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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
Jim is confusing Bill Gates thoughts here, which are also a bit confused. Bill Gates specifically says that he thinks the ratio of taxation on labor income vs. capital income is out-of-whack particularly if you believe the returns to capital will be higher than the return on labor in the future (owning robots and farm land). This means that Gates thinks that taxes on capital income should go up. Bill Gates however qualifies this by saying that capital income that is given to philanthropy or reinvested should be taxed less than capital income used for consumption. This is where Jim says that Bill Gates is advocating a consumption tax and immediately goes to his favorite so-called consumption tax – the Bradford X tax. However the Bradford X tax specifically excludes capital income from being taxed, which means it doesn’t capture consumption funded from capital income, e.g. trust-fund babies. Now the Bradford X tax purports to capture this consumption through taxing the wages of the people who provide goods and services to the trust-fund baby. This however is indirect, which means the person spending capital income on consumption is taxed less than a person spending labor income. Now one can argue whether this is more fair or economically beneficial, but I doubt that Bill Gates would approve.
Income is not profit. Income includes money earned from labor.
I can no longer tolerate the fact that 47% of the people in this country pay nothing to use public thoroughfares, schools, fire and police departments, and benefit from the freedoms provided by our military. Many think payroll taxes *count.*
MarciN; I’m specifically interested in your thoughts as to how to get all citizens to pony up.
I’m concerned primarily for one reason- see last sentence on comment#25.
More recently, I have realized that taxes are the least important problem that conservatives should focus on. Vastly more important is where tax money goes. The “Starve the Beast” strategy is a complete failure. If conservatives really care about limited government, liberty, and getting rid of rent-seeking then we should advocate greatly increasing taxes so that the American public has to pay for it. Maybe then the American public would demand a more accountable and smaller government.
For self-employed person me, there is no difference. :)
I have to say that I think it is really interesting that Bill Gates just suggested this. It was my latest thought too–a consumption tax. Yet I see the problem with its capacity to destroy whole industries. I don’t like the income tax because it destroys whole people. :)
Like health care, the costs are just plain too high.
Amity Schley’s (spelling?) book The Forgotten Man (title? ugh) made a point that made me put the book down and run around the block it was so shocking to me: the federal taxes just before FDR started increasing deficit spending were ridiculously low in comparison to today. And as I write this, I know it can’t be right, but I think she said it was something like 8 percent of people’s income.
The ridiculously high cost of government is the main problem in my mind.
And there’s no fair way to raise that money–it’s too much. It shouldn’t be the problem it is in the first place.
And you’re not going to like this, ugh, but I think the poor do pay a lot in taxes because those taxes and costs of compliance are built into everything. It’s wild. And everybody is paying–babies, kids, teenagers, old people, and everybody else.
There are ways to reduce poverty and get more people to participate. To care. To have skin in the game. It was one reason GW wanted more homeownership. He succeeded, only to fail with that initiative.
Prosperity is the best way–the liberal at twenty versus the conservative at forty. :)
The Walmart question comes to mind here: Are the low-income workers and the poor better off with low consumer prices or with higher incomes?
@MarciN: There’s so much meaty stuff in your last comment that I’m dying to address, but I’ve got obligations this evening with friends and family who are already annoyed with me for being late to cocktails!! (Your fault entirely.)
Look forward to talking tomorrow.
Speaking of consumption tax, why do we tax food and drink?
In california, which supposedly doesn’t tax food and drink, I pay tax every time I shop at Carl’s Jr.
I’m one of them. Every cent that enters the treasury is the government’s to do with as it wishes.
The federal black hole currently consumes 15.3% of our labors even before putting an income tax on top of that. Even a flat 10% income tax to replace only the current income tax would put the poorest worker at 25% tax rate. Make it one tax then the bastards can’t hide how much they’re actually taking.
Yes, there is a difference. It matters which portion of your income is considered wages, which you by law as a self-employed person have to pay Social Security and Medicare taxes on and what portion of your income is non-wage income and you don’t have to pay SS or FICA on.
For example, if you have a business renting out construction equipment, a very large portion of your income could be considered rental income.
I’m an editor who has a good accountant. :) The accountant takes all of my expenses and deducts them from my income. In fact, the IRS makes me compute my income on its Profit and Loss form. I guess that’s why the relationship between “income” and “profit” is so clear to me. The IRS sees them as the same, and so do I.
In the end, it’s all the same for self-employed people who file as sole proprietors. What is not expense is “ordinary income,” to which is added interest income and capital gains.
But what I do with my income and expenses is the same thing the publishers I work for do. They send me a package via FedEx, and the money it costs the company to do that is subtracted from the income they get from sales of the book. Taxes are not paid on that money that went to FedEx. It’s not income or profit for the publisher.
That’s what I’m saying. I don’t think adopting a flat tax is going to change much in terms of taxation. The taxes owed will be based on gross receipts minus expenses. And which dollars are profits and which are expenses will keep the same IRS agents and private-sector accountants as busy as they are right now.
I’m.suspicious of VAT taxes, because they are not limited to retail sales. There’s a lot the politicians can hide.
I think we have too many hidden taxes as it is.
This is good. Looks like some people are finally coming around to what economists have been saying for decades. Good for him.
