Taxing the Rich

A year or so ago there was a possibility I’d be interviewed for a story in the Daily Telegraph. I subscribed to the paper to check out the journalist involved, and have never got round to cancelling. The paper sometimes called The Torygraph, the paper of that party in effect, might be useful to read to keep an eye on what Britain’s most establishment political party is up to. It gave, to cite a relatively trivial but instructive example, the most in-depth coverage of the Handforth Parish Council episode featuring Jackie Weaver (if your memory stretches back that far), with the most detailed background information.

This week in the paper, an article on US politics caught my eye. The report, on Biden’s budget’s progress, seems to me a good summary. Though highlighting the views of billionaires and opponents to a proposal to tax unrealised capital gains, the details provide a more balanced view.

Biden stings the rich in $2 trillion tax raid

The headline reflects a plan, outlined in Biden’s budget proposals in the spring, for tax reform as a hedge against interest rate rises, which would increase the repayment burden on US debt. Biden is paying for renovations and additions to infrastructure, and social spending, with cheap debt; the new taxes ‘pay for’ the provisions by covering the risks of the debt becoming more expensive once interest rates rise. At least that’s the theory.

These tax reforms, in my understanding, include:

  • Biden’s global push for increased corporation tax
  • improving efficiency (that old favourite)
  • increasing reporting requirements for crypto-exchanges, including offshore entities, in a reciprocal international information sharing arrangement
  • income tax changes.

The Telegraph currently lead on the latter, with the Senate “poised to vote on a 5pc tax on earnings above $10m (£7.2m) a year, with an extra 8pc for incomes above $25m”.

As well as the corporation tax increase, the Telegraph reports on a one percent surcharge on share buybacks (the repurchase of stock by the company that issued it)

The White House said the share buybacks tax was aimed at curbing a practice it claims is too often used by executives “to enrich themselves rather than investing workers and growing their businesses”.

Telegraph, ibid.

Taxing ‘paper profits’ fails, but why not think about it?

The controversial proposal to tax unrealised capital gains, mentioned at the top of this summary, it turns out has been dropped.

The idea seemed to try to get round the problem of those with vast wealth paying no income tax, because they often don’t draw much of an income, preferring instead to borrow cash against their wealth, held in shares and other assets.

Authored by Democrat Senator Ron Wyden and backed by progressive former presidential candidate Elizabeth Warren, the proposals unveiled this week would apply to taxpayers with more than $1bn in assets or over $100m in income for three years in a row.

At the end of every tax year, billionaires’ tradeable assets would be appraised. The increase in their net worth over 12 months would be taxed at the top capital gains rate of 28.3pc.

Telegraph, ibid.

Readers might feel entitled to ask: what is the issue with taxing the rich in this way? The Telegraph argues taxing unrealised assets opens “a hornets’ nest of issues.”

What issues?

The proposals, announced on October 25th by Treasury Secretary Janet Yellen, specified liquid assets; Yellen denied it should be considered a ‘wealth tax’.

A classical libertarian argument, militantly argues that taxing unrealised gains in this way is theft. I’m not so sure. But, is there something in the classical libertarian approach to consider, before dismissing it?

Venture capitalist Mike Novogratz made alternative suggestions: “maybe try eliminating step up basis first. And carried interest. That would be a start”.

Step-up basis apparently refers to a readjustment of the value of an appreciated asset for tax purposes upon inheritance. Carried interest means a share of profits that the general partners of private equity and hedge funds receive, regardless of whether they contribute any initial funds – a kind of performance fee.

Novogratz went on to argue taxing

“Unrealized gains on illiquid securities would be a unmitigated disaster” –


Something of a non-sequitur given Yellen specifies liquid assets only.

What of the ‘soft’ argument that the tax would force founder CEOs to sell shares, thus affecting the market’s valuation. We can’t know what the unintended consequences through the chaos of the markets would be. I think the proposal does raise complicated concerns around unintended risks, certainly at the highest capital gains rate; it’s a risky way to cover Biden’s debt. But what if the tax was at a much lower rate?

Perhaps we should consider this in context. Many factors are at play here. Tax avoidance by the wealthy, increasing the relative tax burden on the rest of us, seems ingrained in the whole structure of today’s capitalistic organisation. Are Novogratz’s alternative suggestions pointing to loopholes that could be closed before considering a straightforward tax on unrealised capital gains? On the other hand, if restricted to the 700 or so people planned, and at a lower rate to mitigate systemic risk, why not try it?

But opponents pose a challenging argument, pointing to creeping taxation: income tax, they point out, was originally ‘just for the rich’. Perhaps this is what Novogratz was hinting at by suggesting taxing illiquid assets might be a next step? Elon Musk, who reports estimate would pay $50billion over five years, took this line, suggesting that since the White House estimates this tax covers “~10% of the $3.5 trillion spending bill. Where will the other 90% come from? The answer is you.”

The Telegraph report, incisively, points out Musk

has raised few problems with government spending when it subsidised Tesla sales or funded rocket launch contracts for SpaceX – the other source of his paper wealth.

