Something I'm curious what you think about, that seems like it would have been included here is the strategy of borrowing against your assets to keep your tax bill down and not having to pay for it as a realized capital gain. I'm not a tax wonk but every time I hear about this approach It feels like a big unfairness in the tax code that punishes high income w2 folks and allows the top earners to really avoid full taxation of their assets.
I would also make the estate tax graduated; irrevocable trusts have long been used to eliminate assets altogether from a taxable estate when one passes away. The estate tax exemption amount is arguably low at $30M for married couples (ultra HNW starts at around $50M these days). We could have multiple tax brackets that could tax certain assets (appreciated stock) differently: estates between $30M-$100M and $100M and above, etc. But then we would also need to update many of the rules on trusts and gifts into trusts during the owner's lifetime. I agree with the elimination of the cost basis step up provision at the owner's death.
650K is a paid off house in a lot of places. If someone wants to leave a paid off house to their family who may have been living with them and helping them out, that seems like a good thing.
If the house is taxed, the kid then needs to find cash to pay the tax which they might not have (can they get a HELOC/mortgage before the estate is settled and they officially own the house? Can they get either loan if they were underemployed caring for the person who just died?)
And now you’re also forcing more people to consider more complicated estate planning (trusts? whole life insurance? More gifts when alive?) and more IRS enforcement. Also cryptocurrency, gold, art, assets in other countries etc can all hide wealth on a modest scale that could be impractical to find.
I think it’s good that estate planning is pretty simple for the average person because federal taxes aren’t an issue. We don’t want more old people in Medicaid because they were trying to avoid estate tax.
I dunno... If the estate tax was like 10% for the first bracket starting at $650k, then even a $1m house would have 10% of $350k, which is paying $35k for a $1m house. Still seems like a good deal for the inheritor. If they were in dire straits and couldn't get a loan, then they should still have the opportunity to sell it and pocket $965k (minus taxes) and buy another house.
Not an attorney, but just shooting from the hip it seems more practical to just tax money going to the heirs. Rather than endlessly chasing the creative new shenanigans of tax evaders & their attorneys, just say 'if you as an heir receive above X amount at any time in your life, it is taxed at this rate'. Could be a direct inheritance, could be a gift, could be from a trust, whatever
I would prefer to simply eliminate the mechanism that permits the shenanigans in the first place, but sure, this could work. But you have to word things very carefully to properly account for/deal with the bizarre legal personhood of trusts.
That’s not what antitrust means in any legal setting. Moreover, trusts are incredibly useful tools for people with sick or disabled relatives. This is wildly unfair and unworkable position. It would also require legislation on a state by state basis.
See where I said "in the literal sense"? That is me saying that I know what the legal meaning of antitrust is and I am not using it in that sense, I am using it to mean what the underlying words literally mean.
Your second claim is just unsupported ipse dixit, so if you want to make an actual argument I'll be happy to respond.
Eh there are use cases where it definitely makes sense for complexity (special needs, spendthrift provisions) but they have been misused and abused and should be reviewed.
So the parent who dies with minor children should just what? all the money goes directly to the kids without any trust administrator to oversee the assets? They want to provide assets for their disabled child so she has sufficient assets for her lifetime of care...instead, what?
You want to eliminate trusts. What do you propose to take their place in these two specific instances?
If a parent wants to appoint someone as legal guardian for their children, they can do that, and the guardian has the same fiduciary best-interests-of-the-child duty a trustee would have.
Similarly, a disabled child can simply be willed money. No fancy shenanigans required.
You're the third person to gesture vaguely in this direction without actually spelling out what you're concerned about. What, specifically, is the objection here?
Instead of the “estate tax” we should just tax it as income to heirs over some exemption. If you have $100m on death and leave it to 100 people it should be taxed less than in pure primogeniture. This includes trusts.
More broadly, I'm wondering at some change to the capital gains tax. My initial idea is something along the lines of adjusting the basis for inflation or change to GDP and applying ordinary income tax rates on the gains.
The fact that Matt wrote about taxing unrealized capital gains in the context of INHERITENCE and did not talk about step up is insane. What the hell is he doing in this piece? Did he just inherit his dad's money and was stricken by a bout of motivated reasoning?
I would say he's allowing for some facts he doesn't want to deal with then shrugging. There are a lot of times I think his argument is bad or something I disagree with. This time, it feels like he didn't bother with one
Re the step up on basis, if the estate paid a 40% estate tax, that's more than the 20 something cap gains rate. Of course, that wouldn't be true for anything that passed under the $30mm exemption, so there eliminating the step up makes sense to me.
One thing I realized even as a teenager is the idea that you’re being double taxed is absolutely absurd. You know why? The person taxed for all that income is dead. God forbid my parents pass away tomorrow, if I inherit any of their estate, please tell me how much “work” I did to earn that money?
Greatest trick the GOP ever pulled is convincing a whole lot of middle class voters that having no effective estate tax* for anyone wealthy was somehow beneficial to them.
* Listen to Felix Salmon. Basically no one pays estate tax.
Why should it matter how much work you did? Your parents did the work, and they want to leave their belongings, accumulated with a lifetime of their work, with you, not the government, as should be their right.
I would like to enjoy my income, accumulated through my work, without giving anything to the government. But someone's gotta pay for the government and I don't see why heirs should be exempted.
Yes, heirs shouldn't be exempted from taxes. My point is that it is just as morally problematic for the government to be raiding inheritances as any other source of income. At best, taxing inheritance is like all the other taxation - a necessary evil.
Taxes are not a necessary evil, they are a necessary good. They constitute willing participation in a common enterprise and a commonweal. They are the hall mark of a functioning democracy. They ensure that the citizens have a say in the behavior of their government.
Countries that have little or no tax, usually because they are rich in natural resources like petro countries, lose the connection between what the government does and the need for the people to participate in it. If my government's actions don't come out of my pocket, then what do I care what it does?
Why should it be their right? They made their money by living in this country and having the advantages this country gave them. Even with the tax, there will be plenty of money to pass on to heirs. (I am Gen X.)
Great point. I hear this argument a lot from Millennials and Gen Zers. They seem to think that inheriting assets somehow makes them a terrible human being. It seems almost pathological to me
Somebody should start a school for the champagne socialist heirs to large fortunes. Their parents can stipulate that they don't get full access to their inheritance until they pass the class showing they understand all the pro-market arguments. If they still want to be socialists after that, so be it, but at least no one could claim it's due to a lack of education.
That’s an argument against all tax. My employer did the work, they want to pay me with the money they earned, does this mean wages shouldn’t get taxed? As long as you want to have an ongoing government you can’t just tax money one-time…
“Double-taxed” is an idea that feels like it makes sense to ordinary people, but really makes no sense at all when you start to actually think about it. Why should a business pay tax on its income when its customers already paid sales tax? Why should customers pay sales tax when they already paid income tax? Why should anyone pay income tax if it’s coming from taxed sales by their employer?
I mean the alliance with business interests is pretty obviously working out for middle class Republican voters, the median income tax burden in the US is significantly lower than in the EU. A lot of this is due to the lack of VAT, but also lower income tax rate brackets for middle and upper-middle class. In both cases, you can see how voting Republican kept these from ever happening.
Now there are some elected Democrat Senators proposing that even if they do their complicated capital tax idea that probably won't work, they should use the revenue to lower working and middle class taxes even more. So you can see how voting for the center-right political party in response to Bill Clinton's 1993 tax hike has actually helped move the whole conversation of tax revenue rightward to significant benefit of the middle class.
Maybe one thinks this is all bad and both higher estate taxes and a VAT should happen. Fair. But it's pretty obvious how the GOP made the sales pitch to the middle class to oppose all of this and join the same side as the businessmen frustrated with their estate tax rates.
You are correct about the estate tax. I just past my estate planning module. It kicks in at $13M+ (it was $13.99M last year, idk what it is this year), and with careful planning, it can mostly be avoided.
It's never been a large amount of "federal taxation".
But I think many people believe it is never paid at all, which is not true. Its existence also funds a lot of charitable giving (which I would argue is a net negative, but that is a different conversation).
At very large levels of estate value, it isn't as easy to avoid as people think. If you have $100M, lots of strategies to avoid. If you have $5B, those strategies are a LOT harder and often don't pencil out.
Ehh… nothing you're probably not thinking of. Take advantage of spousal deduction, give stuff to charity, put assets in irrevocable trusts, etc. You do basically have to give stuff away. That's of course if your only goal is avoiding estate tax burden at all. If your goal is to maximize the amount that goes to heirs, then at a certain point you might want to bite the bullet and pay some estate taxes.