I met a guy once whose best friend’s first cousin’s (twice removed) brother-in-law made significant financial contributions, pro re nata (PRN), to several young ladies’ college funds.
Interrogative: Should those donations, under the so called Gate’s scheme, be taxed at the philanthropic rate or at the more prohibitive lavish lifestyle (LL) rate? If at the higher LL rate won’t all parties, including the state, suffer?
This is an old idea, of course. With the big bugaboo ensuring that the income tax doesn’t come back later.
The mechanics of making a consumption tax progressive are daunting.
In theory the way to do that is to exempt (or set a lower rate) for unprepared food and a few other items like children’s clothing. But setting the regulations is no simple matter – not to mention empowering the regulators and their lobbyists.
I’d have thought that someone would have mentioned the Fair Tax by now. This is the only solution that covers all the bases, but will NEVER be implemented. Fun to discuss, though.
Payroll taxes certainly do not count as a sole contribution. I have to pay for both my family and contribute an additional 15% of my payroll to fund my employees entitlement programs as I write checks for fed, property and capital gains taxes.
But I think we’re all missing the point and MarciN clarified it best:
The ridiculously high cost of government is the main problem in my mind.
Just had dinner with my stockbroker husband who said Bill Gates’ consumption tax, otherwise known as the “fair tax,” would be fantastic. He said my concern that people would stop spending, which would shut down whole industries, was not seen in the research. In fact, studies have demonstrated that it would improve the economy.
And it would involve people more directly with government because everyone would see themselves stakeholders. Instead of having taxes hidden from the view of consumers by being incorporated invisibly into consumer prices, people would be acutely aware every time they purchased something how much of that price was for taxes.
I would assume, I said, that wealthy people would save more and spend less. He said that they do, and in fact that money from savings gets invested, so there is real growth in the economy.
Interesting. I’m not sure I’m convinced that it would not harm a consumer-based economy, but I’m open to considering it further. :)
I once argued with one of the really smart Argentine officials in their Dept of Treasury that their tax rate should be no more than 10% and that government spending should also equal no more than 10% of GDP. He was much too smart, sophisticated, and well educated to give any thought or credence to my idea or any governmental financing scheme that did not repeatedly bankrupt his country.
Sometimes I don’t understand the super clever people. Take Barrack Hussein Obama and his lovely bride Michelle for example, I admit that I just don’t understand those crazy fun loving kids at all.
I could live with a fair tax but think that the flat tax is the better choice. May even be possible if we could ever capture the executive and legislative branches at the same time. Of course the Supremes would just throw it out as being unconstitutional so maybe we need to get some conservative judges on the bench too.
How would your scheme have enriched the really smart Argentine officials?
In no way whatsoever?
There’s your answer.
I think I agree. I think a flat tax would be easier to push through. To go to a fair tax would seem so extreme to the electorate that I don’t think it would happen. People would be afraid of it.
I agree that a consumer tax only would be effective but you and I both know that there is no such thing as taking away in government. A consumer tax would only be an addition to the income tax and would completely destroy our economy.
< devil’s advocate mode = on >
Up here in the Great White North, the revenue from the GST allowed the federal government to greatly reduce personal and corporate income taxes.
However, the GST wasn’t really a new tax. It was merely replacing the previous Manufacturers Sales Tax, which was hidden in the price of goods and was actually charged at a higher rate than the GST (but it only applied to goods, not services).
I think the only way a VAT could theoretically get implemented in the US would be if the legislation reduced income taxes first (say in Year One) and brought the VAT in second (say in Year Two).
< devil’s advocate mode = off >
Too funny. When I first mentioned that it was Bill Gates’ latest idea, Mr. N said, “Why would anyone listen to him? He has turned into a flake.” I’m, of course, a long-time admirer of Bill Gates, but I understand Mr. N’s objections.
Then he said, “Would this be in place of the income tax?”
I said, “I believe so.”
“In that case, I’d be for it. And it’s not Gates’ idea. That’s the Fair Tax. But if it is in addition to the income tax, no. No way.”
I believe the government has a fixed amount of money it wants to take in every year and nothing will stop it. We can change terminology and methods, but in the end, the beast must be fed every day.
I’ve not been involved in the federal government or state, but my town works that way. It’s appalling. No matter what, it keeps the revenue the same.
One reason people fought so hard here to resist the full valuation. They opponents (including me) said it would be too easy to ratchet up the taxes and those taxes would stay forever. As they always do.
Romney had the right idea. He once held a press conference in Boston where announced that he was laying off 600 lawyers from the state payroll. “We do not need 600 lawyers on the state’s payroll. If we need legal advice, we know where to get it.” I think he left about nine or ten. Needless to say, Deval Patrick hired them all back. :)
This is getting to be ridiculous; I’m not used to agreeing with anybody so consistently. :))
My point exactly.
I believe the government has a fixed amount of money it wants to take in every year and nothing will stop it. We can change terminology and methods, but in the end, the beast must be fed every day.
I believe the government has a fixed amount of money it wants to take in every year and nothing will stop it.
And this gets at the point of my comment #53. The government should not be able to get after fixed amounts of money, whether stolen from the taxpayer, printed in the basement, or borrowed from the ChiComs. They must be constrained by a certain percentage of GDP. If 10% is good enough for God, it should also be good enough for my crazy Uncle Sam.