Tax the Rich!

Speaker 2

The economist. Well, that's exactly the case. We already do tax the rich. We have a very steeply progressive federal income tax system that charges higher rates the more income that you make. And, you know, an average rich person, you know, this varies year to year, but ⁓ it it's it's something like the top one percent or so of ⁓ of earners, their average effective income tax rate ⁓ in any given year is probably north of forty percent. Whereas you get to the bottom of the distribution, they're paying almost no income tax at all. Maybe in some cases they're getting a rebate, and their only tax burden is from state and local sales taxes and things like that. So you have a very low tax bot burden on the bottom of the distribution, a very high tax burden on the top of the distribution. That means you are in effect taxing the rich already.

Speaker 1

Something you'll hear a lot is ⁓ pay your fair share. And in similarly to the tax the rich and and fair share is that the people who shout it the most are never specific about what percentage they want.

Speaker 2

Again, it's pay pay your fair share. If you look at the portion of the federal government that's paid for by taxes on the wealthy, it's like the top twenty percent, the top quintile, earns probably a little bit short of sixty percent of income in a given year, but they pay over eighty percent of the federal taxes. ⁓ eight eighty percent of the federal government's revenue comes from that share. So they're already paying more than their share of what they're actually earning. And this has been basically the case. since at least the World War Two period, 'cause we have an extremely progressive existing federal tax system.

Speaker 1

It seems like in recent memory, a lot of millionaires are trying to get me to hate billionaires. And part of me is like, Well, wait a minute. Hold on a second there. There was a time when, you know, the boogeyman were millionaires, but I guess

Speaker 2

No, it's billionaires. Well, I I I think that flipped when Bernie Sanders crossed over into the millionaire category. Uh-huh. Because he used to be this guy, well, we gotta tax the millionaires and then he had a big book deal and got famous on this presidential campaign and suddenly he was a millionaire and his rhetoric just suddenly switched. Now it's we gotta tax the billionaires.

Speaker 1

When it comes to, you know, those taxes, the allocation of tax dollars for spending, it's like, well, what do you want those taxes to be spent on? And where's kind of like the break even? You know, because it seems like we're already spending a lot more money than we even have. So it's like, you want more of that stuff?

Speaker 2

I think at the end of the day that's what all these tax hikers are really after, it's just a giant revenue grab to expand the role of the federal government or to expand the role of the state and local government on projects that they want to do to increase the US government's share and presence in the economy. And you do that on two sides. It's money you extract out of the tax side, and then it's money that you spend, although we spend more than we take in from tax revenue and hence a growing deficit problem. ⁓ but yeah, they they feed off of each other. And you hear all these stories of like, well, we're trying to make the tax system more fair to tax the rich, or some will claim inequality is running out of control and we're trying to rein that in. But no, at the end of the day, if you push them hard enough, they really just want more revenue to spend on public projects.

Speaker 1

When it comes to the taxes, tax the rich, are we are we talking about income? Because we we also hear a lot now about a wealth tax.

Speaker 2

That's the new innovation. So there's a history here that makes things pretty complicated. And that is, you know, our at the federal level, ⁓ nineteen thirteen, we passed the sixteenth amendment, which ⁓ authorized a new form of federal taxation on income. Income is what you earn in a given year. It actually has to be earned. And there were several early Supreme Court cases on this, and they they refer to it as the realization principle. It means Income must be realized to tax. It can't be hypothetical income that you didn't actually earn, because then it's not income and it doesn't pass muster under this constitutional amendment. Well, the wealth tax people, they want to tax what they're referring to as unrealized capital gains. So the growth in your stock portfolio, whether you sold that stock or not, suddenly becomes countable as income. And therefore could be taxed, even though it's not been realized. Or say the real estate value of your house just goes up in the area. ⁓ last year it was $500,000, this year it's six hundred thousand dollars. That hundred thousand dollars, even though you did not sell your house, they want to count that as income and tax it. So it's a shift in what they are targeting here, and it's it's kind of done by a sleight of hand. Now there are left-wing law professors that say, ⁓ well, we can ⁓ reclassify unrealized capital gains as income and therefore get around the sixteenth amendment. But I think most sane people look at the current Supreme Court and they say, No, this isn't gonna fly.

Speaker 1

Just trying to wrap my head around. I live in a house, I have a mortgage. If somebody looks at my house and says, Okay, you may have paid, you know, this much for it, and this is how much your your mortgage is, but you know what? I think it's worth a lot more than that. Therefore, you're going to have to pay the difference. And in taxes, I'm like, but wait, I don't have that money.

Speaker 2

And they claim this is why they want to target the ultra wealthy, because they're like, ⁓ well, all right, rich people, yeah, ⁓ we are taking their unrealized gains on their real estate or their stock portfolio or something. But ⁓ they have such a cushion that they can afford to do it. And this is how they get this in politically. Now remember they got this constitutional obstacle. They also have an obstacle in practice because several countries elsewhere in the world that didn't have these restrictions have experimented with wealth taxes. as a big thing in Europe in the 1990s and early 2000s, and like places like France would enact a wealth tax on unrealized capital gains from their ultra-rich, ⁓ the very top of the distribution. ⁓ so people that could afford to absorb that buffer in the tax hit. But what happened? Actually, those people they packed up and they moved to England from France, where they left the country. And all these Wealth taxes were enacted on promises. Look at all this revenue we're going to raise. And because it had a displacement effect, it caused millionaires and billionaires to leave and move to different countries, or because it caused a drag on the way that they use their assets. If you can no longer invest without it being pulled into the tax system, you know, there's an economic drag that comes about from that. And it turns out the the contractionary effects on the tax base. offset almost all gains that they would ⁓ had projected that they would make. And these taxes end up bringing in a ⁓ just a piddling amount of money, like a tiny fraction of a per percent of annual GDP comes in to the government from these millionaire and billionaire wealth taxes that they had sold everyone on as like this panacea that would fund everything. And over the course of the next decade or so, all but I think three European countries repealed them all. ⁓ well now we have that taking off as a movement in the United States, but as I mentioned, there's a constitutional problem at the federal level. So what are they doing? Well they're going to states like California and trying to get it passed at the state level where there's no longer a constitutional constraint.

Speaker 1

Mike Solana at Pirate Wires, he interviewed 21 billionaires, which I think might be the world record for the amount of billionaires interviewed. At least for one article at Pirate Wires, no doubt. And ⁓ it was ⁓ in regard to California's ballot proposal to seize assets ⁓ of the wealthy. And spoiler, a lot of those billionaires were talking about leaving the state. Leaving the state. Either they were definitely 100% outright doing it or were thinking about it more than ever. And we see, you know, kind of a similar thing happening in New York City with ⁓ Ken Griffin, who was a man who I I didn't know existed not until the mayor of New York decided to film a video in front of his apartment building talking about how you know, we're gonna make sure that that we are, you know, taxing the ultra wealthy who live in in New York. maybe something that people forget about wealthy people is that they are people and they have needs. Yeah. They also might have a thing ⁓ called self respect and say, Hey, I don't like the way I'm being treated now or the way that I'm being talked about being treated in the future.

Speaker 2

All these proposals, they're they're changing the rules of the game. They're saying, well, the the the earnings and wealth that you acquired previously under the rules that existed, we're going to change those rules and now we're going to take it away from you. There's something pretty fundamentally un-American about that. It's seizing private property just in a money grab. ⁓ now they'll dress it up in all this claims of like, well, we're ⁓ we're fixing inequality or we're ⁓ trying to make you pay your fair share, and there's all this rhetoric about it. But The empirical analysis of it, the studies of inequality, ⁓ here's the other trick. It all comes down to a bunch of really bad academic research by these three French economists. And one of them's famous. ⁓ everyone's heard the name Thomas Piquetti. Thomas Piketty, he's the ⁓ he was the guy that wrote this book and at the end of the Occupy Wall Street movement called Capital in the Twenty-First Century. ⁓ Capital, an homage to Karl Marx's Capital, but he's saying here's the updated version. And his whole thing is that inequality is running out of control. ⁓ and the only way to fix it is ⁓ we have to jack up taxes to these astronomical levels and seize the wealth of the r of the rich and redistribute it. ⁓ so taxes are his solution to everything, and he says it's gonna fix all our social problems too. ⁓ of course this guy's an advisor to the Socialist Party in France. He's a very, very political character. ⁓ well, after his book came out, I started doing some empirical analysis of it, and I found something really kind of Disturbing. He likes to put his finger on the scale of all his measurements and numbers. And all these charts he was showing about this rebounding inequality that was off to the Gilded Age, I started trying to replicate them from his own data sets and found out you couldn't do it. He basically, you know, in in a in a one way or another, light, ⁓ manipulated the stats. ⁓ so I work on historical tax statistics, I recalculated Piketty's work. He brought in his ⁓ his two ⁓ proteges, Emmanuel Sayez and Gabriel Zuckman, who were both at UC Berkeley at the time. And guess what? They are the architects of the California wealth tax proposal right now. And ⁓ these characters have for about the past 15 or 20 years been all over the place advocating for wealth taxes. In France, they're pushing it. They advised Elizabeth Warren's presidential campaign and got her to put up a bill at the national level. Now they're behind the referendum in California to push a s a state level wealth tax. And you dig into these guys' work, their academic publications and data. Well, Zuckman is the originator of another claim that we've heard a lot in recent years, and that is this assertion that billionaires pay an overall lower tax rate than the average American. And ⁓ we w that was trumpeted by the New York Times. You know, it's Published everywhere. It's a talking point in the presidential campaign. I think Joe Biden even put it into one of his State of the Union addresses as billionaires are paying a higher tack or paying a lower tax rate than average Americans, and we're going to fix that. And everyone hit here's the like, ⁓ yeah, that's right. Except the numbers are false. And I actually caught Zuckman about six or seven years ago nakedly manipulating his data on this. And basically what happened is he had published this paper where it had a data file attached to it that ⁓ in a roundabout way estimated the tax share paid by the ultra wealthy, the billionaires, ⁓ nationwide. And he came up with a number that's about where all the other estimates are. It's in the low 40% as an average tax rate, ⁓ which is the very highest of the category. Like billionaires are paying forty, forty-five percent-ish as their effective tax rate. ⁓ average Americans are maybe paying between 10 and 20 percent as their effective tax rate. All the data seems to show this and suggest it. And then the poorest Americans are are paying almost no tax at all except for state and local sales taxes. Exactly what the system was designed to do was playing out. Well, ⁓ Zuckman's data showed this. And then he he was like, uh-oh, this undermines my political case. So he releases a new paper to the New York Times, not academia, doesn't get peer-reviewed, shows it to the New York Times. purporting to recalculate all this stuff and suddenly has the wealthy are only paying about twenty percent on average in taxes, not the forty percent plus that his own data showed, but twenty percent. And he says, and that's also lower than the average American, because the average American, ⁓ under his new calculations like twenty three or twenty-four percent. And that has been the talking point ever since. I start digging into the numbers and I find out, well, what's he doing? He is manipulating how he calculates the tax rate at the top to make it look much lower than it actually is. And then he's excluding things like the child tax credit and the earned income tax credit at the bottom to make it look like poor people are paying a much higher tax rate than they're actually doing. And if you massage the data enough, you torture it, you eventually get to the point where those two lines cross, and that's the talking point.

Speaker 1

I know he listens to the show because he hasn't gotten over you. ⁓ all these years he's trying to find a way to get back at you. You know, something that that I find really interesting is especially in a lot of blue cities where they're having this this conversation and promoting, you know, this idea of, you know, the wealthy don't pay enough and billionaires shouldn't exist. And I I've heard that quite a bit, is yeah, they simultaneously don't want billionaires to exist, but also want to tax them so much that they're able to fund all of the things that they want to fund. So you have a situation where, you know, say for example, in a state like Illinois, it's kind of like, screw you billionaires, go to Florida. Wait, but you still have a lot of stuff you want to pay for in Illinois. And and I th and that goes back to, you know, the ⁓ Ken Griffin, whose company they I guess they had started in Chicago and they were thinking, do we go to Miami or New York? And that was at at the time when they were thinking it, that was part of the the equation, which one would be better. And now he came up and said, New York doesn't seem to be a part of the equation anymore. They're looking, you know, kind of squarely at at Florida. And do these policymakers, you know, actually consider the number of people who will move when they create these policies and or do they presume that everyone's just gonna stay and take it?

