The US Already Has A Wealth Tax

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In Model­ing A Wealth Tax, Paul Gra­ham writes:

Even a 0.5% wealth tax would start to keep founders away from a state or coun­try that im­posed it.
The US, how­ever, effec­tively already has a ~0.3%-0.4% wealth tax.

Speci­fi­cally, the long-term cap­i­tal gains rate in the US is 20% for high earn­ers (like the startup founders Gra­ham de­scribes) and the IRS taxes nom­i­nal gains. This means that part of what they’re tax­ing is real gains, but an­other part is imag­i­nary gains due to in­fla­tion. This is not ex­actly the same curve as a per­centage wealth tax, be­cause while it starts at to­tal in­fla­tion * cap­i­tal gains it asymp­tot­i­cally ap­proaches the cap­i­tal gains tax rate. You can see this in the ex­treme: if in­fla­tion is high enough or you hold your money long enough, effec­tively ev­ery­thing you have is cap­i­tal gains, and when you sell you’ll be taxed at the cap­i­tal gains rate.

In­fla­tion is about 2.4% (the an­nual CPIAUCSL change from Jan­uary 1990 to Jan­uary 2020) and the long-term cap­i­tal gains rate is 20%, so we have some­thing close to a 0.4% wealth tax over 20y, or a 0.3% wealth tax over 50y:


(sheet; shows a real in­ter­est rate of 0% for illus­tra­tion pur­poses)

To be con­crete, imag­ine you had $100 in 2000, and in­vested it in the US stock mar­ket. In 2020 it’s worth $250 and you sell it. Your nom­i­nal gain is $150, and that’s what the IRS will tax you on. But your real gain is only $100; the rest is 2020 dol­lars be­ing about 23 as valuable as 2000 dol­lars. Tax­ing this differ­ence is tax­ing wealth.

This makes me think that Gra­ham is over­stat­ing his claim, since the US is very pop­u­lar for star­tups and has a wealth tax nearly as high as he dis­cusses.