Bill Gates has decided to add to the conversation on how to tax rich people like Bill Gates. He’s now saying that a higher capital gains tax, perhaps a higher estate tax, is the way to do it. This is incorrect and might, uncharitably of course, be described as a result of his own quite specific preferences. The annoyance here is that half a decade back, the very same Bill Gates was spot-on with what should be done about the taxation system.
Don’t tax incomes, don’t tax capital; instead, tax consumption.
The advantage to a progressive consumption tax, as the proposal is called, is that you can indeed have 70 and 80 percent marginal tax rates and yet not have all the disincentives to working or building businesses.
His latest comments are here. Tax capital accumulation through a capital gains tax, and tax the great fortunes through a higher and more rigidly applied estate tax. He notes, as I did here, that those higher tax rates of the past didn’t raise more revenue. There’s thus a certain wonder at the idea that raising those other taxes to their old levels will raise much more revenue.
There is also that uncharitable idea: Gates has pointed out that his children are going to be rich, certainly, but they’re not going to gain that dynastic fortune. That near enough $100 billion is going to be given away. Thus, Gates’ reactions to the disincentives of those two forms of taxation upon capital are going to be more than a little different to those of most others. It can indeed be a mistake to project from the personal to the general.
Do note that because Gates is giving that money away, both forms of taxation he’s suggesting won’t raise any money from him.
Rather more annoying than this is that five years back, Gates recommended the best form of taxation: the progressive consumption tax. Here’s his reading of Piketty where he describes it, and here’s both AEI and I lauding it.
The underlying point is that if we tax something, we get less of it. Tax labor incomes, and, often enough, people will work less. Certainly at some taxation rate, this happens. Tax capital and people will accumulate less capital. Yet, people working and accumulating capital are both good things. People going to work is what produces all those goods and services that we get to consume. Capital is what makes that labor more productive, giving us more production to enjoy from each hour labored. We like capital accumulation.
We also like taxation because we do need to have government, not perhaps as much government as we’ve got, but some at least. So, what is it that we should tax? The consumption of people, not their labor incomes or capital.
Effectively, we should give everyone a giant IRA or 401(k). Any money going into it pays no tax. Any profits made inside it pay no tax. Any money taken out of it pays that progressive consumption tax. This is the way that we can take 70 or 80 percent off those who are very rich without disturbing their incentives to either work or build capital. We catch them when they try to spend it, not when they make it.
It’s actually a standard finding of optimal tax theory that we shouldn’t be trying to tax returns to capital at all. The existence of lots of capital is what makes the society as a whole so stinking rich. That’s obviously not politically acceptable, which is what leaves us with this as the best compromise.
Gates is a bright man — one colleague of mine worked with him decades back and says it’s scary how bright he is — but the truth is he was right on this subject five years back, and he’s straying into error now. You want to tax the rich? Tax them when they spend the money, not when they earn it.
Tim Worstall (@worstall) is a contributor to the Washington Examiner‘s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