Speaker 2

Well they're they're operating in a fantasy land, so they'll give themselves the most optimistic project projections of how much tax revenue they can make and they'll pretend that, hey, through enforcement or through all whatever else, ⁓ I think there there was even the mayor of Seattle who was saying, Well, we're gonna prevent billionaires from leaving when we put in our new taxes. Also she said we're gonna prevent grocery stores from leaving when we regulate them out of existence.

Speaker 1

gonna pay for that wall? You're gonna need a lot of billionaires to pay for that wall.

Speaker 2

Living in fantasyland, and they're stumbling headfirst into the same thing that France and some of these other European countries discovered by accident in the 1990s. And that is, if you do impose these types of taxes, they they induce tax avoidance behavior. Perfectly legal, because you can't require someone to live somewhere. If they get up and leave and they move and they take their company elsewhere, well, the tax revenue goes away. So you've got a fantasy land prediction. Of high amounts of revenue with complete denial that it'll have the exactly anticipated and predictable effects of causing people to leave. And then they plow ahead with the policy error anyway. ⁓ you know, I I I often joke if your ⁓ your only tool is a hammer and a sickle, everything looks like the proletarian seizing the means of production. And I really do at the end of the day think that's what these people are up to. They just hate the rich. ⁓ they are ideological socialists and they view this as a giant money grab. And how they implement it and whether it even works or not is a completely distant tertiary consideration because they think that once we implement true socialism, well that'll fix everything.

Speaker 1

Yeah, it is interesting that the symbol remains the hammer and sickle, but yet the proponents of it have probably never picked up either a hammer or or a sickle.

Speaker 2

Right. Well, yeah, as Frederick Hayek used to always point out, it's like never and nowhere has a socialist revolution actually been initiated by the proletarian classes. It's often the ⁓ like the fail sons of wealthy industrialists that are extremely well educated and grew up in lives of privilege. And, you know, that's exactly it of what you see of these wealth tax proponents. ⁓ Manuel Sayes and Gabriel Zuckman, they're They both have various points been professors at University of California, Berkeley. Turns out they have public salaries. These are guys that are making in the mid to high six figure salaries, much more than I ever make. And yet they're supposedly the advocates of the little guy. And that's just a recurring pattern. It's the intellectual elites, the people of privilege, that are pushing this policy and purporting to do it on behalf of the lower classes, on behalf of the workers. ⁓ but it's really just kind of a frivolous intellectual exercise for themselves. ⁓ and and you know, we look at historical regimes. One of the most unequal societies in human history was the Soviet Union. Another one, Cuba. ⁓ that there's a famous case ⁓ w where ⁓ I think someone estimated what Fidel Castro's wealth was, his actual wealth, as ⁓ and they find out, well, of course, he's the richest guy in Cuba. And if he had been in any other country, he would have been this like multi-billionaire. And he's furious about it. He says, Well, I'm not rich. This is the people's money. I just happen to represent it. And everyone else is living in squalor. And this is the recurring pattern of socialist societies. And yet they supposedly say everyone's equal. Well

Speaker 1

I wanna remind people that, you know, Fidel Castro was so beloved that for decades he won every single election in a landslide. That's how ⁓ that's how loved he was. You know what I often think about ⁓ you know, as you point out, I mean it is pretty clear that, you know, people just, you know, hate hate hate the rich. And I don't know if if there's just something weird about me, but I don't I if I see somebody drive by in in like a Porsche or ⁓ you know, a really nice car, my first My first thought isn't, you know, ⁓ I hate that guy. My my first thought might be like, ⁓ that's cool. ⁓ that's a cool looking car.

