Wealth taxes are a trending topic again. Elizabeth Warren’s Ulta-Millionaire tax 2% tax on net worth in excess of $50mm and 6% on worth above $1B.
The discourse about them focus on the practical aspects. Questions like:
- Should we have them?
- If so, how much?
- Where do we draw the line?
- How do we collect?
- What will happen to incentives?
I fully understand why those questions get lots of attention. But the discourse is conspicuous to me because of what’s unsaid. It feels like I’m watching a flock of NYC birds decide whether they should take a train or a bus to Florida for the Winter. I’m like, “what?”
The wealth tax discourse is a dull object level debate. The far more interesting discussion resides at a higher level of abstraction. Why do birds migrate in the first place and why not fly instead of split hairs over ground transportation? What’s the wealth tax really about in the first place?
I’ll address a few of the practical arguments, why I find these debates distractingly empty, and finally the meta-level questions that actually matter. Perhaps if we had more cohesive answers to those questions, the practical questions would be seen for what they should be — concessions between earnest parties, not moral hills to die on.
I have a non-exhaustive list of arguments these wealth tax debates will turn your gaze to.
- “Property taxes are a form of wealth tax”
- “How do we value illiquid assets?”
- “What about incentives?”
- “Arbitrary lines of who is subject to the tax?”
- “It will raise X dollars”
- “Our income is already taxed once”
- “Capital has been favored over labor”
These are practical issues. No doubt, we are swimming in them. Even Warren’s 2% and 6% numbers are practical problems. Should they be indexed to market parameters like inflation or costs of capital? Let’s explore some pragmatic arguments.
- Where we draw the line
I’ve heard of a study (of apocryphal origin since I can’t find it) where people consider a rich person to be someone worth 4x what they have. Try it on yourself. How about your younger self, what was your definition of rich? Does the 4x rule hold for you? It would not surprise me that people define rich as a multiple of themselves rather than an absolute number. Once your income stabilizes in adulthood 4x is a number that balances aspiration and envy. It balances “If I have a few lucky years I could get there” and “Nobody needs more money than X”. In any case, if everyone defined rich in a similar way, as X times [current net worth], it is a reminder that our perception of wealth is tyrannically relative.
- Our income has already been taxed once
So what? We already have estate taxes. If that’s a problem don’t worry we will address that at the meta-level later.
- Wealth taxes will raise X dollars
X is hard to predict. The second derivative of tax code policy can easily be bigger then the first. This is obvious to anyone who has heard that a “financial transaction tax would yield X dollars of tax revenue”. Umm, multiplying a tax rate by the current amount of volume is like a streaming service thinking they can make X revenue if they charged a fee every time you listened to Taylor Swift. Folks will be googling “Limewire” before they finished reading the announcement.
Liberals underestimate creative tax avoidance and conservatives basically say they will avoid taxes. This looks like a legal problem. We created AMT to limit tax avoidance. The effectiveness of that policy notwithstanding, we should not pretend that we are powerless to enforce the spirit of laws. Where there’s a will there’s a way.
- Liquidity and valuation problems
We already deal with these issues when a person dies. I do think these are hairy problems but I find it hard to believe that we couldn’t figure them out if we decided we wanted to figure them out. It might not be cheap with the technology currently available but that’s an issue that factors into the cost/benefit of implementing a wealth tax, not an issue which shuts down the conversation. Even today, futures which are legally “1256 contracts”, are taxed based on their mark-to-market as opposed to when they are liquidated. Futures are liquid, are not perpetual holds, and taxed at a lower blended rate. I’m not saying that the experience of futures is applicable to equities, but I’m pointing out that tax policy is capable of handling specificity. If there’s a will, we can figure out how to tax wealth.
First of all, extreme wealth is a byproduct of complex forces and rare innovation. In the aggregate, the extreme wealth is not an accident, but who it happens to is. If you are in positive sum games then your extreme wealth was a byproduct of doing something amazing but whether you are worth $100mm or $1B or $10B is a lot of luck. Google’s founders turned down an offer from Excite because they couldn’t come to terms over a few hundred thousand. They probably would have become rich either way but the degree is luck. For every visionary that becomes a billionaire many other equally capable people do not. I’m skeptical that wealth and estate taxes spoil the carrot to create awesome stuff.