Good point. The estate tax escape is actually the bigger issue than the avoidance of income tax through borrowing.
Borrowing requires the payment of interest, which generates incremental marginal taxable income for the lender and as a result, an additional stream of tax revenues to the government.
This incremental stream of taxes would last until the shares were sold and the loan was repaid, ie when the taxes on the capital gain is paid. But it becomes perverse when that capital gain is then avoided either through the step up in basis or through trust planning.
The other issue is that the capital gains rate is so much lower than taxable income.
I don’t think this is just left wing attempts to reclassify gains as income. Many of these founders have gotten massive amounts of compensation in the form of free “out of the money “ options that then skyrocket in value and are taxed as capital gains. These options are rewards for work, does anyone really believe these founders are only earning 80k a year?
Neither should it be taxed when I spend it on purchases! Or when a business hires someone to do a job for me! Once one generation pays income tax once, all other tax is double-taxation, and government should just live with no more revenue because it has stopped providing services!
I’ve researched this situation quite a bit and the “buy borrow die” strat is more of a meme template used by academics to communicate complicated tax structures than a consistently deployed specific strategy. Interest rates are between 4 and 6% now for secured loans making this approach way less favorable, it’s less favorable than using trusts and other instruments for passing wealth on, and because it hinges around dying and having a step up in basis for inherited shares it’s more likely to be used and used more aggressively by people 70+ vs musk/zuck/bezos.
That being said step up in basis is stupid, we should eliminate ASAP, and it’s more or less the “fix everything switch” for tax issues around mega inheritance in the US.
Mark Zuckerberg doesn't pay 4% interest. He gets loans from whatever immense bank (JPMorgan Chase, etc.) he has massive investments with, and they give him a really sweet interest rate, like 1%, to thank him for his business.
That was a move in the zero interest rate regime, 2016-2019ish, mostly done by SVB and First Republic Bank, both banks famously killed due to interest rate risk. Back then, the play was to borrow and lend at SOFR, which was 0-1%, a modest loss for the banks but part of their marketing/investment strategy. Nowadays ultra high net worth people are paying SOFR + 50-200, so 4-6% depending on the terms. There is basically no lending below SOFR.
These banks have entire wealth management departments for the extremely high net-worth that are separate from 'normal' lending. They can do things the other department can't do. (Fun fact, one thing that came out in Trump 1 reporting from the NYT was that after he got blacklisted by major banks in the 90s, all of his commercial lending then came through the wealth management department which bypassed normal guidelines). So I'm not sure your information is correct
Yes, I am very familiar with the wealth management industry and how it works for UHNWIs and the information I provided above is correct.
Wealth managers are there mostly to help with structures around capital preservation and tax efficiency. The problem they mostly solve for people is 'I got rich owning a single asset, now that asset is worth 500M dollars, how do I diversify and maintain my wealth". There is no "magical money box" that they can reach into and provide a very wealthy individual with money for free or less than free.
The way that banking worked in the 80s/90s is very different than it works today due to changes tax law, bank regulation, and capital availability. If Donald Trump was blackballed from CRE lending today he would go to private credit providers that didn't really exist back then. There are definitely non bank associated lending mechanisms that could probably structure a secured lending deal against appreciated assets that appears to be below SOFR in interest rate but that would also be necessity carry some equity like risk or fee structure such that in the outcome they expect they pay SOFR - 100, but in many other outcomes they're paying SOFR + 500 or more but saying that you can easily get a loan for 0-1% interest is just not true.
The best available study on the topic finds that on average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income.
Zuckerberg regularly sells massive amounts of his stocks to provide himself with income.
Interesting that nobody else has made this point here, but the best available study on the topic finds that on average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income. This will be bridging loans, I think.
Agree that it is a bit of a loophole, but is there really that much revenue to be captured here? Also, it seems like whatever logic you come up with would impact every secured loan - e.g. a HELOC is a way to spend the equity in your home without triggering taxes, isn't it?
I kind of like the consumption tax idea as a way to pick up this kind of thing, but I am also not a full-on tax wonk...
The problem with consumption taxes is that high income people consume way less of their income than lower income people, so they are often regressive.
For a Western European style welfare state with a lot of universal programs that benefit the middle class that makes sense. But I don’t see it as a way to make taxes more progressive.
You can account for the regressive bit by having a large exclusion though. Like if your first $50k of consumption isn't taxed, many people never even see this tax.
I'm curious how this works? Like I go to the store with cash and want to buy bananas or socks or whatever am I like typing in my ssn into Target's POV machine? Am I expected to keep all my receipts and prove how much I spent to the IRS?
How does the state know if I've gone over 50,000 in consumption? especially when most of these taxes are applied at the point of sale.
If you agree with the theory, I think we can solve the implementation. Maybe not ME, personally, in the comment section - but with the help of experts :)
Even if it is not QUITE the same thing, you could get close by giving a universal payment that covers the exclusion value while collecting the tax on all transactions. This would actually be even better for folks at the bottom.
I wouldn't jump to this conclusion. We're getting close to Matt-in-Maine season, which means we're getting close to jokes about Matt writing a piece about lobster fishing rights or something so he can write off his trip as a "business" expense. I obviously don't know Matt's personal tax situation, but a lot of tax shelters are all about the fuzziness of the line between investment and consumption. With a consumption tax, these implementation details become even more important, and I'm not sure there's any non-arbitrary way to make some of those calls.
That seems like it discriminates against people with ADHD. Damn you, I *need* my fucking reminders, and you will have to tax them from my cold dead hands! 😉
You’ll get a credit at the end of the year based on some formula for your income level, I would guess. I think Europe does this sort of things to redistribute for the VAT.
General Econ thought that the taxes with the least amount of deadweight loss, that are easiest to administer, have the highest compliance and are generally pro growth are land value/property taxes and consumption taxes. When combining actual state and local taxes We already have one of the most progressive tax structures in the OECD.
I'm not sure how you would know. At some level the abstract fairness point is more significant than the amount of money attached to it. That here I am making money by having a job and it's taxed less than selling assets and not selling them is taxed not at all.
>is there really that much revenue to be captured here?<
Probably not.
I do think as a matter of fairness we should tweak the code to tax personal consumption loans over a certain threshold (say, $3 million). Jeff Bezos wouldn't break a sweat if he had to borrow $40 million to spend $25 million.
Is there any research to suggest that this is a thing that moves the needle at all? I could've sworn when researched that people found this wasn't a significant driver of wealth.
I don't think it's a significant driver of wealth but it's a significant driver of division. When you read over a decade ago that Warren Buffet pays less taxes than his secretary and no one is doing anything to close these loopholes around the mega rich it's acid to the bonds of solidarity. Not because it makes them wealthy but because we all end up feeling like suckers.
I don’t think this is a real hack if you have, say, a $10 million portfolio, and certainly not less.
I have professional experience here. A 60/40 portfolio of global stocks + muni bonds is going to throw off about $350,000 in income. Regular rebalancing of stocks (so that your portfolio isn’t crazy high in Nvidia) will generate another $100,000 or so in realizes capital gains.
If you need more liquidity, you can borrow money from your bank, and they’d happily lend it to you, but you’re still paying about 4.5-5% interest right now vs 20% ltcg rate.
So if your need is short term, by all means borrow, but it doesn’t make sense to perpetually pay the bank interest, as 4 years of bank interest is approximately equivalent to your potential tax.
That being said, if certain billionaire can borrow for around 3.5%, then borrowing becomes more attractive.
But isn't the point to finance the consumption *and still own the stocks*? Which may - and historically did - appreciate faster than the interest rate on the loan? And can eventually be passed on to heirs or given to charity with a stepped up basis, avoiding capital gains taxes entirely?
Like the downside of selling the stocks is mostly that you now have fewer shares. Not only about the tax vs. interest calculation.
All this is correct! But it’s leverage. Buying on credit works well until it goes horribly wrong.
A friend of mine had $1m in his brokerage account and recently paid cash for a $600k home renovation. Setting taxes aside, the market has appreciated about 20% since he sold his shares. He would have been way better off borrowing at 5.5% against his shares.
OTOH, if the market tanked, he’d be looking at potentially getting a margin call and being forced to sell into a down market.
If their assets are cooking at 10-20%, which is their average growth this century, then wouldn't it make sense to borrow at 5% rather than liquidate any of those assets to buy stuff? I suppose the rub of it would be that everybody (among the mega rich) has some low-yield stuff to dip into?