Telegraph, ibid.

Indeed, the profitability of Tesla depends in part on US Government tax credits to the company for being ‘ecological’. This allows them to increase their profits at the expense of public funds.

I don’t believe all taxes are destined to creep and encroach. Political will can override that. We may then consider, free of events, taxing unrealised capital gains on liquid assets, but a more modest tax than the October 25 proposal, so as not to risk disturbing the markets systemically. But we may also consider what would theoretically stop a covenant restricting it to liquid assets over $1bn? How do we stop any creep in such a tax towards the rest of us? Questions worth considering.

A new/old deal

In any case, Biden has announced a framework deal which excludes the Oct 25 proposal, considered too radical for the Senate’s centre to agree. The game of ambitious, even radical proposals, led to haggle and a compromise, a new deal which may or may not be what the parties were aiming at.

On the table now is a revised $1.75 trillion spending plan. It remains to be seen if simply raising income tax on the wealthiest, alongside increasing corporation tax, can cover Biden’s bet. By the end of his first term, we should be able to discern an answer, when the political games have been won and lost, and the consequences play out.

Addendum – breaking news

As I write, further developments related to this story and issue have unfolded. The headline here is that “Elon Musk is ready to spend $6 billion to end world hunger, asks the United Nations to provide a plan”.

Billionaires are occasionally criticised for, as in the recent case of Jeff Bezos, spending their wealth created by their companies, on pleasure jaunts into space instead of, for example, ending world hunger. Of course it’s not necessarily that simple; world hunger and poverty are properties that emerge from the system as we know it – throwing $6bn at it would not necessarily solve the underlying problem. But it could be a start.

According to Business Insider India, this was prompted by David Beasley, director of the UN’s World Food Programme (WFP), who tweeted commenting that one-sixth of the recent increase in Musk’s net worth, $6bn, could help save 42 million people who are suffering from famine. Musk responded, asking ‘exactly how’ the $6 billion will help solve world hunger. He pledged to immediately sell Tesla stock and fund the $6 billion, under the condition of “open source accounting, so the public sees precisely how the money is spent”.

So to be fair to Musk, he seems to recognise the complications. To be cynical, we could read this as a PR effort from Musk to avoid being taxed, by suggesting he could liquidate some of his net worth to directly tackle world issues through international organisation, sidestepping left-wing efforts to raise the tax burden on his ilk. This is a developing story and may well be a PR flash in the pan, but worth keeping an eye on to see how this unfolds, as Dr Beasly indicated a willingness for the WFP to work with Musk to see if anything can be put together. Full story from Business Insider India here.

Sunday Afternoon Radio

I spent the afternoon of the 24th October this year listening to two instructive, entertaining and even illuminating editions of two standards of BBC Radio broadcasting.

Desert Island Discs, running continuously on the BBC since 1942, interviews each week a ‘castaway’ entitled to choose eight sound records, a book and a luxury to console them in the event of them following in the footsteps of such archetypal castaways as Robinson Crusoe and Tom Hanks.

My maternal grandmother was a big fan of the show, though it’s the kind of thing I would only listen to if interested in the guest. On this occasion I tuned in on spec, and found myself engaged and intrigued by the castaway and his choices: Michael Sandel, a noted political philosopher. I’ve just re-listened to the edition, including the bit at the start I missed. Well worth a listen, Sandel’s choices include Hamilton, from the musical of the same name, which he mentions listening to more critically recently in light of his own critique of the ideology of meritocracy, Billie Holliday’s Strange Fruit and Nina Simone’s Feeling Good, as well as other delights I’ll leave you to discover for yourself.

Radio 4 being primarily a station of the spoken word, a valuable commodity, nevertheless produces a slight weakness in DID‘s format: we only hear the briefest of clips from each choice.

Radio 3’s Private Passions, in which guests are invited to share their favourite recordings usually of classical music or poetry, has the luxury of longer excerpts, but otherwise in form resembles nothing less than a slightly higher-brow version of DID. Indeed the emphasis remains on the conversations. Scheduled after DID, the two together form a good solid hour of enlightening listening both to musical choices, perhaps unexpected or familiar, as well as to the perspectives of some notable and fascinating people. On this occasion, Private Passions interviewed the ever-interesting Rory Stewart, former diplomat, Tory MP, and possibly spy. Stewart talks most interestingly of how little he misses being a politician. He’s particularly good on detailing an insider’s view on exactly how the political system corrupts those involved in it, so that by the time you get to cabinet level and thus power, all your ability to think critically and with nuance and compassion has been eradicated from your political practice. He even goes as far as to suggest if he had succeeded in becoming Prime Minister, which he had a crack at in 2019, he thinks he would have been ‘corrupted’. The interview also gives an insight into Stewart’s experiences in the Middle East, as well as his cultural interests there and in Scotland, including an interesting excerpt from a recording of Scottish folk singing, as well as usual suspects Handel and Bach.

Both episodes remain available on BBC Sounds, and repay a listen: