Paul Graham v. Wealth Tax

Is it bad for a society when some people have way, way more money than everyone else? Some people think so, and one of the ways they have proposed to address this issue is a wealth tax. Though proposals come in many forms, the basic idea is usually to levy a tax on assets (as distinct from income) above a certain threshold. For example, a 1% tax on assets above $50 million would mean that someone with $60 million in assets would be assessed $100k (1% of $10 million) in a given year, regardless of what they were doing with their money. Anyone with less than $50 million in assets wouldn’t pay any additional tax.

Despite the rhetoric from some corners, most popular wealth tax proposals don’t function as a mechanism to ‘eliminate all billionaires’ or any such thing. Instead, a wealth tax is theorized (in the U.S., some countries already have wealth taxes) as a more aggressive form of progressive taxation, something advocates view as desirable in the face of rising inequality.

There are unlimited ways to set this up and also unlimited things to do with the tax windfall. You could increase spending on social services, reduce taxes on the middle class, build some cool fighter jets, it’s open season. Supporters of a wealth tax (in the U.S.) typically point to the country’s relatively low maximum marginal income tax rate, tax avoidance among very rich people, and rising wealth inequality as reasons to favor more progressive taxation. Common arguments against a wealth tax are that it would incentivize both tax evasion and capital flight. Detractors argue that the second and third-order effects of a tax would harm the poor and middle class, ultimately outweighing the benefits of wealth redistribution.

What does Paul Graham think about this? Paul is a programmer and writer, notable for founding Y Combinator and publishing essays on the internet. In keeping with the goals of Y Combinator he is a staunch advocate for startups and policies that bolster the startup ecosystem. It was from this perspective in August of last year that he wrote “Modeling a Wealth Tax”, describing the effects of various wealth taxes on a successful startup founder over 60 years:

Suppose your stock is initially worth $2 million, and the company’s trajectory is as follows: the value of your stock grows 3x for 2 years, then 2x for 2 years, then 50% for 2 years, after which you just get a typical public company growth rate, which we’ll call 8%. Suppose the wealth tax threshold is $50 million. How much stock does the government take now?

wealth tax	government takes
0.1%	5%
0.5%	23%
1.0%	41%
2.0%	65%
3.0%	79%
4.0%	88%
5.0%	93%

It may at first seem surprising that such apparently small tax rates produce such dramatic effects. A 2% wealth tax with a $50 million threshold takes about two thirds of a successful founder’s stock.

Wow, that sounds scary! Paul says that even at a 1% tax on assets above $50 million the government will (given 60 years) take 41% of a hypothetical founder’s stock. How much money is that? With the growth Paul outlines the founder’s stock is worth $72 million in year four when the tax first kicks in. The stock grows at 50% for two years and then 8% for the remaining 54 years so without a tax the founder would net $10.3 billion. With the wealth tax the government takes 41% of that leaving the founder with a little over $6 billion.

That is… still a lot of money? I don’t know, we’re talking about sums that are really beyond our capacity for imagination. I think the implied point of Paul’s piece is mostly what I outlined earlier: that a wealth tax like this would disincentivize people from starting companies (creating value) and thereby be a net negative for the people it is designed to help.

I suppose it could be true. It does seem a little disingenuous, though, to concoct a hypothetical scenario as an example of the negative incentive (government takes 41% of your money! scary!) and not mention that you walk away with billions of dollars. I don’t think that’s an uncharitable reading of the essay, especially given that Paul’s net worth is likely somewhere in the nine-figure range. There’s a clear conflict of interest.

Macroeconomics and tax policy are very complicated topics to begin with and the politicization of this issue makes any attempt at an unbiased analysis of wealth tax effects challenging. Even so, it’s disappointing to see Paul employ his usual pro-startup viewpoint as a smokescreen for his personal incentives.