Not really. Average growth isn't meaningful here. You need to look at volatility of both returns and the interest you'd be paying (it will not be fixed like an American home mortgage but instead will change on a daily/weekly basis).
At the end of the day it is essentially a gamble, not something that you can linearly extrapolate. It is also somewhat asymmetric in that you're basically capturing a few percentage points a year but putting at risk significant fractions of your fortune -- and if you put less of your fortune at risk then the upside is even smaller.
Consider an example where someone started this strategy in 1966, following 19 years when the average (arithmetic) return was 16% and there hadn't been a big crash since the 1930s. Things cruise along for years until the mid 70s when stagflation kills your portfolio, interest rates turn crushing, and then your stock broker makes a margin call one morning in 1980 and says "hey, you need to send me 4.7% of your net wealth in cash by 5pm EST or I'm going to start liquidating things on my own discretion".
Andrew, I don't think borrowing avoids much if any taxation. You still have to sell the asset to pay off the loan, so it only defers the gain. And you have to pay interest, which isn't deductible at all for loans against stocks, or on home equity if used for consumption (I could be out of date on this part, I haven't taken out a home equity loan in 20 yrs and never borrowed against other assets). And those soaring lines on Matt's chart are mostly unrealized gains anyway--you "keep your tax bill down" mostly by not selling and so you don't have the actual money to spend. I think the basic "unfairness" is the 15% rate on capital gains when you do sell and spend. Borrowing tricks don't add much to that.
I'm not sure the math works, but I haven't worked through all the considerations yet.
Option 1:
Borrow $10M at 5% interest for 10-years, collateralized by $100M portfolio with $0 cost basis. Pay bank $500K per year, so spend $5M. Die after 10 years. Estate owes bank $10M. Sell $100M portfolio, pay bank $10M, pay IRS $36M (40% estate tax on $90M). Kids keep $54M.
Option 2:
Sell $6.6M (of $100M portfolio) stock with $0 cost basis. Pay IRS $1.57M (23.8%). Spend $5.03M. Die after 10 years. Estate sells remaining $93.4M portfolio. Pays IRS $37.36M. Kids keep $56.04M.
Option 2 wins...the decedent spends the same amount of money and the kids get more money in option 2.
Mitigating factors: option 2 might require selling some portion of a closely-held business, which the about-to-be-deceased owner might not want (or be able) to do. Also, if the forgone $6.6M investment would earn more than the 5% interest, then that pushes the math toward option 1.
The borrow-spend-die strategy only made sense during the time of 0% interest rate environment. ZIRP created all sorts of unintended consequences and opportunities for banks to push these types of arbitrage opportunities.
As I noted to Tom H above, the wealth management departments of these banks for extremely high-net worth individuals can make loans to Zuckerberg etc. that lose them a bit of money. You can't just look at this like 'normal' lending, it's a totally different world
This is an especially surprising omission given that Ezra Klein discussed the “buy-borrow-die” tax avoidance strategy at length with Ray Madoff on a podcast just 6 weeks ago. Curious whether Matt would refute that this is actually happening.
Also, while I can understand the argument that wealth accumulation in the form of unrealized capital gains is not income, I think there’s broad agreement that the profit from the sale of appreciated capital assets does count as income. And of course, this income is taxed at a much lower rate than the top marginal rate for ordinary income (20% vs 37%). Seems like a stretch to claim that “we keep seeing efforts to kind of redefine the billionaire situation to make it seem like they’re paying unusually low tax rates when they actually aren’t.”
Interesting that nobody else has made this point here, but the best available study on the topic finds that on average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income. This will be bridging loans, so the strategy is effectively a meme and not actually real. I was quite disappointed that Ezra Klein uncritically platformed the idea.
It's incredibly annoying that this gets ignored when the lower tax rate for capital gains and dividends than wage income is an ENORMOUS driver of wealth inequality. That and the step up in basis for inheritance is basically the whole thing. Compare someone with $1M in income per year from their work versus $1M in income per year from cap gains and dividends ... You are talking about paying 15% less in tax every single year. If you're reinvesting the tax savings that ends up being tens of millions of extra dollars after a couple decades, just because of the lower tax rate.
Interesting that nobody else has made this point here, but the best available study on the topic finds that on average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income. This will be bridging loans, so the strategy is a meme and not actually real. I was quite disappointed that Ezra Klein uncritically platformed the idea.
Instead of the “estate tax” we should just tax it as income to heirs over some exemption. If you have $100m on death and divide it equally among 100 people it should be taxed less than in pure primogeniture. This includes trusts.
The best available study on the topic finds that on average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income. This will be bridging loans, so the strategy is effectively a meme and not actually real. I was quite disappointed that Ezra Klein uncritically platformed the idea.
I don't think it is coincidence that this growth in asset prices aligns with massive government deficits. As best I can tell, when the government pushes a dollar into the system, it circulates amongst people who NEED to spend until eventually it reaches people wealthy enough to save that dollar. At which point they usually add it to the giant pile of money sitting in the capital markets.
For all the old talk of "trickle down" economics, as best I can tell the mechanism is much more "trickle up" with a few cents of profit getting skimmed off every transaction and sequestered in financial assets.
Pandenic spending was NOT inflationary. Fed policy was inflationary, largely rightly so. If you don't agree address your complaint to Powell, not Biden.
Most economists agree that the pandemic spending was inflationary, though not the sole driver. Basically there's debate over the significance, but not the direction.
Whatever the deficit, the Fed controls aggregate demand and hence inflation. It was a very good call of the Fed to increae aggregate demand and inflation to facilitate the massive change isn relative prices that COVID/Putin caused. Dit it inflate more thn was necessary to achieve the adjustment? Possibly, but in any case the size of the defict had nothing to do with it.
This does not imply “of course” that the the Trump/Biden deficits were optimal. I think they were excessive, more than called for by the criterion of financing expenditures with NPV>0 when evaluted at marginl costs and revenues of the activities being financed.
It woud depend on what the Fed did. Would it allow aggregte demand to go up by$4trillion, more, or less.
think that people who say thinks like “tariffs are inflatinoary” or “deficits are inflationary” are implicitly assuming Fed behavior that makes that happen. Either that or they have a kind of moral sylogysm working such that
Pandemic RECOVERY spending was inflationary. The actual spending during the pandemic wasn't because the economy was depressed, what with the 1/3 of people not working or going anywhere.
Of course, the fiscal investment in recovery was not the main driver of inflation. It's generally thought to be responsible for 2-3% of increased inflation, meaning that the supply chain was the main problem, and that the lack of an ARA would not have avoided political fallout for inflation.
Plus, the economy would have been worse along many measures. It's annoying to me how people want to keep the Biden economy while removing the things that made it successful, like the ARA and high immigration. It feeds into this "Biden made dumb mistakes" narrative that ignores that he was making real tradeoffs, and that he got quite a bit for them.
Is that kind of ok though? In that people who need that dollar spend it and get some benefit - more than the person whose bank account it ends up sitting in, even though it increases their net wealth. So in terms of dollar worth, the gap widens but in terms of resources, lifestyle etc it helps out people at the bottom more.
"kind of ok"? I mean for the people who need that dollar, it helps them short-term. But the ever-growing federal debt is an actual problem, so this isn't a permanent fix. You could imagine higher taxes at the top resolving the deficit, and then maybe yes it does work?
I think the ideal would be for the folks at the bottom to be more needed by the folks at the top, so the system balances itself. But I could not tell you how to achieve that.
"it helps them short-term" - isn't short-term in this case a period of decades?
I do take your point about deficits and it could be the more important aspect. But it doesn't really seem like this system is particularly harming workers and "kind of ok" seems fair. Over the last 20 years, the years when lower income americans were doing best were probably the years that had the most cash flooding the system, even if it didn't turn most into long term savers.
I'm genuinely unsure. I agree that short-term fixes tend to require more short-term fixes, and eventually decades have gone by without real repair.
My intuition is that the post-war period had a better balance where workers were actually needed and therefore "normal" people has better outcomes.
My other thought is about the financialization of everything, like I wonder if you used to have to actually find a use for your money versus being able to confidently park it in liquid secondary capital markets that just seem to keep going up. The money that goes into the stock market isn't exactly "doing anything", you know? And that feels like a problem.
This stuff is complex enough that I'm not certain about anything, but my first thought on your financialization point is to consider countries where there's much less of it, and I'm not sure they look too much better.
China has much less of a stock market, and instead their money just gets absorbed into a real estate bubble. In Europe I suppose you could say that their spare money gets largely taxed into government revenues?
