How to convert between wealth and income tax

Anymore I think the question shouldn't be about some kind of economic fairness (the time value of money thing being discussed) but the idea that wealth accumulation is a disease that afflicts society. I don't think anyone should have the level of control or influence on others that having a billion dollars currently allows. If a millionaire gives $100 to a political candidate it probably doesn't require too much thought. It's impressive to note that a 10-billionaire can give $1M just as easily, and so we have a class of folks who can throw around influence, who can order a team of lawyers to do things, can employ their legion of sycophantic followers to harass people, or can threaten the employment of many people not-of-their-class because they can make decisions that threaten someone's employer's bottom line. And note that above I compared a millionaire to the 10-billionaire, but there are plenty of folks, especially around the planet, who economically live several orders of magnitude below the millionaire.

As a bit of an aside, "spending more time with family" is an often-used euphemism around someone being fired, but if you have more money than you know what to do with and you aren't using it to spend more time with those you love, then what on earth is it for?

Stop thinking about taxes as a way to fund the government.

Money in the long run can buy anything, including political influence. There are no regulations that can effectively preclude this. (And empirically, America over the past 40 years has seen moneyed entities successfully re-align politics and economic policy with their interests -- this was entirely predictable). An unequal society therefore cannot be a democracy. If you believe in democracy, then you necessarily must believe in wealth redistribution. (In fact, I argue that any person who believes that the American Revolution was justified, for any non-trivial reason, will likely find that those the same non-trivial reason could be invoked to reallocate wealth away from today's wealthy.)

Counterarguments to this view (i.e. a different top-level value than democracy / meaningful sovereignty over the society in which one lives) might invoke utilitarianism: an unequal society potentially produces "better" outcomes if capitalism is allowed to run unrestrained.

But a problem this argument encounters is who gets to decide what "better" is? All systems are economic in the long term, including political ones. A good framework for understanding is that a society in the long term is not "one person one vote" but rather "one dollar one vote." Today's preferences are dollar-weighted. Those with money decide what is better. The economy serves the average dollar's interests. And the average dollar's interest are the wealth-weighted preferences of society's members.

We started with an income tax to fund the government. But today our most pressing issue is not funding the government, but not having an oligarchy. Wealth is the thing that most needs to be taxed in order to allow for any semblance of democracy. Analogies drawn to income, though interesting, are meaningless.

Yet... an entire industry (financial advisors) will happily charge you a 1% "wealth tax" to manage your money. And you don't see lengthy articles from luminary venture capitalists about that.

Feel free to just tell the masses to eat cake since bread is so expensive while you dine on your mega-yacht. Just like the market can stay irrational longer than you can stay solvent, you may or may not be able to outlive the eventual violent outburst from the rest of the 99%. Scott Galloway is right on that the anti-data center backlash is just a proxy for anger at wealth inequality.

I think a lot of ink has been spilled on the problems with the proposed California Wealth tax, the main points being:

1- Is this in fact a 1-time tax or is that a dishonest narrative to make the proposal easier to swallow?

2- How do you prevent capital flight to other states?

3- How do those with paper money or more voting shares than equity shares cover their tax bill?

That being said, I think more creative energy needs to be spent on the problem itself.

What do we do about individuals with $100M+ of unrealized capital gains that through various methods will never have to realize those gains to live an extraordinary lavish lifestyle, and their children will inherit the money with a step-up in basis? For those who make all their money from W2s, they pay very high tax burdens, while those who strictly have capital gains generally pay at most around ~20% for LTCG.

To those criticizing the California Wealth Tax, how do we solve this? How do we make billionaires pay more and lawyers/doctors/software engineers pay less?

Paul the billionaire ignoring that billionaires often don't pay any income tax at all. Come on man, we're not stupid just because we don't own superyachts.

https://www.propublica.org/article/the-secret-irs-files-trov...

The argument is plausible - that you can treat wealth taxes as equivalent to income taxes if you treat wealth taxes as a tax on the ostensible income generation of the wealth.

Of course there's more complexity than this, but that aspect is a plausible reductive lens.

But the conclusion is silly. We all know the extremely wealthy who'd be subject to a wealth tax basically don't pay taxes and that a 20% tax is totally right around what the typical overall tax burden is for the middle class or median households. The 1% example equating to 20% is basically saying the wealth tax would be in line with a flat tax, not even with a progressive rate tax. The wealthy have turned the tax system into one that's functionally regressive for the most wealthy and then PG complains that a proposal that makes it more like a flat tax is "not understood" by lawmakers?

