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Bill Gates Has a Big Idea for Tax Reform — And It’s Excellent
On his gatesnotes blog
, Microsoft cofounder and philanthropist Bill Gates offers his thoughts about inequality, particularly concerning economist Thomas Piketty’s Capital in the Twenty-First Century. Among his insights: (a) extreme inequality is a societal problem, and government has a ameliorative role, (b) Piketty underplays how much of American superwealth comes from entrepreneurs rather than passive rentiers, (c) inequality analysis need to look at consumption data, not just wealth and income, (d) Piketty understates the many forces that decay wealth. Gates:
Take a look at the Forbes 400 list of the wealthiest Americans. About half the people on the list are entrepreneurs whose companies did very well (thanks to hard work as well as a lot of luck). Contrary to Piketty’s rentier hypothesis, I don’t see anyone on the list whose ancestors bought a great parcel of land in 1780 and have been accumulating family wealth by collecting rents ever since. In America, that old money is long gone—through instability, inflation, taxes, philanthropy, and spending.
Gates, perhaps not surprisingly, also disagrees with Piketty’s inequality fix: extremely high wealth taxes:
I agree that taxation should shift away from taxing labor. It doesn’t make any sense that labor in the United States is taxed so heavily relative to capital. It will make even less sense in the coming years, as robots and other forms of automation come to perform more and more of the skills that human laborers do today.
But rather than move to a progressive tax on capital, as Piketty would like, I think we’d be best off with a progressive tax on consumption. Think about the three wealthy people I described earlier: One investing in companies, one in philanthropy, and one in a lavish lifestyle. There’s nothing wrong with the last guy, but I think he should pay more taxes than the others. As Piketty pointed out when we spoke, it’s hard to measure consumption (for example, should political donations count?). But then, almost every tax system—including a wealth tax—has similar challenges.
Spot on. Under one version of a progressive consumption tax, individuals would pay tax on their wages only, not on any income from saving. And companies could immediately write off their investments, rather than depreciating them over a period of years. A progressive consumption tax could boost GDP by around 6% in the long run. As AEI’s Alan Vaird explains, consumption taxes promote economic growth because they avoid a central flaw of income taxes, the penalty on saving and investment. A progressive consumption tax would a vast, pro-growth improvement over the current code. And given that some folks on the left like the idea, too, it might actually have some political legs if given a big push in Washington.
Here is Bill Gates at AEI making a similar point on the consumption tax:
Published in General
Geesh, for all his money you’d think he’d buy a tie with one of those little loops in the back.
But I agree. This is excellent.
Really interesting post but I’m not sure I agree with the Great One here. The guy spending large amounts of money to fund a lavish lifestyle is often supporting entire small economies and indirectly providing jobs. Consumerism is a good thing and should never be punished.
When I lived in CA the state put an onerous consumer tax on large boats and yachts and one of the most thriving businesses in the state died.
I do, on the other hand, question the way some philanthropists spend their money, particularly a Mrs. Melinda Gates who uses an impressive percentage of the Gates Foundation budget to study the habits of “sex workers” in third world countries.
We have to tax something to support government, even appropriate levels of it. The problem is finding the most equitable thing to tax. Even a flat consumption tax is odd in some ways because those at the very bottom who consume their whole wages as a matter of need are taxed on 100% of their income while those who spend lavishly from an exponentially higher wage are taxed on a much smaller percentage even if they pay a higher gross amount. That kind of inequity will never sell politically. Exempting the basics of life runs the problem the other way where we end up with the same kind of makers/takers situation we have now with the progressive income tax. I generally come down on the side of a flat income tax (or even a progressive one for political expedience reasons) with zero deductions. Everyone gets skin in the game even if it’s just a little. Couple this with a major reduction is the welfare state (as if) and the nation starts pointing the right direction again.
Not really… broken windows and all that.
Investing and Philanthropy and Consumption can be either good or bad. And if you tax something you get less of it.
If you tax investing and philanthropy you are equally likely to get less of both the good and the bad.
If you tax consumption, people may cut back on wasteful consumption but they won’t cut back on necessary or useful consumption. So you get to generate revenue and keep the good consumption. Cake and eat it.
Who gets to arbitrate these judgments?
The consumer.
That’s what Mr. Gates was getting at with the problem of targeted luxury taxes and why they don’t work.
Like KP said, we have to tax something. Taxing certain things is problematic. Taxing consumption across the board is the method that does the least harm.
“Taxing consumption across the board is the method that does the least harm.”
That’s certainly not something I would say. In fact, I think it does as much or more harm than the current tax code.
We already tax plenty of things and the most destructive tax of all is on the “best” consumption- property. The answer is to cut back federal spending and institute policies that allow businesses to prosper.