Ideally we'd recapture a higher percentage of those dollars sitting in savings and put them back into the hands of people who need them rather than having to make new dollars to go to the people who actually need to spend them.
Maybe I don't understand inheritance tax policy, but why is it common knowledge that inheritance tax should be on the lower end?
Dynastic wealth seems like an unmitigated bad for a liberal rawlsian society. There's better grounds for fairness when people are in fact on the same starting ground. It would also encourage institution formation, as older people have marginally less use for loud consumption in cars and more incentive to philanthropy/legacy building.
I think there are important reasons to encourage this but also because I view the velocity of money as a very very rough indicator of equality at a macro level. Use it or lose it inheritance laws force more wealth through the economic system on average and allows for more market discovery. I also think people in the last years of their life are less prone to the pursuit of veblen goods as they have less time to consume them.
I remember talking with a guy who had his own plane. He said that the government picked up 40% of every trip (the estate tax is 40% on amounts subject to tax), so it was a powerful incentive for him to spend money rather than keep it invested in other assets.
Perhaps this is good (to your point about velocity and spending), perhaps it is bad due to encouraging consumption over investment. But I always thought it was an interesting perspective.
Congress did that in the 90s and it completely failed because rich people just bought their planes and yachts in Europe. It also killed the American yacht building industry.
How? Increasing taxes on avgas hits pilots on the bottom end of general aviation flying old Cubs and Cessna 152s just as hard as the wealthier individuals flying around in their Cirrus. Taxing jet A is a whole other can of worms because it's the standard fuel in most commercial aviation.
The ultimate problem is that it's not practical to separate the student pilot scraping up enough money to train for a PPL from the wealthy individual with a million dollar private plane when it comes to consumption. They use the same fuel and the same runways. The student is often doing more flights to build time and practice. Even if you are okay with pricing normal people out of general aviation, the airline pilot pipeline in the US is set up such that pilots self fund their own training through PPL, CPL, IFR, and multi-engine ratings. Unless they're former military, airline pilots start in GA.
As in all things, it is a balance. The more one discourages wealth transfer via estate taxes, the more likely the ultra-rich liquidate their investments as they age. Which at the margin reduces the amount of private capital available for investment and transfers it to consumption.
All depends on how one prioritizes various goals -- growth, equality, dynamism, investment, consumption, wealth concentration and the like.
"Which at the margin reduces the amount of private capital available for investment and transfers it to consumption."
In the long run the dominant effect on the economy if you don't tax inheritance is that the productive assets and capital pools get trapped with bad management/ownership by staying with the failsons/faildaughters of long dead entrepreneurs and becoming hugely underperforming assets that need to be liberated from bloodline inheritance to become productive again. Historically, these consequences have clear analogies with aristocratic concentrations of land ownership, like in latin america pre 1900s, or england pre 1800s, adam smith literally wrote about this as a huge problem for england in "the wealth of nations", large pools of land that the owners did not have the desire nor ability to manage or make productive.
I did not and would not advocate for an elimination of the estate tax. Don't know where you got that idea.
I think it is fine as-is. I'm even fine with the step-up rule with the rate at 40%. I'd also be fine with taxing any inheritance in the year received as "income", though that path is pretty complicated due to the use of trusts in estate planning.
A mistake I see a bunch of people make when thinking about this stuff is treating the things billionaires own as if everything is in S and P 500 index funds and you just sell it and pay the tax and there is no other consequence on the economy. At the level of UHNWIs, theres a lot of concentrated private holdings in things like hotels, or ranches or medium size manufacturing businesses and who owns and manages the stuff really does impact economic growth.
I find this perspective confusing, economically. In general, isn't it better for the economy to have marginal resources invested rather than consumed? (To a point, obviously need some consumption, but we're well on the side of still wanting investment on the margin).
So why would it be better to extravagantly consume wealth, rather than transfer it to the next generation? The next generation is likely to keep at least some of it invested.
Is it for social status or political power reasons? Like money carries those things to an extent, and inheritors deserve them less than earners? Or are less likely to use them well?
Yes I suppose it's an empirical question, but my understanding is that the high ROIs available indicate lots of room yet for productive investment. And that over-saving was a problem in some times and places specifically because the marginal available investments were unproductive. Do you believe that is currently the case here?
"Indeed the broad strokes of economic history suggest that increased labor share of income and increased consumption do more to drive innovation than increased savings and capital formation, when it comes to leading economies."
Hard disagree. It's investment that drives scientific advancement. It's investment that drives efficiency gains.
One counterpoint is basically that it’s unnecessary. The wealth of the guy who owned the US oil market 100 years ago is almost completely dissipated, along with all of the other massively wealthy people from that era. And that didn’t happen because growth outpaced savings or inheritance taxes, but because the man has hundreds of descendants. The dynamics of multigenerational wealth inheritance are brutal, which is a major reason why most of the people we’re complaining about are newly wealthy that isn’t really reflected on in Matt’s piece.
"The wealth of the guy who owned the US oil market 100 years ago is almost completely dissipated"
This is probably the single worst example to pick for the point you're trying to make. His wealth was never split -- it is held in a trust established in 1934 -- and the Rockefellers are still the #42 richest family in America according to Forbes.
Nothing has been dissipated and certainly "almost completely" so.
Their finances and investments are largely private but my guess is simply that the family shifted from caring about growing their wealth even more to having other priorities. Rockefeller Sr gave away $500 million while he was alive. His son gave away another $500 million. A 2008 profile of David Rockefeller claimed he had donated almost $1 billion during his lifetime.
Forbes estimates the family is worth something like $15 billion and has 200 descendants. $75 million a piece is a very comfortable life, especially given the vast portfolio of paid off real estate the family owns, such as "The Rocks", the largest residential property in Washington DC.
Not to mention their affiliated charities. The Rockefeller Brothers Fund alone has an endowment of another $1.5 billion.
I agree, that’s the worst choice I could have picked. And yet, on an individual level, they’re only about the .1st percentile of wealth. At this rate, in another generation or so, it’ll be top 0.5 or 1 percent; a sixth generation and they’ll be on the level of wealthy professionals.
In retrospect I think you probably were thinking about the Vanderbilt family which is sort of known for their 1973 family reunion where none of the 120 family members were even millionaires.
People don't have large families to dilute wealth inheritance as much anymore. A dynastic family with 2 kids after 25, who have 2 kids after, etc., can sit on the money and cover that division, barring economic crisis that hits their portfolio hard.
OK, let's go down the list of the top ten billionaires and count their children:
- 14
- 2
- 3
- 4 and 3 step-children
- 3
- 2
- 5
- 2
- 3 (does not plan to leave most of his wealth to them)
- 3
People don't plan their lives around these weird Bene Gesserit-esque schemes. If you have a problem with their wealth, it's that they have so much of it and are influencing politics right now, not that decades after we're all dead their children will be multi-trillionaires.
So one extreme outlier and people with fairly normal numbers of children will enable their offspring to be vastly wealthy and influential for many, many generations (also, with smaller numbers, when you have kids has a dramatic impact on how quickly your family tree grows, so leaving that out misses a lot). And the guy at the top show just how dangerous a single one of these nutters is.
Tax their wealth, tax their estates, tax their loopholes.
Exactly, that’s my point — an inheritance tax basically doesn’t do anything to solve the problems we’re talking about. Simply having kids later or leaving it to your younger wife can massively defer a tax bill that already pales in comparison to the 50% that comes from dividing it between two descendants. We might need a wealth tax, or to eliminate buy-borrow-die, or to get money out of politics, but an inheritance tax is basically superfluous chaff. That’s the argument against it.
Long long ago on the individual level wealth was more highly concentrated such that your median top 1%er had the large majority of their net worth in concentrated holdings like a small business they own and built themself (ex: car dealership, small accounting firm etc), productive commercial real estate holdings (family farm/ranch). Ownership of things was less “I have 5m of a and p 500 etfs in my brokerage” and more “I have a 5m partnership interest in this local business that I created that pays me 250k/year”. Selling 5m worth of s and p 500 etfs to pay a tax bill is simple and anyone can do it, selling a 40% plus interest in a farm or small business is very complicated and much more likely results in a full liquidation as there are few buyers for minority stakes in these things. The idea behind some of the structure in the tax code was that these farms and small businesses should be able to remain “in the family” from generation to generation, and that it’s better for the local small businesses or farm to remain locally owned vs selling to a large conglomerate in order to pay the tax bill. What we see now though is the heirs largely don’t want to work the farm or the accountancy and either the original owner before death or the inheritors after death sell the stuff anyway.
