Most of this wealth probably has nothing to do with merit. For every Steve Jobs there's a whole bunch of people who did nothing more than sit on property that appreciated in value and yielded rents.
The tax system seems to prefer this to actually earning money for some reason.
True, and almost everyone would be unaffected by the law I proposed. If you have two children, you'd need >$10 million in assets for it to affect you. I guess what I proposed is a fix for just the super-rich's inheritance, but it's low hanging fruit and there's a lot of it.
> The tax system seems to prefer this to actually earning money for some reason.
The tax system favors unearned income over earned income to adjust for risk. If you work a job you're guaranteed to be paid for the hours you worked (assuming an honest employer). Investments have no guarantees and you could lose all the money you put in.
There's an argument to be made that the top tax rate for unearned income is too low in some countries, but it makes sense to me that the tax rate for unearned income should always be less than the tax rate for the same amount in earned income.
There may be reasons unrelated to investment risk.
For example, the risk of losing an earned income stream because my (assumed honest) employer (fires me, goes bankrupt, etc.) seems much higher than the risk of losing an unearned income stream based on my investment in bonds backed by the US government.
When everyone is jumping on the band wagon its probably time to run away and passively investing in guilts is dangerous when bank rates return to normal - there will be a massive loss of capital.
OTOH passive investment will only track the market and return an average of 7-10%. Compared to that small-time landlording (which I define as 1-10 units), a popular side-income stream for many working professionals, returns 10-20% in return for higher risk and volatility (you could get bad tenants or have units go vacant).
Also since passive investment requires "no skill and little luck" it's one of the few entry routes into the capital-owning class available to working-class people and middle-class professionals. Anyone can buy an ETF for a couple hundred dollars. You don't need a hot stock tip or a insider lead on an undervalued property. So I'm not sure why one would want to start treating unearned income exactly the same as earned income at the precise point in history that we've learned about the magic of passive investment.
Its not fraking "income" for gods sake if you don't know the difference between income and capital gain you probably should learn it before commenting on this issue.
"Unearned income includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions."[1]
"Unearned income includes things like annuity payments, pension income, distributions from retirement accounts, capital gains, interest income, dividends, passive income generated from rental real estate, alimony, stock dividends, and bond interest." [2]
Sorry...is that what you meant? Or were you referring to the definition of earned income?
Trouble is "unearned income" is one of those dog whistle worlds like "rent seekers" - which tends to lead to rants about "the gold standard" and onwards to well we all know where that ends.
If you lose a job, you just lose the income stream and 2 weeks of salary at most (+ whatever time it takes to find a new job). With an investment there's a risk of losing the asset entirely. Rental property gets buried in a landslide, company goes bankrupt, gold gets stolen etc. There's also the risk of not making any return at all: rental property remains vacant, company barely breaks even, gold only tracks inflation etc.
> investment in bonds backed by the US government.
Those bonds have a correspondingly low yield, to reflect their low risk.
Certainly some investment can be classed as "gambling". But not all, maybe not even most. Starting, owning, and/or running a business is working. Only it's working with no guarantee of any reward.
Again, we can argue about how high the tax rate should be on unearned income vs earned income (20% max is too low IMO). But $50k in unearned income is worth less (risk-adjusted) than $50k in earned income and should accordingly be taxed lower. Maybe $50k in unearned income is the same as $20k in earned income and similarly all the way up the earnings ladder (I don't know the exact ratio; I made these numbers up).
We often talk about survivor bias in business success; how successful people owe something to luck as much as skill or hard work (which is true, IMO). Shouldn't the variance of this success be recognized in the tax code as well?
>Starting, owning, and/or running a business is working. Only it's working with no guarantee of any reward.
Well, yes, that's why the rewards of starting a business are often completely tax free up until a pretty high level. I don't really have a problem with that, which should have been pretty obvious from my above post.
However, that is completely irrelevant to what I said above.
Sitting on property and collecting rent is clearly not working.
>Again, we can argue about how high the tax rate should be on unearned income vs earned income
I'm of the opinion that unearned income should be taxed at 100% and distributed equally throughout the population whereas earned income should be taxed at 0%. I have yet to meet a person who can cogently argue why handouts (e.g. land rents) shouldn't be distributed equally.
Note that starting a business that grows is clearly earned at least up until a certain point (usually the point where the founder lets the employees run most things).
>Shouldn't the variance of this success be recognized in the tax code as well?
You really seem very keen on having the tax code encourage gambling over working.
I'm not so sure that using the tax code to deliberately discourage working for a living is necessarily the best way to generate a productive economy.
> Sitting on property and collecting rent is clearly not working.
I guess we'll have to agree to disagree about that.
Even landlords have to work (and I say this as a tenant). There's tenants to screen, repairs to manage, regular safety inspections to perform. Land rents have volatility and risk as well. There's the possibility of vacancy or bad tenants which leaves you with a property that's not returning any value. A landslide could take away your property entirely and insurance won't cover it (don't scoff; I know someone this happened to). Maybe it's not as much work as running a small business, maybe it is, I don't know. But it's a non-zero amount of work.
EDIT: As I pointed out in a comment above, I think the top tax rate for unearned income should be higher, with more brackets overall. There's no reason for it to be flat 20% when the top rate for earned income is 40%. That unfairly penalizes small-time investors (who get taxed at 15% on an income that would be almost 0% if earned) as well as high-earning salaried people who pay 40% compared to the 20% someone making 20x as much in unearned income would pay.
> I have yet to meet a person who can cogently argue why handouts (e.g. land rents) shouldn't be distributed equally.
Taxing rental income at 100% would kill off the rental market completely. A lot of people like the flexibility of renting and don't want to deal with realtors and banks and mortgages every time they change their job. Many people can't afford the down payment to buy a house so they need to rent until they've saved up enough to do so (you might argue that property prices will go down because of no landlords and there won't be a need for mortgages, not sure that'll actually happen but it's another topic). Businesses also rent offices or retail space when they can't or don't need to buy. At the end of the day, landlords provide a service that's useful, by deploying their capital and labor.
> I'm of the opinion that unearned income should be taxed at 100%
Here's the IRS definition of unearned income:
"Unearned income includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions."[1]
So if you really mean that, you're going to be taxing average-Joe-worker-with-index-funds (that includes me BTW) 100% on his dividends. Maybe we need to start being clear on what the term "unearned income" really means before we argue further :-)
So...CEO making $50 million/year would pay $0 in taxes?
> You really seem very keen on having the tax code encourage gambling over working.
Gambling implies the possibility of loss, the presence of real risk. And even property speculation is still a lot of work; you have to research lots and lots of properties, crunch numbers, line up funding, develop and market the property for rent or resale. Given that it's work with more risk involved than taking a paycheck, why is it a bad thing for the tax code to recognize this?
The tax system seems to prefer this to actually earning money for some reason.