Taxes on “bad” consumption don’t work- people still buy cigarettes and even during Prohibition managed to subsidize the Mafia in order to buy alcohol. Taxing “bad” consumption demonstrates a fundamental lack of understanding of human behavior which in turn neatly summarizes the irrelevancy of the Democratic Party.
Just to be clear, I’m only focusing on the Bradford X tax Jim linked to above. Which is a progressive wage tax.
Do you feel that this method of a consumption tax is harmful? Why?
“Taxing “bad” consumption demonstrates a fundamental lack of understanding of human behavior which in turn neatly summarizes the irrelevancy of the Democratic Party.”
The morons in Washington State are contemplating a mileage tax now that they’ve convinced enough people to drive hybrids and aren’t getting the revenue they expected from gas taxes. So, yes, cut spending by all means (if possible, whole other argument), but barring that we have to find the least destructive method of taxation. What is the least bad among horrible choices?
But the proposal is not to tax bad consumption. The proposal is to tax consumption by progressively taxing wages.
The consumer would still decide what to consume.
I don’t know what the right form of taxation is, but I can sure as heck say that current business and income taxes are obscenely bad.
Right now let’s say that my business, with 5 partners, does $2.5m in EBIT – that’s $500k net to each partner. However we’re each only drawing $200k in salary, trying to leave the rest in the business to grow it, save up for capital equipment, etc. I still pay income taxes on the $500k (either directly, since we’re an LLC, or the business pays the $300k side). In either case we’re paying $150k each in taxes, or $750k in taxes. How many people could we have employed with that money, or how much equipment could we have acquired?
Several years ago we finally had saved up enough funds to purchase a building and a surface mount assembly line. We did this after running the business for 10 years.
Without that ridiculous level of taxation we could have done it in half that time.
Before we get too far along, the bad consumption remark was my own counter to EThompson #2 regarding consumption. It has nothing to do with the argument put forth by Bradford.
The argument is that the current system encourages present consumption over future benefit. The X tax would change that.
Consumption tax is perfect.
We taxed the baby boomers income all through their working life.
Now we can tax the consumption as spend the money they managed to save.
“First, households are taxed on their wages under a progressive rate schedule, with higher tax rates on higher-paid workers and exemptions and tax credits for low-paid workers.”
Still an income tax.
I think I stated earlier why an across the board consumption tax is bad: it taxes at 100% those who require their entire income for subsistence. If we’re talking about excluding X, Y, and Z from the tax then we’re right back into the politics of rent seeking on the tax code.
I’m more inclined to a flat income tax (with the first X dollars exempted) than to a consumption tax.
Agree. I believe everybody needs to have skin in the game or the GOP is doomed forever.
A wage tax. Not income.
Where this get could get sticky is what counts as wages?
But this taxes saving and investment. That seems unlike you.
Oh but it is. I firmly believe that people who don’t pay federal taxes have no right to vote on how mine are spent. That’s a recipe for fiscal disaster that has unfortunately come to fruition.
Yes, but that was an extra luxury tax on top of all the other taxes, not a generalized consumption tax replacing all the other taxes.
Exactly the same thing for most of the nation. So I advocate for a flat wage tax with X dollars exempted for everyone.
My ultimate hope is for “one tax to rule them all” since every dollar that goes into the treasury is treated exactly the same way regardless of its source. No more social security tax, medicare tax, and income (or wage) tax…just one federal (insert name here) tax. The working poor who never pay “income taxes” are still being hit for over 7%. However, as we learned from the last presidential election cycle with talks of this type of tax, the number required to replace the current multiple taxes with a single tax is higher than is probably politically viable. People are (I think) willfully ignorant that about 15% of what they could be taking home every check goes into the treasury to never actually be seen again.
Yes but I used it as an example of the destructive nature of consumption taxes. Flat taxes are more crucial because I believe they’d have a far bigger impact on voting.
The two party system in this country is at great risk.
What drugs are you smoking to think any consumption tax will replace rather than sumplement current taxes?
KP, that’s the idea. That’s what we’re talking about here.
I don’t believe it would ever happen, ackshully, but that’s what Mr. Gates is proposing. If one wants to argue against a different proposal than the one that’s actually being proposed, of course that’s one’s prerogative.
“KP, that’s the idea. That’s what we’re talking about here.”
It’s still an income tax, it simply excludes certain things from income that are currently counted. I would hardly call that a consumption tax.
We’ll have this argument on a serious, national level when the progressives no longer believe that the point of a tax system is not to pay for things, but first and foremost to take away the property of the top ten percent in the name of Fairness. Whether it gets to the other 90% is irrelevant. What matters is the taking.
This sounds like a most excellent title for a new book to be written by a witty and charismatic conservative.
To me, the problem with the flat tax is that I don’t think it changes the game very much. The argument will remain, “What qualifies as income (profit)?”