I was just discussing this as a result of watching this video: https://www.youtube.com/watch?v=-asltUUvcGU in which they discuss the result of the western capitalist system loosely resembling a meritocracy, except in the case of inherited wealth.
An exceptionally productive individual can generate billions, but then when he dies the money goes to his heirs which may not have done anything to deserve commanding that much wealth other than having been raised by (and having the genetics of) the exceptionally productive individual, which is a far cry from being exceptionally productive themselves.
My thought was to create a cap on inheritance. Enough so that the heirs would be able to live a normal middle class life without working, but not be disgustingly wealthy like the parent. ~$5 million seemed like enough to live off interest for a lifetime. I don't think productivity would be disincentivized too much by this, as the productive individuals still get to use their wealth as long as they're living. It'd probably be pretty difficult to plug all the loopholes but I think it's worth thinking about.
edit: another thing, we could lighten some other taxes (income, property, whatever) for this increased death tax such that the overall government tax income remains roughly the same, to make the proposal more palatable. Overall, everyone keeps more of their wealth, and the playing field is leveled and we're a bit closer to an actual meritocracy.
Exactly, there is nothing wrong with individuals not doing anything useful and just modestly living on inheritance but it's a serious problem (if not the most serious for mankind) when people who just happen to win the birth lottery are able to bend societies to their will via lobbying, propaganda or outright hereditary rule.
Most of this wealth probably has nothing to do with merit. For every Steve Jobs there's a whole bunch of people who did nothing more than sit on property that appreciated in value and yielded rents.
The tax system seems to prefer this to actually earning money for some reason.
True, and almost everyone would be unaffected by the law I proposed. If you have two children, you'd need >$10 million in assets for it to affect you. I guess what I proposed is a fix for just the super-rich's inheritance, but it's low hanging fruit and there's a lot of it.
> The tax system seems to prefer this to actually earning money for some reason.
The tax system favors unearned income over earned income to adjust for risk. If you work a job you're guaranteed to be paid for the hours you worked (assuming an honest employer). Investments have no guarantees and you could lose all the money you put in.
There's an argument to be made that the top tax rate for unearned income is too low in some countries, but it makes sense to me that the tax rate for unearned income should always be less than the tax rate for the same amount in earned income.
There may be reasons unrelated to investment risk.
For example, the risk of losing an earned income stream because my (assumed honest) employer (fires me, goes bankrupt, etc.) seems much higher than the risk of losing an unearned income stream based on my investment in bonds backed by the US government.
When everyone is jumping on the band wagon its probably time to run away and passively investing in guilts is dangerous when bank rates return to normal - there will be a massive loss of capital.
OTOH passive investment will only track the market and return an average of 7-10%. Compared to that small-time landlording (which I define as 1-10 units), a popular side-income stream for many working professionals, returns 10-20% in return for higher risk and volatility (you could get bad tenants or have units go vacant).
Also since passive investment requires "no skill and little luck" it's one of the few entry routes into the capital-owning class available to working-class people and middle-class professionals. Anyone can buy an ETF for a couple hundred dollars. You don't need a hot stock tip or a insider lead on an undervalued property. So I'm not sure why one would want to start treating unearned income exactly the same as earned income at the precise point in history that we've learned about the magic of passive investment.
Its not fraking "income" for gods sake if you don't know the difference between income and capital gain you probably should learn it before commenting on this issue.
"Unearned income includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions."[1]
"Unearned income includes things like annuity payments, pension income, distributions from retirement accounts, capital gains, interest income, dividends, passive income generated from rental real estate, alimony, stock dividends, and bond interest." [2]
Sorry...is that what you meant? Or were you referring to the definition of earned income?
Trouble is "unearned income" is one of those dog whistle worlds like "rent seekers" - which tends to lead to rants about "the gold standard" and onwards to well we all know where that ends.
If you lose a job, you just lose the income stream and 2 weeks of salary at most (+ whatever time it takes to find a new job). With an investment there's a risk of losing the asset entirely. Rental property gets buried in a landslide, company goes bankrupt, gold gets stolen etc. There's also the risk of not making any return at all: rental property remains vacant, company barely breaks even, gold only tracks inflation etc.