But in my model that's a good thing. And preventing old people with money from spending it in necessary healthcare is pretty hard... It's almost textbook price inelastic in most cases
Lol, if the point was that something has changed dramatically in the 21st century, this is grossly misleading.
1. Plenty of sources for this (eg Jorda-Schularick-Taylor macro history series). Post-war:
Long-run return on equities: Risk-free rate + ~7%
Long-run return on housing: ~5% (you need to include rental value here, not just price appreciation)
Long-run GDP growth: ~3%
The weird thing is that these kind of line up from 1995-2010. Obviously, if you plot series like these over a long horizon, you’ll see a massive divergence. (This also illustrates why it’s a terrible idea to draw conclusions about long-run returns/growth rates from short samples like this.)
Contra the post, a risk premium on equities is nothing new!
2. Are you at all familiar with the literature on time series asset pricing? I’d want to have some familiarity with the basic facts before positing a structural shift in the returns to capital in the 21st century.
You’d also find that the puzzles about returns on capital are very distinct from equity return puzzles. (Equity is a risky, levered return on capital. Of course the return on equity is higher than the return on capital, which is what Piketty studies!)
3. If stock returns were much higher than GDP growth over the past 25 years, but earnings grow at roughly the rate of GDP, what will happen to stock returns going forward?
Put differently, you have a provocative chart showing past returns. Is your expectation that the stock market will continue to return about 20%/year? If so are you levered to the hilt?
4. Risk-free bonds are a massive asset class. What has happened to the returns on these relative to GDP growth during the period you study?
5. If you’re trying to understand how individuals build wealth, clearly the housing return you’re interested in is
(House price appreciation - mortgage rate) x Leverage ratio,
I'm not in the weeds on this literature, but looking it up US GDP has grown by 2.0x since 2012 while S&P 500 earnings have grown 2.25x, that's not nothing!
There's a pretty coherent story you can tell about why returns to capital are growing. We see that a larger and larger share of the S&P 500 is composed of IT companies, which due to the nature of IT (especially software) can scale without as much capital or labor as other industries. This also leads them to have higher P/E ratios: because growth is easier more of it is expected in the future, which again increases their value. Now I know finance academics will say those P/E ratios will come down in the long run, but will they? Big tech seems to have demonstrated that they can keep growing at fast rates even as huge companies.
And of course, there's a real possibility that AI progress in the near future further increases returns to capital, especially if it is commoditized and/or it can replace human labor.
The other reason for the disconnect -- the earnings are worldwide but US GDP is domestic only. Growing earnings in Mexico, Europe, China, Indonesia doesn't show up in US GDP, but it does show up in S&P 500 earnings.
I'd clarify things like this. The first two points are the main things Matt confuses in his article, and then the last one is about AI.
1. Expected future equity returns aren't the same as past returns, and in fact the two tend to be inversely related in the long run. Think of the Gordon growth valuation formula:
P/D = 1/(r-g),
where P is the stock price, D is the current dividend, r is the expected return on equity, and g is dividend growth. What happens if P/D (the valuation ratio) increases much more than g (basically the consequence of the huge S&P returns of the past decade)? r (expected *future* equity returns) must come down.
2. Returns on physical capital and equity are different things, because equity is a levered, risky claim on capital. The return on capital is a combination of returns on equity + debt issued against that capital, and real interest rates have fallen a lot.
The return on capital can be measured in various ways, but it's very much not clear that the returns on capital have trended up. These authors use NIPA data to calculate returns on capital and basically find a flat trend:
3. AI is relevant to capital's share of output, but it's less clear how it'll affect the returns on capital. It'll certainly increase investment demand, but if (as Matt fears) people are worried about losing their jobs and all the wealth is accruing to a few people, savings demand could expand as well. So the net effect on rates of return isn't obvious.
The line going up recently is concerning because it correlates with the estate and capital gains tax codes becoming more friendly to capital and heirs. Beyond this, the risk of equities I think is meaningfully different now as a result of easy, broad diversification.
The 20% growth I think corresponds both to this, and relatedly to massive public debt increases in this time period. The fear for me at least, is that "r > g", regardless of what they are, really does mean that wealth keeps concentrating, but there is no government action on taxing r.
It’s been a while since I took finance but I learned the standard equity return is 5.5%+risk free? If it’s now considered 7%+risk free doesn’t that support the idea that returns have been higher in recent years?
In the flip side of this, if you, like me, lived in a fairly low cost of living place for a while and just put money into the S&P 500- literally latte money, like 50-60 bucks a month- starting in 2004 or so you’re wealthy enough to be the people nailed by some of these tax proposals but not nearly wealthy enough to avoid the taxes ( to a point).
Some of these loopholes stay loopholes because it drives a truck into people with 2-3 million dollar net worths.
I think an electorally meaningful number of people would get hopping mad if they did something to change the taxation on something like whole life life insurance (that people are using to game FAFSA, for the record).
Like sure that’ll gore some very rich people trying to hide money, and I’m not totally opposed, but the modal person with one of those plans is probably around 350k HHI in California
"whole life insurance (that people are using to game FAFSA"
Wait, the value of whole life insurance doesn't count towards assets on FAFSA? I'm serious when I say I would have bought twice as much coverage 20 years ago if I'd known that!
I wonder if Matt knows he is cheating by starting in 2012.
$1 million in 2000 in total stock market, reinvesting dividends, after inflation in the year 2012 leaves you with ... $1 million.
Seeing how little taxes I'll pay in retirement off of investments has scandalized me. I want capital gains generally taxed like income. Index them to inflation, maybe exempt the first 5K completely and maybe the next 25K at 50%, but just add it to total income to be taxed.
Seems like most people in your position (it’s also my position) are well-shielded from capital gains tax by 401ks, IRAs, 529s, HSAs, etc. all of which are tax-free?
Not so much for college expenses though. And an advisor will tell you to avoid a 529 and get something that shields you from the financial aid office AND has tax benefits.
Huh? A 529 is a super-charged Roth. Growth is tax-free, and growth over a whole childhood is substantial. Plus you can deduct contributions from state tax in a lot of states.
And what do you mean by shielding you from the financial office? YMMV but I feel like hiding assets in order to get financial aid is kind of unethical…
I read it as that too, but wanted to make sure because that seems pretty unethical and not a good sign for society if people are advocating that openly.
I'm a broken record on this but ELIMINATE THE STEP UP BASIS AT DEATH. And while we're at it, I'm fine with pushing the estate tax to the top of the Laffer Curve. In exchange we can eliminate the gift tax. You want money for heirs? Buy life insurance or give it away while you're alive.
The variance of assets late in life is WILD. At least once a week, one of our clients who is already well-off calls in because one of their parents died and they inherited $1M. They're either in their peak earning years or already retired, and have zero plans to spend the money. Good for them, I don't resent them for this! Most of the time this is because they had a good job with a 401k they maxed out. They played their cards right. At this same time, I don't get the point of having tax policy cater to these people, whether it's in the form of making sure they can sell their non-qualified inherited assets tax free, or giving them property tax breaks as so many states want to do now. Meanwhile there are other people who keep calling in trying to take money out of their IRAs two weeks before they turn 59.5.
I love the idea of getting rid of the step up basis at death *and* getting rid of the gift tax. That would be a great way of finding out how many of these rich parents actually love their kids -- enough to give away their wealth while they're still alive rather than after they're dead and no longer care.
I have an incentive to not gift my appreciated stock to my kids while they are alive. That's nuts. I can give it to them now, with the basis, and that seems like an entirely sufficient tax break.
I also have an incentive to stay in my giant house. Between this and Prop 13 nonsense we are encouraging people to stay in places way too big for them.
But when they sell the stock, they'll pay taxes on the gains. I'm at work right now so I don't have time to type out a long response, I'm just unconvinced we need to adjust basis for inflation. There are brackets within the capital gains tax. It makes sense to adjust those brackets for inflation, but not the basis itself.
If there is a set formula established by the SEC that dictates how to adjust the basis, seems like it would be pretty simple to do now. Especially with the rule changes requiring firms to track basis now, they could probably do that pretty easily for most clients.
What would you say is the big objection to doing so?
As for paying taxes on the gains when they sell, why would billionaire inheritors sell the bulk of their inheritance? Let's say they inherited 10 billion dollars. They could sell 1 billion, live on that for their entire life. The remaining 9 billion dollars continued to grow without ever being sold until its inherited by their kids who sell $5 billion out of the $50 billion that the 9 turned into.
