I say: at normal earned-income rates), whether or not they’re distributed. No more double taxation, but no more preferencing over earned and interest income, or indefinite/eternal deferral.

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