A friend in Cambridge shared this article about Bernie Sanders proposing a 90 percent top income tax rate. I tried to figure out how it would work in practice given our not-so-simple tax code.
My friend’s justification for the higher tax rate was “You want to live in a country? With paved roads and safe bridges and lots of customers for your products? Then pay for it!” Some of his other friends observed that the most productive citizens might be motivated to emigrate (e.g., Eduardo Saverin fled to Singapore, where the entire government is run for about 15 percent of GDP (compare to roughly 40 percent here); almost anywhere in the EU or Switzerland would also become a low-tax option were the U.S. to adopt the proposed rate). He responded “If the threat is: rich people will take their money and go live somewhere else, you know what I say to that? Good riddance! You want to be an American and take advantage of the biggest army on the planet defending your shit? Pay for it. You want access to the best consumer market in the solar system? Pay for it. Capitalists: always looking for a handout.” His friend chimed in “Yea I love the anti-government folks. They are the ones who live in this weird world where the government is useless…but take advantage of it the most” and he responded “Exactly: handouts. You don’t get to be rich without taking maximal advantage of the system.”
I then asked “Where do you define rich? Personally I would choose the threshold for high taxation at $1 more than whatever I happen to earn in any given year. And you are making powerful arguments that all wealth properly belongs to the government for enabling it to be created or preserved. Why not a higher tax rate than 90% then?” and that generated a consensus that the threshold for the 90% rate should be $1 million per year (given state and local taxes, therefore, it would become tough to take home more than $500,000 per year).
Given that the same people who support higher taxes on the rich also support higher profits for child support plaintiffs I asked “How would you address the issue of child support in your ‘90% over $1 million’ system? Many states, including Massachusetts, set child support based on pre-tax income. If a woman met a finance industry guy in a bar and got pregnant following their one-night encounter, she might get a $1-1.7 million/year child support revenue stream (depending on the state) based on his $10 million/year income. But under your system the child support (not tax deductible, unlike alimony) would exceed the defendant’s after-tax income.”
The answer to that conundrum was that only a small percentage of child support plaintiffs get more than $500,000 per year in revenue from any one defendant (which still does leave open the problem of what to do with those defendants whose child support obligation exceeds after-tax income).
I then asked “What happens to mid-career people who have already saved a lot? Suppose an entrepreneur has $100 million in savings from a previous company. Why does she keep working if the most she can possibly take home is about $1 million? Do we accept that people like her exit the workforce?”
The response from the the original sharer “People who have $100 mil in the bank should be figuring out how to spend that money in the most productive possible way, not working their butts off trying to make more money from a salary! What the hell is the point of that?!” I pointed out to him that he was a big admirer of Tesla “which was founded by Elon Musk after he already made $165 million from PayPal (and started PayPal after making $22 million from Zip2). Would Musk would have done the same thing with no way to earn more than $500k to $1 million per year? Or would be better for society not to have rich people like Musk at all?”
The answer regarding Musk, who has gone from being worth about $22 million (pre-tax) to $12 billion was that “Elon Musk is trying to save the world. That’s why I admire him. He’s not in it for the money; that’s the last damn thing he needs. He’s way smarter than that. He knows money does him no good on a burning planet [global warming reference]. And he didn’t make $165 mil from PayPal in salary payments smile emoticon He did that by creating massive shareholder value.” [Nobody commented on the irony of a person so uninterested in money earning $12 billion.]
So it turned out that at least this advocate for a 90 percent tax rate wants to distinguish between “unproductive” W2 income and “productive” capital gains income. But how does that work in practice? Couldn’t companies issue employee stock options that would be tax-free at the time of issue (see irs.gov) and then take the money that they would have paid in W2 salary and use it to buy back shares, thus lifting the price of the stock? The formerly high-paid W2 workers would now be high-paid option exercisers. Perhaps this would work out better for public company shareholders because the insiders couldn’t enrich themselves without returning cash to shareholders as well.
And what about people who have a high income because they operate a business as a sole proprietor or partner? Are they also subject to this 90 percent tax? If so, do they cut back to working 15 hours per week and let the business shrink? If they’re not subject to this 90 percent tax does that simply mean that companies bring in their most important/valued people as 1099 consultants on a project-by-project basis? Then the “consultants” can keep more than 10 percent of their income. With a high minimum wage (previous posting) and a high top tax rate, the U.S. becomes a nation of consultants at the top and bottom end of the income scale?
What do readers think? Could the 90 percent tax rate work? If so, how? And let’s say that that it does work but results in the high-income people that make us sick with envy emigrating to Europe and Singapore, is that good or bad? We lose the people who pay about half of current federal income taxes (source) but prices for downtown apartments, fancy suburban mansions, and beach houses will all presumably fall. A variety of European countries had very high tax rates in the 1970s and average citizens didn’t get upset when their most successful peers emigrated to Monaco (or just moved their productive assets offshore, like U2).
There is an experiment going on that should help answer these questions. Although still at a small scale, the migration is happening. The answer is Puerto Rico. Zero federal/state income tax on capital gains. Keep your US citizenship and enjoy US infrastructure (sort of). It’s the only place in the world that this is possible for US citizens. For wealthy people with capital gains income, it’s like someone paying you double to sit on a Caribbean beach. Comparing to Florida, PR does it better.
Robert: That is amazing. http://www.forbes.com/sites/robertwood/2014/07/04/hate-taxes-move-to-tax-free-puerto-rico-stay-american-avoid-irs/ has some extra info.
“Where do you define rich?” – and yet everyone still talks about an income tax, rather than a wealth tax. So isn’t the real goal to soak those with high W2 income, rather than to soak the rich?
Anonymous: Yes, Bernie Sanders would impose a tax against “becoming rich”, not a tax on “being rich”. Needless to say this is much more likely to be supported by already-rich liberals!
Phil, why are you still in Boston? Fly down and visit, there are good private schools here for the kids. There is a helicopter landing pad in the community so you should be all set.
Just a note – the federal and state gas taxes, are “supposed” to pay for all road creation and maintenance. However a bunch of it keeps getting siphoned off to pay for railroad improvements and light rail scams, among other things.
The left are still darkly muttering about vengeance regarding IKEA emigrating from Sweden in the 70s and its lack of loyalty in being taxed until its pips squeaked. I believe this was due to a singularly ill-considered tax proposal, where companies were taxed and the funds given to unions to buy shares in the same companies. (After a while, the assets were thus owned by responsible institutions.) It was never fully implemented, but has to be near the top of destructive tax law.
In retrospect, it seems like a lot of head offices, family fortunes and high net worth individuals quietly were moved abroad too. So there’s that.
Sweden also had at about the same time the infamous 102% income tax rate which the leftist government eventually was shamed into reforming. Good times, good times.
Canada might be in a good position to cater to tax fugitives personal and corporate. Let’s see if they seize the day.
It’s interesting to think about what happens to the Clintons (and I guess anyone else with the ability to rake in 7-8 figure annual incomes due to their influence/gravitas/special skills) under this tax regime: if one only gets to keep about 500k annually, I guess the rest gets sluiced off into the tax-free family foundation.
It seems that the usual pattern for this has close friends and the kids serving as highly-paid directors, expensing an exciting lifestyle of flying around on private jets do-gooding and influencing things. One wonders how much of that 90% would ever actually be collected. The enactment would represent a good day for the accountants and lawyers, I guess.
Can I simultaneously believe that 90% income tax rates are dumb and also we’d be better off if every 20 years we strongly encouraged all the people with high net worth and income to self deport? If they want to go to Singapore, fare them well. Eduardo left, but we’re still stuck with Zuckerberg doing idiotic things like advocating for mass immigration and dumping money on dysfunctional Atlantic City schools. American rich people are statistically horrible from a political perspective. They love incredibly dumb ideas like high income taxes, mass immigration, and all kinds of stupid social programs and foreign policy/wars. The rich are far left and want higher taxes, contrary to popular ideas.
Also, Singapore is a parasite state. They basically exist to launder and warehouse money from around SE Asia. They do not provide for regional security on their own dime. So it’s not quite fare to use them as a benchmark against a real country.
The best argument against democracy is a five-minute conversation with the average voter.
I think the experiment’s been done. In the US, the top rate was 90% from the mid-1940s till the mid-1960s. I wonder if anyone has any analysis of the effects from then.
http://en.m.wikipedia.org/wiki/Income_tax_in_the_United_States
What ends up happening (did happen in the US when the rates were that high) is that few people end up paying them – instead you find loopholes and structure around them. It’s great for tax lawyers.
ND, Izzie: I don’t think that you can compare what people did in the 1950s to what they might do now. There was no Internet in the 1950s. You wouldn’t have wanted to live in Shanghai, for example, or Singapore. There were no business jets (the Learjet was first delivered in 1964 and had minimal range (see http://en.wikipedia.org/wiki/Learjet_23 )) and certainly nothing like a modern Gulfstream 650ER that can fly non-stop essentially from any point on the planet to any other point.
(But if you did want to compare tax rates you could also say that tax rates were lower in the 1950s. The capital gains rate then was 25 percent. As long as you had sufficiently smart accountants and lawyers you could convert all of your income to capital gains and pay at the 25 percent rate. That’s the same as the current long-term capital gains rate (including the Obamacare supplement), lower than the current short-term capital gains rate, and remember that state tax rates are higher now than they were then.)
This is crazy.
Where did the 90% came from? Why not tax at 100% and be done with it? Once you tax at 100%, then my neighbors will take care of my yard for me, fill my refrigerator, maintain my car, do the dishes for my wife, take the SAT for my kids, set me up for cable TV, and more while my family and close relatives of mine are on a cruise ship for a life long vacation.
What’s wrong with this picture? Did we ever had this kind of a model in the past? Pharaohs, Emperor and Kings taxing their citizens (be it money or forced label)? Where can I find something close to this today? What country will take care of my yard, fill the refrigerator, do the dishes for me, offer me cable TV, etc.? Actually, I don’t have to look far, a town next to mine comes close to this model, a place called “correctional institutions”.
George: “slavery” in Ancient Egypt was paying a 20% tax. So I don’t think that you will find too many models from the distant past.
But I don’t think it is a surprising political choice for a majority of voters to support laws that will encourage the most successful envy-generating citizens to depart. Nor for people who are already rich and competing for beach houses to try to impose a high tax on anyone else joining them in the rich club.
Wouldn’t we all feel better about what we have if there were not rich people in our midst enjoying their 100,000-square-foot houses? Perhaps the biggest unfortunate change since the 1950s is that rich people in foreign countries are no longer out-of-sight/out-of-mind. It is becoming hard to ignore that, on average, citizens of Singapore are richer than Americans. And it is hard to keep our newspapers from writing about rich bastards in China, Dubai, London, Davos, etc.
sammysamsam #9
I recall having gadgets made in Singapore when I was growing up. Apparently Singapore still has strong industries with manufacturing alone at about 25% of their GDP: https://www.edb.gov.sg/content/edb/en/industries.html
Singapore have had strong navy, especially for its size. I think the main idea here is to blockade the straights in case of military threat and make attack on it unprofitable. Singapore navy is up to date http://en.wikipedia.org/wiki/Republic_of_Singapore_Air_Force and probably is the largest per person in the word. It also has robust airforce with F35 deliveries pending this year http://en.wikipedia.org/wiki/Republic_of_Singapore_Air_Force
I would say it carries more than its weight in support of civilization.