I'm pretty much cool with people giving away assets while they're alive.
I don't think we should adjust basis for inflation, that's (hopefully) already factored in when the assets are purchased. Also, that would kick off a bunch of gaming the refs for your preferred calculation of inflation.
My problem with not adjusting for inflation is that if your parents bought a stock for $20 in 2000 and you now inherit it with a current price of $30, you have to pay taxes on that $10 gain with inheritance taxes. However, in *real* dollars, the investment was a loss! So you are forcing people to pay taxes when they lost money for investing. Its bad enough when you that happens to people when they are alive, but at least they have a choice not to sell yet and hope it appreciates more. If we apply inherited taxes to such an investment, there is not option to way to sell.
As for what preferred measurement of inflation, I'm fine with using CPI or some other government set method for this calculation even if its not completely accurate.
I think gifting can gamed. I setup a trust for my kids with them as the beneficial owners while I maintain control. Shift more and more assets over to that trust every year. If I do this with 90% of my assets, I could avoid almost all inheritance taxes.
I just remain unconvinced we need to adjust basis for inflation. We don't do this with pretty much any other part of the tax code. Fwiw, I favor relying more heavily on consumption taxes anyways, so ideally you'd just pay your taxes at the point at which you spend the money, regardless of your gain or loss on what you sold. But yeah I think we'll just agree to disagree there.
As for gifting assets, yeah I think we should encourage aging owners of capital to pass the baton earlier and it seems fine to me if they choose to.
Aren’t the big social entitlements (social security, Medicare etc) indexed to inflation? 401k limits are, there is plenty of stuff indexed to inflation.
The big revenue generator for most governments are income taxes which are inflation adjusted! We already accommodate that some with capital gains taxes being lower than income taxes. We could/should reduce that difference if we adjust for inflation.
I'm a really strong proponent of inheritance taxes so the idea that we negate them by allowing gifting to avoid them seems bad.
As for consumption taxes, I'm a big proponent of not having "one tax to rule them all" but instead multiple reasonable/moderate taxes. That makes it harder to game the system IMO. For example, to replace income taxes, you would need consumption taxes probably at the 30-40% level. That seems incredibly high and likely to lead to enormous efforts to avoid.
- If you are a someone that was 55 in 2012 chances are that you'd have a standard 40/60 portfolio, which is appropriate for the age, and it did not 6x over the past 13 years as a result. Part of the issue here is that the richer you are the less you need to dedicate to bonds as insurance for a falling stock market, and the more you can capture from equity's gains.
- If you look at valuation metrics (like Shiller PE https://www.multpl.com/shiller-pe) you can roughly see a regime shift happening at around 1990. The most convincing explanation I find is that this is the advent of globalization and the stock market went from tracking the US's growth to the world economy's growth as the top US economies all became multinationals. Which also explains the divergence with US salaries. Tech stocks, the most valuable subset, get 3/5 of their revenues from outside the US.
- Picking 2012 as the starting point and making these observations in 2026 feels a bit like picking a bottom and then yelling "wow assets are high" near the top of a bubble. Let's see where we are in 3-4 years.
- Not a single sentence about QE in a post about asset prices exploding since 2010?
Regarding point 1, you're missing how people actually behave. I was 58 in 2012 and was probably 70/30 (I don't remember exactly). In the back of my mind I kept reminding myself that I needed to rebalance soon and, being a human being, I kept procrastinating and didn't do so year after year. As a result, I did very well in my retirement account! Only in the past few years, noticing that the stock market has been kind to me, I finally decided to cash in my winnings and move money into safer harbors.
The key to smart investing I've found is to not have the stock market crash on you while you're not paying attention. (Please buy my book.)
Has anyone had a 60/40 portfolio for generations? Ever since interest rates fell off after the GFC I think it’s been generally understood that owning bonds is stupid and most bondholders are institutional investors who legally have to own bonds.
Claiming this is about globalization ignores the fact that other countries’ stock markets have not gone up nearly as much. The story is largely about extraordinarily high margins for US companies.
Owning bonds is "stupid", unless you're 10 years away from retirement and want insurance against a stock market downturn preventing you from extending your retirement date. You'd be surprised! A lot (most?) of people's IRAs these days are invested in fairly simple target date securities which follow pretty basic rules about asset allocation.
Why would other country's stocks go up if US companies get a portion of those shares and if foreign companies prefer to list in the US rather than at their relatively tiny exchanges instead?
Bond funds were dumb to own when we were in a ZIRP market.
Bonds did poorly when stocks did poorly in 2020 and 2022 but that was the particular situation. Bonds are weakly but positively correlated with stocks. You don't want something anti-correlated with stocks, because that's just shorting the market. You want something as uncorrelated as possible, so if stocks go down your other thing has a decent chance of not.
It’s always seemed strange to me that income you get from working is the most heavily taxed whereas there seem to be lots of way to dodge inheritance taxes.
IMO it would be better if we taxed inheritances more so people started out on a more level playing field.
Most people receiving inheritances today are people in their 60s whose elderly relatives have died, it isn't that relevant to leveling the playing field
Knowing you'll eventually get that inheritance affects your financial decisions in your 30s, 40s, and 50s. Speaking from experience. I don't have to worry as much about having a super high emergency fund. I know if things got really bad my parents would give me some money and deduct it from my future inheritance, for example.
Yes, that's a problem that can occur, although bear in mind that (i) there's debt service and (ii) abstract services like national defense that your income taxes are paying for too. That said, government services should be converted maximally to direct fee-based payments by users and income tax rates adjusted downward to the greatest extent possible.
I think that it is under appreciated how the money flows have led to much of the wealth increase. The rise of the 401K vs pensions and the changes to 401K auto enrollment have created a continuous spring of money going into the stock market. (Ray Dalio taught me the analysis of the numerous possible movers to the actual price of stocks.) So much of the current wealth that is out there is sitting on top of self inflated prices. For instance Walmart is floating around a 40 PE, where it has been historically been around 20. The current stock market pricing is based on recency bias vs. anything resembling future earnings.
One thing pushing up valuations is just a savings glut. The population is getting older and will soon be shrinking; that’s fewer people buying diapers and cocaine and more people bidding up securities.
“ For instance Walmart is floating around a 40 PE, where it has been historically been around 20”
Because it has transitioned to a tech stock and has successfully negotiated logistical advantages (their stores) better than Amazon has the ability to do.
Tech stocks are usually those that are trading overall growth for current earnings and have great unit economics and are primarily selling a technology product. And are priced at a P/E equal to their growth rate. So using that metric Walmart should be growing by 40% a year, which would be feat. But its growth rate is 5.5%, which is great for a company that size.
But your comment really shows how everyone is taking the recent price as a meaningful measure of its intrinsic value. The lack of a real stock downturn for 20 years has warped everyone's perception. And the lack of a good alternative place to invest is stopping the needed reevaluation of stock prices.
But supposing you're correct, this still means that the rich really have been getting much richer in the past decade, and there's nothing in the immediate term that looks like it will change that, so that doesn't seem to contradict Matt's overall point.
This gets hard because AI is making things very uncertain. But absent that I would say the chances of a significant correction within the next 5 years are really good.
As Miles has already mentioned, I imagine that this is in significant part* a function of the massive federal budget deficits we've been running since the global financial crisis. I'm no economist, but it strikes me as obvious that those deficits did (and do) two things:
1) They pushed a massive amount of liquidity into the economy, which is going to result in inflation because a lot more money is chasing supply. That inflation is going to go into prices of some sort. We all hate it when it goes into consumer prices, but a lot of people love it when it goes into asset prices. You focused on the stock market but all that liquidity also went into housing prices in places where a lot of people wanted to live.
2) All that stimulus drove a lot more economic growth than in most of the rest of the rich world. That (and other things, like rising global instability) attracted a lot of foreign money into the US dollar, which was very helpful because it financed those insane deficits without us having to pay very high interest rates.
The fraught policy question in the counterfactual is this: Had we run much smaller deficits since 2008, would the adverse effect on the incomes of ordinary Americans have been even worse than the inequality driven by all that deficit spending? We may learn the answer to that question at the point in the future when it becomes much more expensive to finance our deficits.
*No doubt smarter people than me will point out that various aspects of our economy have become "winner take all," because of network effects and the ability to tap into a global market for many services, including software, finance, and so forth. No doubt that has driven a certain amount of wealth inequality as well, but I think that the huge surge in Walmart stock value is evidence that sheer liquidity is behind a lot of it.