It sounds ridiculous to me.

Or maybe I'm missing something.

This is wrong. You can’t convert between the two because it’s possible to have a lot of wealth with very little (even zero) income. Billionaires can completely avoid income taxes by paying themselves a very low salary and instead borrowing money against their assets (usually stock), which is not taxed as income.

Source: The Second Estate by Ray Madoff (2025)

Wealth tax is highly impractical. Very high and inescapable death taxes is what we need. Like 80% after an initial exemption amount. https://www.yesigiveafig.com/p/the-summer-slide-part-3-the-t... https://m.youtube.com/watch?v=mX5U5DNUfBc

Lots of confusion and misunderstanding in these comments. Not surprising, given the highly charged nature of the subject. I highly recommend Ray Madoff's book The Second Estate [1] to learn more about the topic.

[1] https://press.uchicago.edu/ucp/books/book/chicago/S/bo256019...

I appreciate PG's writing as always.

I'm skeptical that the super-rich are only generating 5% on their money. My anecdotal experience is that it's usually north of 15%. They have access to investments that main-street does not.

If we plug in 15% instead of 5% in PG's reasoning, the effective income tax increase is quite a bit lower.

Here is a better algorithm to edify the masses: if someone is such a massive billionaire as to have the boldness to teach the public basic 5th-grade math, their wealth tax rate should be set at 10%. From that point on, the rate goes in proportion to their level of condescension.

Why choose the median state tax? The proposed wealth tax is in California, where the top tax rate is 13%. Also relevant would be Medicare (1.45% or 2.35% depending on your employment income) and presumably for billionaires, the Net Investment Income Tax, another 3.8%.

I understand why he simplifies things, but it doesn’t really jive with saying politicians don’t understand how taxes work.

I think politicians have a better understanding of taxes than Paul does, and they have a better understanding of how politics work - basically as in all things political, if you convince the majority that you’re dumping on minorities (billionaires, immigrants, trans people) you’ll do well.

Just going to put this here to open up discussion: https://en.wikipedia.org/wiki/Georgism

His math is correct, but the conclusion is wrong.

Income is money that comes from actually laboring and contributing to society. Wealth tax is tax from sitting on your ass doing nothing.

Also, taxes don’t have to be a flat percentage. Like income tax, a good wealth tax would be progressive. Only wealth beyond a certain amount would be taxed, and the percentages would scale.

This is why we should have income taxes that are as low as possible, but still progressively scaled. We should similarly have a progressive scaling wealth tax, but it should be much harsher than the income tax because we want people to work.

Is this Graham accidentally revealing his contempt for working people?

This is a transparently misleading framing.

The very wealthy are paying very low effective rates on their investment gains. Various billionaires have publicly described the truth of this. This is not 20% on top of 35%. They are paying a marginal rate of 35% of deliberately minimized taxable income and zero on deliberately maximized unrealized gains. Then 20% when realized, but as we all know by now there are ways to make sure it’s never realized.

I don’t know what the best approach is here, but I know this framing is nonsense.

Isn't this argument simply confusing income tax with capital gains tax? Because that's the tax you pay on your investment returns, and it's actually capped (in the US) at around 20%.

> It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing. [2]

I am fully against any wealth tax but 'Don't get this'?

Who says they don't get it. It doesn't serve their purpose so of course (like anyone selling) they are not going to disclose it.

As others have mentioned this is wrong. Here's 3 accounts on how it is so:

1- Fundamentally, they are magnitudes of different units, one is tax/income, the other is tax/wealth/time. Not only is the denominator different, one being calculated over income, the other over wealth, but there is an additional inverse time factor.

In income tax, whether the period is yearly or monthly or hourly, is an administrative matter that doesn't materially change the rate, 1%/month is the same as 12%/month, however in wealth tax, 1% wealth tax per year is not the same as 1% wealth tax per month. In many respects one might consider wealth tax to be a second order derivative of income with respect to time. Which is again very similar to a progressive income tax. Anyone that studied polynomials knows that there is no such equivalence between ax and bx^2, they are irreducible mathematical forms.

2)Trivially, in the scenario Paul proposed, Wealth tax is comparable to income tax only with respect to capital gains. That is, if he did find an equivalence between income tax and wealth tax for capital gains (which he didn't), income tax would still apply non capital gain taxes. But I will concede that there may be an argument that, if such an equivalence were found, it could be considered that there exists an Income Tax which will always yield more tax than another specific wealth tax.

3) The equivalence between wealth and income tax cannot be linear. The example given applied to 1% wealth tax and was compared to 20%, and a risk free interest of 5%. If the wealth tax were of 2%, 5% or 10%, would that be equivalent to 40%, 100%, and 200% income tax respectively? The last one is especially ridiculous.

There are numbers in this post, but only in the technical sense.

My read of this is "the discussion of taxing wealth makes me anxious. i will do a tap dance, please become mired in watching / discussing my tap dance so that we can put off the inevitable and ultimately necessary a little longer"

To the "conversion rate": maybe, but who cares? The answer here is: apply the tax, see if we still have billionaires afterwards. If we do, then keep doing it.

You need to understand the "Buy/Build, Borrow, Die" cycle that the ultra rich use to avoid basically any taxes.

Explained here: https://gemini.google.com/share/e230bcecaaeb

But income from most comes from labor, whereas wealth is passive.

I don't want to do math, but they aren't the same.

And people aren't investing 100% of their income in risk free 5% assets.

The thing that all these asshole billionaires don't want anyone to think about is that not taxing wealth means that a person who primarily accumulates non-income capital only ever pays taxes on what they spend while the rest of us pay taxes on approximately everything we get regardless of whether we spend it.

This treats all income like Labor income and completely ignores Investment income and long-term capital gains and losses.

How I pay tax on my labor income doesn't have a lot to do with how Paul pays taxes on his investments. Paul makes his money from investment income.

Because billionaires accumulate wealth through assets and unrealized gains, many of them skip taking a traditional income and pay. If the numbers in the links below are to be believed, according to paulgraham's calculations, this might bump them into a ~fair range (when comparing to average/median earners).

https://www.nber.org/papers/w34170 https://www.propublica.org/article/how-we-calculated-the-tru...

Here's a crucial mechanism that Paul Graham did not mention:

With a wealth tax using his calculation, the higher your returns, the lower the comparable income tax would be. If your returns are 10% you'll pay $1 on $10 capital gains which is 10% and you end up with $109. Conversely someone achieving a mere 1% cap gains would be essentially taxed for 100% of his return.

With income taxes it's usually the opposite: the more you earn, the higher the tax bracket you will be put into.

Somebody like Paul Graham surely has higher than 10% capital gains, otherwise he'd not be exactly a great investor.

Personally I'm against wealth taxes, I think capital gains taxes are a much more appropriate and fairer tool. I also think taxes in general are way too high, if you are part of the middle class and add up everything you pay in taxes, fees, insurance, duties and whatnot you can end up losing 70-90% of whatever you earn. It's extremely hard to actually accumulate wealth for the vast majority of people.

Paul doesn't mention that these aren't exclusive. The California "Billionaires Tax" (which will likely soon become a "Millionaires Tax" after all the Billionaires exit the state), is levied on top of the regular state income tax.

> None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing.

I sure would, if I was talking about someone who makes more money in a week than most of us will make in our entire lives.

I think pg has forgotten that most people aren't rich.

>It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing.

His core point seems to be that taking $20 from him is mathematically equivalent to taking $20 from a homeless girl's hat.

I guess mathematically it is the same number if you dont normalize for that, which he wont.

> It's clear that politicians don't get this from the way they talk about a "mere 1%" wealth tax. None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing.

Uh … sure I would? Why not? The top bracket was 70% in the 80s. So that 61% is still a fair bit short of what it was then. (And the 80s isn't the highest point, either.)

IDK if it would be a good idea or not, but I'd entertain the debate, certainly. To state that this is unarguable, though, well…

I used to be against wealth taxes but as inequality gets out of hand I've more and more felt like they are the right move.

Hell, I'll be the first in line to pay the damn tax so long as billionaires are right in line with me too.

Completely ignores the true distinction between wealth and income taxes.

Person A has one billion dollars. Holds it in cash in a vault deep in a mountain he owns. He does not earn any wages.[1]

20% income tax: $0.00

01% wealth tax: $10,000,000.00

[1] Every billionaire controls their taxable income. Unlike wage earners, billionaires have 100% control over how much taxable income they have each year. They make choices.

They can have the vault in the cave. Or they can put money into artwork that grows in value and only generates income upon sale. Or a million other ways they can choose to control taxable income.