> investment in bonds backed by the US government.
Those bonds have a correspondingly low yield, to reflect their low risk.
Certainly some investment can be classed as "gambling". But not all, maybe not even most. Starting, owning, and/or running a business is working. Only it's working with no guarantee of any reward.
Again, we can argue about how high the tax rate should be on unearned income vs earned income (20% max is too low IMO). But $50k in unearned income is worth less (risk-adjusted) than $50k in earned income and should accordingly be taxed lower. Maybe $50k in unearned income is the same as $20k in earned income and similarly all the way up the earnings ladder (I don't know the exact ratio; I made these numbers up).
We often talk about survivor bias in business success; how successful people owe something to luck as much as skill or hard work (which is true, IMO). Shouldn't the variance of this success be recognized in the tax code as well?
>Starting, owning, and/or running a business is working. Only it's working with no guarantee of any reward.
Well, yes, that's why the rewards of starting a business are often completely tax free up until a pretty high level. I don't really have a problem with that, which should have been pretty obvious from my above post.
However, that is completely irrelevant to what I said above.
Sitting on property and collecting rent is clearly not working.
>Again, we can argue about how high the tax rate should be on unearned income vs earned income
I'm of the opinion that unearned income should be taxed at 100% and distributed equally throughout the population whereas earned income should be taxed at 0%. I have yet to meet a person who can cogently argue why handouts (e.g. land rents) shouldn't be distributed equally.
Note that starting a business that grows is clearly earned at least up until a certain point (usually the point where the founder lets the employees run most things).
>Shouldn't the variance of this success be recognized in the tax code as well?
You really seem very keen on having the tax code encourage gambling over working.
I'm not so sure that using the tax code to deliberately discourage working for a living is necessarily the best way to generate a productive economy.
> Sitting on property and collecting rent is clearly not working.
I guess we'll have to agree to disagree about that.
Even landlords have to work (and I say this as a tenant). There's tenants to screen, repairs to manage, regular safety inspections to perform. Land rents have volatility and risk as well. There's the possibility of vacancy or bad tenants which leaves you with a property that's not returning any value. A landslide could take away your property entirely and insurance won't cover it (don't scoff; I know someone this happened to). Maybe it's not as much work as running a small business, maybe it is, I don't know. But it's a non-zero amount of work.
EDIT: As I pointed out in a comment above, I think the top tax rate for unearned income should be higher, with more brackets overall. There's no reason for it to be flat 20% when the top rate for earned income is 40%. That unfairly penalizes small-time investors (who get taxed at 15% on an income that would be almost 0% if earned) as well as high-earning salaried people who pay 40% compared to the 20% someone making 20x as much in unearned income would pay.
> I have yet to meet a person who can cogently argue why handouts (e.g. land rents) shouldn't be distributed equally.
Taxing rental income at 100% would kill off the rental market completely. A lot of people like the flexibility of renting and don't want to deal with realtors and banks and mortgages every time they change their job. Many people can't afford the down payment to buy a house so they need to rent until they've saved up enough to do so (you might argue that property prices will go down because of no landlords and there won't be a need for mortgages, not sure that'll actually happen but it's another topic). Businesses also rent offices or retail space when they can't or don't need to buy. At the end of the day, landlords provide a service that's useful, by deploying their capital and labor.
> I'm of the opinion that unearned income should be taxed at 100%
Here's the IRS definition of unearned income:
"Unearned income includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions."[1]
So if you really mean that, you're going to be taxing average-Joe-worker-with-index-funds (that includes me BTW) 100% on his dividends. Maybe we need to start being clear on what the term "unearned income" really means before we argue further :-)
So...CEO making $50 million/year would pay $0 in taxes?
> You really seem very keen on having the tax code encourage gambling over working.