Remember, the deficits were specifically creted by reducing collections from high income people. We created a assive drag on economic growth so high income peopel can accumulate wealth at low or zero tax rates. Reducing the estate tax, and the step up of capital gains are not an accident.
I don't believe the facts bear that out. I believe that spending on the GWOT, to deal with the GFC, pandemic relief/subsidies, and the rapidly rising entitlements because of the aging of the population overwhelm the effects of tax cuts.
Good point. I was thinkit about relaively recent policy decisions. The “miscalculation” of social incurance formulae goes back to the ‘80’s. And the cuts (except of corporate raes) were bad whatever the % contribution. My VAT+prgressive consumption tax undows the damage whenever it occurred.
Sorry. Its a professional quirk to discus policy as cheteris paribus. :) The changes in tax law compared to not changing them reduced collections. We were never anywhere near the “pay for themselves” part of the Laffer curve.
I agree we aren't there now. I think in the 80's when we first started discussing the Laffer Curve we might well have been.
The interesting thing to me is looking back over the last 60 years and seeing how steady revenue as a percent of GDP has been despite large changes in marginal tax rates over the years.
Either way, I think the only way we get a handle on the deficits is bipartisanship. Which will mean tax increases paired with spending cuts (in particular entitlements)
It probably would have been quite bad to not have run deficits in the immediate aftermath of 2008. In fact, deficits probably should have been even higher than they were.
I do think an interesting question though, is what would have happened if Trump hadn't increased the deficit in his first term, and if we had brought the deficit back to 2015 levels post-covid? (Remember that Obama had actually cut the deficit significantly by 2015/2016.) That's plausibly a better world for the average person.
Yes it would be interesting to read an article 20 years in the future talking about this period of calamitous deficits (at the expense of revenue from normal taxes and ridiculous stimulus spending, among other wastes of money. I mean what do we have to show for near $40 trillion in unfunded liabilities? The Japanese are even worse off but at least they have a ton of public infrastructure/transportation efficiency to show for it).
A lot of our "self-made" plutocrats came from pretty privileged backgrounds, to boot. Warren Buffett is the son of a Congressman. Bill Gates's father was an elite Seattle lawyer. Zuckerberg is the son of a dentist-doctor couple who raised him in one of the country's richest counties before sending him to Phillips and Harvard. Growing up, Jeff Bezos used to spend summers on his grandfather's 25,000 acre ranch (he then went to Princeton). And so on.
I'm glad America's economy is unequaled as a dynamic engine of innovation and creator of great wealth. It's a genuinely precious national asset. But the rags to riches thing has always been something of a myth (not impossible, obviously, but comparatively rare): the US has a really weak record on this score among high income countries.
It’s true that these are mostly not “rags to riches” stories, successful founders are generally from comfortable backgrounds with educated professional parents. But there’s still an obvious distinction between founding a company and inheriting a fortune.
I always find these international mobility comparison studies to be really weak. They don't do a good job of accounting for migration, either of immigrants or emigrants. They also tend to measure everything on a quintile basis, without accounting for how different the spreads between quintiles are in various countries. It's all apples-to-oranges.
That is particularly problematic when the measure of mobility is the chance of moving from the bottom quintitle to the top. Eg: I once struck up a conversation with a student at a cafe in Berkeley. He was from France, but of Vietnamese ancestry; his parents were "Boat People." https://en.wikipedia.org/wiki/Vietnamese_boat_people
I had many former students whose parents had similarity fled Vietnam and who had gone on to attend Cal. Suppose one of them majored in Accounting (as did the student I met) and got a job paying $120K. Suppose the student I met did the same, but worked in France. I am pretty sure that would put him in the top quintile in France, while my former student would not be. But both experienced the same life improvement.
What is the argument that it is impossible or even hard for a rags to riches story to happen ?
It is impossible to tell without a massive RCT. Lots of people who fled the Soviet Union or the Nazis made billions after having lost everything (often having had successful grandparents).
In a meritocratic society talented people will rise up which means the parents of extremely talented people are likely to have had somewhat talented parents who could get good jobs.
He didn't say it's 'impossible', he said it's 'something of a myth', ie it happens less frequently and/or as a share of very wealthy people than you would expect from the popular discourse. 'Or even very hard', well I think it's safe to say that it's 'very hard' for anyone, including very wealthy people, to end up amongst the very richest in the world (unless they are heirs), even if they started with big advantages in life.
I listened to a How I Built This podcast with the founder of Starbucks- he mentioned that when he got into early legal trouble with one of his investors, he hired Bill Gates' dad as his attorney, because he was the most feared attorney in Seatle
Yeah, I used to live down the road from the private school Bill Gates went too in Seattle (wasn't really a high income area, just the luck of it being a somewhat old school placed in what was the outskirts of Seattle in 1919 that was the deeply suburban part of Seattle by the early 2010s.
You could tell when it was some big event because all of the sudden, it looked like a high end luxury vehicle dealer in parking on the side of the road near the school.
1. I think it would be worth thinking through how these incentives impact "normal" workers at the beginning of their career. It seems to me like building savings/investment as early as possible is much more important and that having children in your 20s is therefore much more costly.
2. My understanding is that stocks have shifted away from dividends and towards share buy-backs as a method of distributing profits over time. To what extent is that exaggerating the change here? There are probably more sophisticated ways to determine the net return on owning stocks.
Completely accidentally and through blind luck I put about $600 or so into index funds a month starting in 2009. This is separate from retirement funds. My rent was about $400 for a room in a college town. This has gotten LARGE.
Similar stories to friends who had decent jobs at their high schools and parents who put the money into like a Fidelity or Schwab account. A couple grand in a summer has turned into a… fucking massive amount of money. Let alone if they messed with bitcoin after hearing about it on Reddit or something.
The same engine driving this decoupling of the UHNW has also led the median college educated millennial with bog standard investments to shrug at their job being disappeared. I mean, I sure could, and most of my friends could probably survive a couple years only on the savings we started tucking away right after college during the Great Recession.
Yeah I had a decently lucrative internship for two summers at the beginning of grad school (2004&2005), and my now wife and I lived together in a 1 bedroom apartment so I didn't need the extra money and invested most of it. That's been very good for me.
I think the amount of money necessary as a starting point to be a beneficiary of this is such that it doesn't create any incentive for regular people at all. We're mostly just bystanders.
At what age? You said, "it doesn't create any incentive for regular people at all. We're mostly just bystanders." But now you seem to be making a much, much narrower claim.
I was responding mainly to JM's #1 which I read as being specifically about what you should be doing when just starting out/in your 20s.
Of course it's a good idea to invest if you can generally and/or once you have established yourself in the upper middle class specifically, including as a high earning W2. That's still nothing remotely like what's going on in the chart though, where people are turning singular or a handful of big earning events few will experience into truly massive wealth (millions into many billions, etc.).
Well, of course most people cannot earn truly massive wealth. But, again, that was not your original claim. Regular people simply are not "mostly just bystanders" to the stock market's rise.
I'm thinking about the decision to have a child around 25 or around 35. Having even just one kid can mean a bigger house and daycare adding up to 30k+ per year.
High market returns means 30k invested now is worth maybe 70k in ten years. I think that might be a factor delaying kids for people in their 20s.
My first thought reading this was “wow we don’t tax capital gains nearly enough and we should have some sort of trading tax”.
To be clear, I’m not advocating taxing unrealized gains (although designed right I don’t know why it couldn’t be much different than a property tax but discussion for another day). But just noting that based on this huge jump in stock appreciation you should be able to increase the capital gains tax to 90s levels (indeed it’s hard to look at the capital gains tax rates from this era as any serious headwinds against economic and stock growth). Furthermore, given the huge ROI with tech, a small tax to make a stock purchase seems a pittance. Honestly, how would this be much different than a sales tax?
Matt has been correctly noting we need to address rising deficits. It seems to me the two taxes I’m proposing (are proposing increasing) has pretty small deadweight loss. Especially if we consider that increasing tax revenue should bring down the deficit and therefore bring down interest rates…which should also lead to even further stock appreciation.
One last thing. I think we underrate the political backlash to the tech brows brewing. People HATE data centers. You can say all you want people are being unreasonable but just ignoring Normies for being dumb would be a category error. Add in that all these tech titans keep saying how massive unemployment is coming with AI, if you don’t find someway to “smooth” the transition to an AI world and find someway to distribute the “winnings” of stock/tech/AI growth, the political backlash is going to be quite ferocious.
Yes, that was my first thought. We know how zoning and property taxes distorte the housing and rental market in the USA. How can super low capital gains taxes NOT support these trends?