> That's why I think few politicians currently understand how to convert between wealth and income taxes. You can tell from the way they talk about the subject that they don't understand the momentousness of what they're proposing. But I'm optimistic that we can teach them. The answer's not hard to understand, once you realize the question exists.

What a pompous and uninformed "I am smarter than others" way to think. And very 'parental' (ie 'we can teach them').

Note that Politicians (in order to remain in their job) need to think in terms of the people they represent and getting re-elected by those people. You may not like it it may not be good for you but understand that in the position they are in why they do it.

> So in the median case, a state adding an additional 20% in income tax would have a total marginal tax rate of 37% + 4.75% + 20%, or 61.75%

Good! It should still be higher!

There's nothing more tone deaf than an uber wealthy man arguing he shouldn't pay more in taxes to the system that allows him to be uber wealthy and to be deliberately misleading at the same time.

The real problem is our politicians aren't representing our people. All these other issues of wasteful spending and money printing and inflation and whatnot are downstream of that main crux of problem. People don't hate wealthy perse but when laypeople aren't provided proper means of living, they will try anything as a solution, even throwing a wrench in the system. That's how we got Trump.

I think Paul thinks people care about the distinction, or think that a 20% marginal increase to the nation's wealthiest is something the public would find "unfair".

Rich people need to stop hanging out with other rich people.

yawn hack writer issues wealth-hoarding and inequality apologia.

Economics is simple. Resources are finite, and money plus markets preserve that finitude as an invariant (that's why it works as a store of value). If you sit on more money and accumulate more money a natural consequence is that someone else has less access to the finite resources available (either in actuality or in potentia), period, because you can accumulate enough to begin to dictate how much they can access (by having decision power around wages). There is no reason to assume private individual wealth-hoarders have public interest in mind, and indeed they have often proven that they don't. They want to maximize value at specific points in the system, which is the literal definition of instability and eventual collapse in chaos theory. You need to bring the system back to stability through structural intervention and regulation. Tax the rich. Cap individual accumulation. It's that simple. The world does need or benefit from kings, whether minted through politic or finance.

Yeah this ignores at least three things:

1. Most people do not derive even a fraction of their income from interest on wealth.

2. Earning income from interest on wealth requires zero effort. That isn't true for salaries.

3. Income and wealth are totally different things. You can find a way to equate them in one contrived example but there are so many other factors involved in the real world.

Billionaires gonna billionaire.

Imagine, poor person, if you had to pay an additional 20% in income tax! That would not be fair!

Fuck off paul. Billionaires aren’t paying anything in income tax when they should be paying 60 or even 90.

So, yes, let’s hit them with a 5% wealth tax.

> In the median case, US state politicians talking about adding a "mere 1%" wealth tax are talking about causing the residents of their state to have the highest taxes in the world. That's not the sort of decision you make lightly.

The missed point is that a 1% wealth tax 'only for a select group' can easily become later a 1% (or higher) wealth tax 'for a less select group'.

Utter nonsense. You can't convert between a wealth tax and an income tax in any manner as simple as this, unless the wealth tax and the income tax were implemented in a simplistic way unlike any actual proposal. Most obviously, there is no such thing as "the" income tax rate, because different people pay different rates; those rates depend most obviously on the amount of income but also on various kinds of accounting gimmicks that allow wealthy people to pay less. Similarly, no one is proposing a flat wealth tax that would tax 1% of everyone's wealth.

The "example" discussing paying income tax on your $5 of return on your capital is similar nonsense. You don't pay anything on that gain unless it's income, which it isn't unless it's realized. So (assuming the various parameters of a wealth tax meant this mythical $100 person would indeed pay a wealth tax), the comparison is between zero income tax and some nonzero amount of wealth tax.

> None of them would speak of adding a "mere 20%" to the income tax rate, even though that's mathematically the same thing.

Plenty of politicians (e.g., Bernie Sanders, AOC) have pointed out that the top income tax rate during the 1950s was over 90%, and have suggested raising rates back or near to that level, which would be well more than a 20% increase in the income tax rate.

This is misleading and not the point of the wealth tax.

If you’re lucky enough that you don’t need to work for your income, you should be taxed. A lot. How much? Enough to make sure you don’t become so rich that your children don’t need to work.

Being rich is not fair, it’s very rarely deserved, and it needs to be taxed unfairly.

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If you want to understand why someone would even propose taking from the rich and complain about inequality, this post titled "Inequality Talk Is About Grabbing " is illuminating: https://www.overcomingbias.com/p/inequality-is-about-grabbin...