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.
Update: Here is Bill Gates at AEI making a similar point on the consumption tax:
Isn’t sheltering “savings and investments” from taxation the same thing as taxing labor more heavily than capital? How is that consistent with Gates’s proposal?
I think Gates is being consistent from the excerpts I read. He doesn’t think labor income should be taxed heavily RELATIVE to capital income. So, eliminate the income tax on both labor and capital. Replace the income tax with a consumption tax.
Regardless of who the saver is, wealthy business owner or worker, they would only pay tax on consumption.
Now the argument those opposed make is that the person making 50k/year needs to spend almost all his money just to ‘live’ so to speak, while the wealthy person has the disposable income to save and invest building more income and saving and investing more.
This is usually solved by a tax rebate system that sends you money back that would represent the first 40k of consumption, as an example. If the tax was 10% you’d get a $4k rebate equal to 40k of consumption.
It’s more complicated but that’s the drift of the issue.
First off all tax schemes are a waste of effort unless spending is brought under control. As long as government grows exponentially it will never be sustainable, with resulting crises of confidence. If we continue to elect people who refuse to balance a checkbook, nothing will ever be resolved. Until then, columns like this are a waste of ink.
It is true that government spending needs to be reduced, but there is still something to be said about the way government raises revenue. With an out of control IRS, a consumption tax that would, if not abolish the IRS, at least severely curtail the activities of the IRS would be welcome. Also, a tax regime that would encourage capital accumulation and spur economic growth is desperately needed.
It’s always about how to create a revenue stream that covers the cost of Free Stuff. First, we need to end many of the unconstitutional welfare programs. Second, repeal the personal income tax. Third, high taxes on corporations will be passed along to the public, so the public ends up financing out of control government spending.
Yes, Bill Gates is no dummy. Neither are the many socialist leaders.
Ignoring the concept of Liberty is what has gotten us to this point. Nothing else.