Gambling implies the possibility of loss, the presence of real risk. And even property speculation is still a lot of work; you have to research lots and lots of properties, crunch numbers, line up funding, develop and market the property for rent or resale. Given that it's work with more risk involved than taking a paycheck, why is it a bad thing for the tax code to recognize this?
Yes, but currently it's a % of the estate. I think right now the highest bracket is 40% (correct me if I'm wrong) so an inheritance of $500 million is still $300 million after the estate tax.
Determining someone's future on parental wealth means determining someone's future on a lack of parental wealth - and a vast majority of parents don't have meaningful wealth.
So we're (society is at present) consigning a majority of children to a life of missed opportunity and missed potential. I don't see how that can be a good thing.
My point is that if you were a parent, you'd probably realize that for many parents, a large part of the reason they strive to earn is to be able to leave their children in the best possible position in life. It's not something we should be trying to "correct" by removing that ability from parents, and it's uncomfortable to have the government trying to get in between that relationship, beyond the normal inheritance taxes.
Also, parental wealth doesn't "determine their future" any more than the quality of the parents does. It's certainly a leg up, all else being equal, but it's very possible to live an enjoyable and fulfilling life without much wealth if you're willing to get outside of the focus on consumption, and personally, I'd generally take poor, loving parents over rich, uncaring/selfish/narcissistic parents.
Who you're born to will always be a lottery that leaves winners and losers, even if everyone is equally wealthy. You'll get variable quality genetics, if nothing else, at least until we completely master human genetic engineering.
I'm not a parent (also not the person you're directly responding to), but I think one day I might be. Right now we're encouraging the productive people to pass on their assets, but not the ability to create wealth - which would be better for society, and (totally my own subjective opinion) will lead to a better life for the child as well.
There's still the option of living a comfortable life being totally unproductive - but why let that option waste an unnecessary amount of our society's assets?
This would be an extremely strong move by the government, you're right, but I think most people would be behind it, especially since it would affect less than a percent of the population. We're not headed down that path currently, but I thought it was an idea worth sharing.
>Right now we're encouraging the productive people to pass on their assets, but not the ability to create wealth - which would be better for society, and (totally my own subjective opinion) will lead to a better life for the child as well.
Most productive parents are already highly incentivized to not see their children become totally unproductive wastrels, because the culture that made them productive taught them to value productivity, and good parents typically want to see their children instilled with what they see as good values. I don't think the government needs to do much more there.
> There's still the option of living a comfortable life being totally unproductive - but why let that option waste an unnecessary amount of our society's assets?
There are a couple things to unpack here. First off, wealthy peoples' wealth doesn't just sit in a cave, it's almost always ~100% invested in productive ventures. Even sitting in the bank, the bank is using it to write loans to people and businesses to do things with.
The other thing is that it's part of our very basic social compact that peoples' property is theirs and their family's, not the society's, and only in very limited circumstances can the government/society seize that property for the use of the group.
I rather think that most parents would prefer to spend time with their children over their current desperate need to amass enough wealth to carve out a meagre existence.
Good question, and one that economics has been trying to solve for thousands of years. This is just one idea that I think might make for a more just world under my own (possibly misguided, but let's discuss it) ethics.
An exceptionally productive individual can generate billions, but then when he dies the money goes to his heirs which may not have done anything to deserve commanding that much wealth other than having been raised by (and having the genetics of) the exceptionally productive individual, which is a far cry from being exceptionally productive themselves.
My thought was to create a cap on inheritance. Enough so that the heirs would be able to live a normal middle class life without working, but not be disgustingly wealthy like the parent. ~$5 million seemed like enough to live off interest for a lifetime. I don't think productivity would be disincentivized too much by this, as the productive individuals still get to use their wealth as long as they're living. It'd probably be pretty difficult to plug all the loopholes but I think it's worth thinking about.
edit: another thing, we could lighten some other taxes (income, property, whatever) for this increased death tax such that the overall government tax income remains roughly the same, to make the proposal more palatable. Overall, everyone keeps more of their wealth, and the playing field is leveled and we're a bit closer to an actual meritocracy.