Viliam's Shortform

Viliam

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Paul Graham's article Modeling a Wealth Tax says:

The reason wealth taxes have such dramatic effects is that they're applied over and over to the same money. Income tax happens every year, but only to that year's income. Whereas if you live for 60 years after acquiring some asset, a wealth tax will tax that same asset 60 times. A wealth tax compounds.

But wait, isn't income tax also applied over and over to the same money? I mean, it's not if I keep the money for years, sure. But if I use it to buy something from another person, then it becomes the other person's income, gets taxed again; then the other person uses the remainder to buy something from yet another person, where the money gets taxed again; etc.

Now of course there are many differences. The wealth tax is applied at constant speed -- the income tax depends on how fast the money circulates. The wealth tax is paid by the same person over and over again -- the income tax is distributed along the flow of the money.

Not sure what exactly is my thesis here. I just got a feeling that the income tax could actually have similar effect, except distributed throughout the society, which makes it more difficult to notice and describe.

Also, affecting different types of people: wealth tax hits hardest the people who accumulate large wealth in short time and then keep it for long time; income tax hits hardest the people who circulate the money fastest. Or maybe the greatest victims of income tax are invisible -- some hypothetical people who would circulate money extremely fast in an alternate reality where even 1% income tax is frowned upon, but who don't exist in our reality because the two-digit income tax would make this behavior clearly unprofitable.

Am I just imagining things here, or does this correspond to something economists already have a name for? I vaguely remember something about tax, inflation, and multipliers. But who are those fast-circulators our tax system hits hardest? Graham's article isn't merely about how money affects money, but how it affects motivation and human activity (wealth tax -> startups less profitable -> fewer startups). What motivation and human activity is similarly affected by the recursive applications of the income tax?

To avoid misunderstanding, I am not asking the usual question: how many kids we could feed by taxing the startups more. I am asking, what kind of possible economical activity is suppressed by having a tax system that is income-based rather than wealth-based? In the trade-off, where one option would destroy the startups, what exactly is being destroyed by having the opposite option?

3MikkW6y

I would very much like to see a society where money circulates very quickly. I expect people will have many reasons to be happier and suffer less than they do now. As you observe, income taxes encourage slowing down circulation of money, while wealth taxes speed up circulation of money (and creation of value), but I think there are better ways of assessing tax than those two. I suspect heavily taxing luxury goods which serve no functional purpose, other than to signal wealth, is a good direction to shift taxes towards, although there may be better ways I haven't thought of yet. Not answering your question, just some thoughts based on your post

3Viliam6y

In the meanwhile I remembered reading long ago about some alternative currencies. (Paper money; this was long before crypto.) If I remember it correctly, the money was losing value over time, but you paid no income tax on it. (It was explained that exactly because the money lost value, it was not considered real money, so getting it wasn't considered a real income, therefore no tax. This sounds suspicious to me, because governments enjoy taxing everything, put perhaps just no one important noticed.) As a result, people tried to get rid of this money as soon as possible, so it circulated really quickly. It was in a region with very high unemployment, so in absence of better opportunities people also accepted payment in this currency, but then quickly spent it. And, according to the story, it significantly improved the quality of life in the region -- people who otherwise couldn't get a regular job, kept working for each other like crazy, creating a lot of value. But this was long ago, and I don't remember any more details. I wonder what happened later. (My pessimistic guess is that the government finally noticed, and prosecuted everyone involved for tax evasion.)

Ah, good ol' Freigeld

Viliam's Shortform

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Viliam's Shortform

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