Comment by SoftTalker
4 hours ago
It's 20% equivalent income tax rate if you have no conventionally taxable income. Otherwise it's 20% on top of your marginal rate. In his $100 example, you'd pay $1 in wealth tax on the $100 and $1 in tax on the $5 income earned, so your total tax is $2 on $5 of income, an effective tax rate of 40%.
But any real wealth tax is going to have exemptions, only apply to wealth above some threshold, and for the wealthy who structure their finances so as to have little or no taxable income, well they end up paying 20% like all the rest of us do.
> an effective tax rate of 40%.
It's not. That calculation would say that if you have $1000 of wealth and $5 of income your effective tax rate is 220%. It's bad math.
Your conventional income is taxed separately.
A wealth tax sort of stacks with capital gains, but capital gains is way too low anyway.
Yes it is.
($1,000 * 1%) + ($5 * 20%) = $11 tax due on $5 income. They are separate taxes but he's expressing them both in terms of an effective income tax rate.
In this case, since you owe more taxes than income you've earned, you'll need to sell off some of your wealth to pay up.
If you have no income at all, but do have wealth, then you get a division by zero error so I do get that it's maybe absurd to frame it this way, but the premise of TFA was "how to convert between a wealth tax and an income tax" and the context is a presumed 5% return on capital.
It's not an effective tax rate, it's an absurd parody of an effective tax rate.
If that $5 of ""income"" is actually capital gains, then it won't be taxed very highly, and adding another 20% is fine. The discussion of 37% + 4.5% + 20% is misdirection.
If that $5 is honest to goodness income, then on average you're also getting $5 of unrealized capital gains, which means you're not paying $2 on $5, you're paying $2 on $10. Or maybe you realize part of the gains and you're paying somewhere between $2 and $3 on $10. A much smaller impact, and that's only if someone in a medium tax bracket with 20x their income in wealth is even affected by the wealth tax at all.
But when you liquidate assets you... pay tax! Capital gains tax. So you liquidate, pay capital gains, and use the proceeds to pay a wealth tax?
2 replies →
Yes, but more specifically, it's 20% on top of your marginal rate on your capital income which maxes out at 20% federal in the U.S. for long term gains However, it is much closer to 0% for the most wealthy Americans because they never realize their gains, which is the only time the U.S. taxes capital gains. They just fund their lifestyles with debt against their assets. Then when they die, their heirs get a basis step up at death.
Graham gets this totally wrong, adding the 20% to 37%+4.75%, which are rates applicable to labor income (and short term capital gains, but those are very rare among the most wealthy Americans). That is such a major error it is hard to take any of the argument seriously.
Edit: Updated account for short term gains.