Speaker 2

I wanna get that.

Speaker 1

Yeah, there there is something I where I have this very I don't know, it's just like a stark disconnect with people who have like real hatred for those who are, you know, the super wealthy. I I kinda looked around at all the products that I use and I'm like, ⁓ yeah, it makes sense that the that the men and women responsible for bringing this to me are incredibly wealthy. Like that just makes so much sense that the people behind my computer and behind the technology that we're using right now are probably billionaires. And okay, that makes sense.

Speaker 2

And a lot of these guys, you know, they didn't start out as billionaires. They started out in the garage in Palo Alto, or they started out with this tiny little company, ⁓ that just did something, filled the niche that people didn't realize that they they knew. And that's kind of the American dream here. And yes, that company launches, you're gonna get very, very wealthy. ⁓ so ⁓ you you often see this as well in this inequality wealth tax literature. These intellectuals that are pushing this stuff, they assume ⁓ they don't really ever demonstrate, they just assume that wealth can only be obtained by inheritance, by becoming rentiers. ⁓ it's like, well, your great-great-grandfather was a Rockefeller and therefore it's passed down through the generations. And yes, of course, there are some families, there's always going to be families like that. But by and large, what you what you find is wealth dissipates in successive generations. And most of the rich people today, most of the people that are on the like the Forge 400 list today, 20, 30, or 40 years ago, were nowhere to be seen. They were in a dorm room making an interesting product or in a garage making an interesting product. And that's what launched them into ⁓ the upper elite. ⁓ it's not legacy families just passing down Scrooge McDuck style vaults. It's actually people who started out with relatively modest means and did something. That served a market niche that people wanted and they got ridiculously wealthy.

Speaker 1

And how about this idea where nobody earns a billion dollars? The idea of either it's passed down or it's stolen from scams. Yeah, it's a scam.

Speaker 2

In fact, it's such a scam that people will stand in line outside of the Apple store to get to partake in the scam and hand over their money for for this scam product called a the a cell phone. It's ⁓ you know, it's a completely backward way of thinking. It's ⁓ it's this notion that people are not providing anything of value and they must have ⁓ tricked me into ⁓ giving the money. I say as I sit here in Starbucks sipping my latte, typing on my laptop computer that's covered in anti capitalism stickers.

Speaker 1

And and also just like this idea, I know Elon Musk rather recently talked about, I guess, his goal of becoming the first ten trillionaire or something or something like that. In order for Musk to be able to reach that that status, you know, not only does he have to be producing a lot of rockets, but also it's like if this is gonna be the first time in history someone becomes a ten trillionaire, that means that that wealth wasn't created yet. Yes. That value needs to be created before you can even attain it. Again.

Speaker 2

This is why I say, you know, they're they're imbued with this Marxist sentiment that the world is a zero-sum game and that we're locked in a material struggle to gather up all the all the bits and pieces of wealth. It's a static view of society and the world, the idea that wealth ⁓ can only be grabbed and stolen from someone. It cannot be created in that ⁓ that system. You know, it's completely at odds with all of human history, but especially the past 200, 250 years of human history when Untold volumes of wealth that previously did not exist on this planet were created by innovation and by new products and new means of doing things, ⁓ to the point that it's it's really has lifted society out of the dark ages and into a place where ⁓ you know extreme poverty is as at its lowest point in human history. the average American has in their pocket a cell phone. That a couple generations ago is doing things that only the top supercomputers could have done. Supercomputers that you had to be extremely wealthy to access, and the cell phone is doing it better than that. And we can all get one for a couple hundred bucks at that ⁓ Apple store or the Android store ⁓ by handing our money over to the people that are allegedly exploiting us. It just doesn't make any sense.

Speaker 1

I don't mean to brag, but when it comes to things like passive income, something that I that I still find, you know, kind of amazing, I'll, you know, put a a tweet out on X and ⁓ I I have a blue check that I pay for. So, you know, if you guys follow me, you'll help me get some, you know, some money.

Speaker 2

You're helping make Elon Musk wealthy, he's stealing from you or something.