Continuing with incentives, we already have progressive taxation. Fairness aside, progressive taxation makes logical sense. We have concave, possibly logarithmic, wealth utility functions. $1000 is worth less to a millionaire than a student. If every incremental dollar is worth less to you as your wealth increases from an aggregate happiness view, progressive taxation is an efficient solution.
An astute reader will spot a secondary effect also couched in efficiency that weakens the progressive argument. Economic growth might be faster if we let the people who demonstrate business-sense keep their capital so they can re-invest it. But I can argue against that without much difficulty (has to do with primary vs secondary investment and other issues I’ll talk about in a future Moontower).
I’ll play along and give my take in the context of these practical concerns:
The cost/benefit of taxing illiquid wealth is probably not worth it. Sure, with enough will and expense, it can likely be figured out. Inequality can be addressed by taxing investment returns at ordinary rates. There’s even latitude in how progressive the schedule is on investment returns. Focus your efforts on compliance and making the estate tax impossible to avoid.
So while I have a take it’s an off-the-cuff response to the need to be practical. But the practical argument is just the visible, above-water part of an iceberg.
Object-level Tax Discourse Is Boring
When the discourse floats along these practical matters I tune out. Should we set the thermostat to 68 or 71 degrees? Who knows, it feels like a distraction.
I get it. It changes everyone’s bottom line. The fight for that bottom line is intense and there’s no version of the world where it’s not a major political issue. But when I zoom out none of the arguments are as serious as their promotors pretend. In fact, when I hear people debate wealth taxes and taxes in general I visualize where they sit in this 2×2:
When it comes to the range of wealth taxes proposals (including zero wealth taxes which is on the continuum), I see points where reasonable people can disagree because the true answers are unknown and unknowable. Extremes like 90% tax rates are not in the discussion. So people are left quibbling over material but non-existential matters. They self-select into different boxes.
- The Top Left: The right thing to do in such a regime is just talk your own book. “Hey, even if I’m a not 100% I’m right, I’m close enough to what is fair and reasonable.” Combine that attitude, with the fact that confirmation bias is our birthright. Expect most sensible people end up here.
- The Top Right: People whose narrow self-interest is their North Star.
- The Bottom Left: A cute bunch of honest people who are overconfident in their belief that the right answers are so clear that it’s worth voting against their self-interest.
- The Bottom Right: Needs no explanation.
Many are willing to die on hills made of these practical matters. You get an eyeroll. It’s either naïvete, dishonesty, or conviction that is out of scale with the evidence. A tweak here, a tweak there. Shifting tax burden a bit from capital to labor. I’d like to see what documentation makes that worthy of a crusade.
The Meta Questions
The practical arguments distract from the most important question. What is all this wrangling really about?
Let’s look at the language on the right. There’s a focus on economic efficiency. Low taxes, means less deadweight loss, and faster growth. They are all about incentives and merit. Deserving what you’ve earned.
The left prioritizes equality. Everyone should have the same chance. We are entitled to a safety net.
These values imbue the practical arguments with the fuel to fight. If you raise my taxes you have wronged me. You are “treading on me”. If you don’t redistribute you are a racist. It seems you cannot galvanize movements about money without appealing to a higher value (this sentence doubles as crypto sub-tweet. BTC maximalists, I see you).
Too bad the values are just useful lies.
Deserving and equality. They seem like they might be at odds but that’s only because of how the arguments are framed. One says merit is the chief arbiter and the other says merit does not exist. Both sides, deserving and equality, are about the same value — justice. Where they differ is in justice’s relation to merit. One thinks merit is justice, and the other says merit doesn’t exist and is owed no justice.
Unfortunately, justice cannot exist. Worse yet, it’s irrelevant.
While it is self-evident that all men are created equal in the metaphysical sense, it is equally apparent that we are all not equal with respect to our value in time and place. Nerds are having a golden era with their ability to think in symbols in a time when software and financialization are eating the world. A few thousand years ago, that coder would have happily traded 15 IQ points and a fancy MacBook for a better spear-throwing arm. And if someone is a hard-worker, how much of that is inborn temperament? How much of what we call merit is luck of the draw? You have heard my rants on the word “deserve” here and here.
On the other hand, you cannot manufacture equality. Harrison Bergerons always exist. Handicapping them is not the answer. But even if there is a sophist case for doing so, it would be irrelevant. We are ultimately animals subject to competition. Nature itself will reject our pleas for equality if she finds our demands excessive. You cannot dam every river on Earth and not expect her to respond.
- The values that animate tax debates are lies. So long as the debates are within widely acceptable ranges, keep the religious fervor in check. It’s just about how you’d like the world to be. If you choose to make it a crusade, it’s one of your own making. You don’t get to invoke moral gravity.
- Instead of unqualified appeals to morality or economic precision, a more honest discourse would acknowledge our limitations in knowing the “right” answers. We would appeal to cooperation. Not even out of altruism. But out of concern for long-term social harmony which is ultimately a selfish trade. Even if your bargaining position today would allow you to crush your opponent, you know tides can turn.
So I’ll wrap with an example of my view on taxes that incorporates my full view that we are not equal, we cannot change that, and merit as a determinant of our outcomes is overrated:
We already have a system that rewards people for being smart and talented. Does that gene pool’s grandchildren need a bigger head start? For any moral argument defending the rights of a rich person to give their wealth to their heirs there is going to be a perfectly valid argument for not entrenching generational wealth. Hard work and talent is required to be rich. If you have these qualities you have already won a lottery. Having a system that rewards this to an extreme is a pile-on. If we all started on equal footing, there is little reason why anyone, before the dice of life made them fabulously rich, would think that their grandchildren should be externally advantaged. If everyone talks their book, our guide to policy should be to imagine what people would pick if they all started with the same book.
Tax Policy Considerations In General
Tax policy is an impossibly difficult problem. We need to balance fairness, incentives, and efficiency not just in what taxes are collected and from whom, but how they are spent. There’s no right answers and everyone just talks their own book. Compound that with the practical way in which it evolves — we edit sections of the code without the ability to understand all the knock-on effects.
The tax code is sedimentary layers of rules, loopholes, loophole defenses. It might as well be a city with different zoning rules per block. The haphazard evolution of the code emerges from whatever political mutation catches on. It’s hardly a recipe for fulfilling a cohesive agenda of tradeoffs.
What’s the right mix of income vs consumption taxes? How should we treat taxes on investments vs taxes on labor? Corporations get double-taxed but enjoy limited liability. Howard Marks has described tax policy as a list of tradeoffs. I summarized it in Howard Mark’s Tax Memo: Your “Fair Share”. (Link)
The Money Angle
My Twitter buddy @demonetizedblog was looking for some help thinking about structuring a single stock option trade.
He was looking for a “process” answer.
While I trade options as part of volatility trading strategy that is a very different starting point from thinking about directional option trades. I explained the different approaches and what I would think about if I were trying to express a directional view with options.
The full post: Structuring Directional Option Trades (Link)
I was chatting with my guitar instructor about songwriting and we got on the topic of melody and he was sharing some artists who were especially creative in how they would compose a melody over a given harmony. One of those artists was Blind Melon’s Shannon Hoon.
This prompted me to watch the 2019 documentary All I Can Say ($3 on Amazon Prime).
I really enjoyed this film. A few bits about it:
- It’s all just edited clips from Hoon’s camcorder. Hoon videologged his life from 1990 to 1995 which captured their rise from Midwest obscurity to the cover of Rolling Stone and playing Woodstock ’94.
- Hoon died from complication of a cocaine overdose at age 28. The documentary opens with his final day. He sets the camcorder on the hotel dresser, calls his wife while laying in bed, and goes to sleep for the last time. It’s a surreal thing to watch before the tape rewinds 5 years to the start of the videologging.
- The documentary is very raw as you might expect. It’s an intimate tag-along on his life. There’s also some amazing cameos. I’ll spoil one…he sang back up on several songs on the Use Your Illusions records, being from the same town as Axl Rose. He’s also in the video for Don’t Cry.
Anyway, I’ve been listening to lots of Blind Melon the past couple weeks but the video I watch every day now is their performance of the song Soup at Woodstock. I just love how he sings this, and the transition into the heavier part of the song is [chef’s kiss]. (YouTube)
From my actual life
Or so I thought.
On Friday, a mutual on Twitter dm’d me a file in reference to a thread about market-making of course not knowing I was the creator of the video.
This is the closest I’ll ever be to finding buried treasure. It’s a bit esoteric because of trading jargon, but it’s a time capsule for NYMEX folk. It’s also the best work I’ve ever done. I watched it probably 10x since I got it.
I uploaded it to YouTube for the 50 people or so in the world that will appreciate it as much as me. Conveniently, they probably all read this letter.
A COMMODITY MARKET MAKER’S LIFE (YouTube)