Speaker 1

Things that I would be doing for free, putting out a joke. I can monetize that now. Here I am sitting on the same on the same ass that you know that I sit on every day and putting something out there where I am able to to to make money doing that. It's crazy.

Speaker 2

Wild New World, but ⁓ again that speaks to the entrepreneurial ability to create wealth. It's seeing things that we had not seen yet. It's doing things that fill a niche that we did not even realize we needed yet.

Speaker 1

You mentioned like a number a number of countries who, you know, had, you know, a version of a wealth tax and they they got rid of it because how many people need to leave to make to make a to show that, hey guys, this tax failed. You really need to repeal this. Otherwise, you're gonna lose a lot more.

Speaker 2

Doesn't work. I mean, i i it's gotta hit rock bottom at some point. And one thing we have in the ⁓ the the states is you know, it's fifty different policy regimes that are kind of in competition with each other. They're experimenting with different types of tax systems. And as long as that exists, as long as there's an exit option to move from California to Arizona, Texas, Florida, you name it, then people will exercise that. If New York becomes too onerous and burdensome, people will move to a different state. And what you're left with is a massive government bureaucracy and budget outlays and the hundreds of billions or trillions of dollars to build like high speed rail the nowhere in California, money that has been allocated and obligations for the future, but your tax base is now being destroyed because you're driving away productive people who otherwise in a more temperate tax system would have stayed in place and contributed to those ⁓ those projects. on just like a regular state income tax or a regular state property tax. Now they leave, you get nothing.

Speaker 1

You I do wonder like, is there a compromise there? I read about Vermont. They have ⁓ they have a a vacation home tax, I think that's what they call it, where it's ⁓ it's a one time real estate transfer tax where the buyer declares whether it will be a primary residence. And if not, the buyer's assessed like a three percent transfer tax or something like that compared to like a one percent on the purchased property. So it's like the tax is baked into the cost of buying the property. It's a one time tax versus a continuous tax. Is that I mean, that seems to to work out.

Speaker 2

And I think that's a a a version of something that we've long had in many states in their property tax system. ⁓ so if you own two homes in some states, you have to pick which one is your primary residence and and you get what's called a homestead exemption or a certain deduction from your property tax, whereas the second home gets taxed at full price on the property tax. And that might be the the condo at the beach or the vacation home by the lake, ⁓ or something like that. And the idea here is you're differentiating taxes. This is a way to reduce the tax burden on something that's seen as as essential. That's your place of living. And it's a way to make the tax system less regressive on property taxes because i if you're poor, ⁓ you're low income, and you fall below the threshold on where you owe income taxes, ⁓ well, what's your main tax payout to the government? It's probably your property tax if you own your home. Or it's your sales tax on stuff you buy at the store. And ways to alleviate that burden are, well, we exempt food items from sales tax, or we exempt your primary home and give you a reduced rate if you declare that your primary home. And the way to differentiate it is that then you pay the full rate on your secondary home, or you pay a full sales tax rate on non essential non-food items ⁓ as you move more into the luxury good category.

Speaker 1

In Florida, while New York is saying, you know, more we need to tax more, Florida is now proposing to eliminate property taxes on homestead property. Like what does that look like? You know, the future ⁓ of Florida.

Speaker 2

it's interesting. I think they're trying to become more tax competitive. They're like, hey, people are fleeing California and New York and some of these other high tax states. Come on down to Florida. We'll give you even more of an incentive to be here. We'll reduce or eliminate a big part of the state property tax. ⁓ now what does that do to their fiscal picture? There's an open question because the state government has to get money from somewhere. And maybe that means you're more dependent on sales taxes. There's no state income tax. So they're already competitive on that margin. Reduce or eliminate property taxes, that makes them even more competitive. Somewhere else has to pay for basic functions of the government. But then on the other side of it, because they're trying to balance their budget, this may mean that yes, you have to cut some spinning.

Speaker 1

So guys, what is the future hold? Is it Florida? Is it California? Is it New York? Let us know what you think. And please join us next week for a whole new episode of Happy Hour Econ. It's completely tax-free as of now.