It also raises an important question of what an economy is FOR and whether all this speed and emphasis on liquidity are distorting the market. I'm no communist, and a free market has proven itself to work. But there used to be this aphorism - "Day trading is gambling, swing trading is speculation, long-term ownership is investing." Why is there such a disconnect between the well being of companies and the well being of regular people?
"Add in that all these tech titans keep saying how massive unemployment is coming with AI, if you don’t find someway to “smooth” the transition to an AI world and find someway to distribute the “winnings” of stock/tech/AI growth, the political backlash is going to be quite ferocious."
It's not great that the major tech figures, rather than advocating for the above, are building self-sustaining fallout shelters on private islands.
That's a LOT lower than ordinary rates! That tax differential compounds to a massive difference if you take a too earner who only pays cap gains rates versus one who worked for the income.
Given that I think day trading is not particularly economic useful (as opposed to medium to long term investments), my case is the deadweight economic harm is likely low. And given that based on Matt's post, we really need to consider that there needs to be some way for the public at large to capture the enormous gains accruing to the few, this seems one of the less economically harmful ways of doing it. It's no panacea by any means but it's something.
Now here's maybe my hot take. Are we sure it's so bad for the government to take equity stakes in companies like NVIDIA? I mean the methodology and the way the Trump administration is going about taking these stakes is just horribly corrupt. Besides the disgustingness of the mafia style tactics used, are we really sure where that money generated by the equity stakes are going? But a way less corrupt process for the US government to capture the gains from stock appreciation? One where US citizens can be given a "dividend" based on stock performance like happens in Alaska? In theory, I'm not sure how against this I am. I know, I know devil in the details; how do you avoid a situation where the US government continuously intervenes to prop up NVIDIA in say 25 years when it's no longer cutting edge and is the future version of the Big 3 car makers today. But the Obama administration bailed out the Big 3, took a stake and then really did sell at a profit. Again, questions asked why the Big 3 are bailed out but not other firms. But point is we have a recent example of this turning out...kind of well.
I think the arguments for a trading tax are pretty weak overall, but specifically to the underlying question - the people who have this immense wealth aren't trading such that a trading tax would impact them!
I think the better argument is to have companies pay tax on their profits and those who get dividends pay tax on the cash they receive. Holding equity positions does little to raise actual revenue for the government unless its sold. Which if it does in a meaningful way will cause downward pressure on what it sells. Beyond that, holding equities means that the government gets involved in voting for company positions, whose on boards, etc. all of which I think are too likely to become incredibly politicized. You already see this with with what Trump has been doing with IBM, TikTok, etc. from a corruption side, but Biden's everything bagel progressivism being pushed into company decisions would also be corrosive.
“We keep seeing efforts to kind of redefine the billionaire situation to make it seem like they’re paying unusually low tax rates when they actually aren’t.”
This is such a silly statement. No one is a billionaire because of W2 income. When you consider that much of a billionaire’s income is dividends or capital gains, they are paying an unusually low tax rate.
We can debate whether this is good or bad but shouldn’t pretend it’s not true!
Hey, I read Piketty's book (the first one anyway)! I think what the pure economic analysis doesn't capture, and what Matt alluded to here, is the social-political impact of this trend. In my view, this is a least partially responsible for the feeling of unfairness that both Trump and say Bernie have tapped into.
One important thing to note: the US having it's richest people have new fortunes, and the US having relatively low tax rates on the top 10% of incomes, are probably closely related. One long-term feature of a tax structure like the US is that the wealthiest positions in society turn over. A lot of advocacy for changes in the estate tax seems to be funded by older fortunes - it's often worth thinking "is this intended to preserve the relative wealth of the Rockefellers and Mellons?" when looking at proposed tax policy.
I attempted to figure out which "average" MY is using, since US top bracket starts at $768k for married filers. I'm guessing that the comparison is to median FAMILY income, which is $105.8k as of 2024.
I suspect, but don't know, that the lower tax rates on incomes from $150k to $750k, relative to Europe, give a significantly higher chance of people being in position to grow wealth to the point where there is some churn at the top.
Something I'm curious what you think about, that seems like it would have been included here is the strategy of borrowing against your assets to keep your tax bill down and not having to pay for it as a realized capital gain. I'm not a tax wonk but every time I hear about this approach It feels like a big unfairness in the tax code that punishes high income w2 folks and allows the top earners to really avoid full taxation of their assets.
That compounded by rules that have gutted the estate tax that allow people to pass on loads of money to the next generation tax free
Seems like a good time to eliminate the step up basis.
I would also make the estate tax graduated; irrevocable trusts have long been used to eliminate assets altogether from a taxable estate when one passes away. The estate tax exemption amount is arguably low at $30M for married couples (ultra HNW starts at around $50M these days). We could have multiple tax brackets that could tax certain assets (appreciated stock) differently: estates between $30M-$100M and $100M and above, etc. But then we would also need to update many of the rules on trusts and gifts into trusts during the owner's lifetime. I agree with the elimination of the cost basis step up provision at the owner's death.
I do not think $30M a low exemption. How about $650k
650K is a paid off house in a lot of places. If someone wants to leave a paid off house to their family who may have been living with them and helping them out, that seems like a good thing.
If the house is taxed, the kid then needs to find cash to pay the tax which they might not have (can they get a HELOC/mortgage before the estate is settled and they officially own the house? Can they get either loan if they were underemployed caring for the person who just died?)
And now you’re also forcing more people to consider more complicated estate planning (trusts? whole life insurance? More gifts when alive?) and more IRS enforcement. Also cryptocurrency, gold, art, assets in other countries etc can all hide wealth on a modest scale that could be impractical to find.
I think it’s good that estate planning is pretty simple for the average person because federal taxes aren’t an issue. We don’t want more old people in Medicaid because they were trying to avoid estate tax.
I dunno... If the estate tax was like 10% for the first bracket starting at $650k, then even a $1m house would have 10% of $350k, which is paying $35k for a $1m house. Still seems like a good deal for the inheritor. If they were in dire straits and couldn't get a loan, then they should still have the opportunity to sell it and pocket $965k (minus taxes) and buy another house.
A reasonable exemption is what I expect to get from my parents.
Absolutely, but nonironically
I will get a great deal more than that but I have a little solidarity
Trusts simply should not be allowed to exist, period. I am an advocate of antitrust in the literal sense.
(I realize that moving to a trust-free model would require legislative reworking of ERISA plans and the like, but I think it's worth it.)
Not an attorney, but just shooting from the hip it seems more practical to just tax money going to the heirs. Rather than endlessly chasing the creative new shenanigans of tax evaders & their attorneys, just say 'if you as an heir receive above X amount at any time in your life, it is taxed at this rate'. Could be a direct inheritance, could be a gift, could be from a trust, whatever
I would prefer to simply eliminate the mechanism that permits the shenanigans in the first place, but sure, this could work. But you have to word things very carefully to properly account for/deal with the bizarre legal personhood of trusts.
That’s not what antitrust means in any legal setting. Moreover, trusts are incredibly useful tools for people with sick or disabled relatives. This is wildly unfair and unworkable position. It would also require legislation on a state by state basis.
See where I said "in the literal sense"? That is me saying that I know what the legal meaning of antitrust is and I am not using it in that sense, I am using it to mean what the underlying words literally mean.
Your second claim is just unsupported ipse dixit, so if you want to make an actual argument I'll be happy to respond.
Eh there are use cases where it definitely makes sense for complexity (special needs, spendthrift provisions) but they have been misused and abused and should be reviewed.
So the parent who dies with minor children should just what? all the money goes directly to the kids without any trust administrator to oversee the assets? They want to provide assets for their disabled child so she has sufficient assets for her lifetime of care...instead, what?
You want to eliminate trusts. What do you propose to take their place in these two specific instances?
If a parent wants to appoint someone as legal guardian for their children, they can do that, and the guardian has the same fiduciary best-interests-of-the-child duty a trustee would have.
Similarly, a disabled child can simply be willed money. No fancy shenanigans required.
Special Needs Trusts?
You're the third person to gesture vaguely in this direction without actually spelling out what you're concerned about. What, specifically, is the objection here?
Instead of the “estate tax” we should just tax it as income to heirs over some exemption. If you have $100m on death and leave it to 100 people it should be taxed less than in pure primogeniture. This includes trusts.
This is not how it works
These seem reasonable to me.
More broadly, I'm wondering at some change to the capital gains tax. My initial idea is something along the lines of adjusting the basis for inflation or change to GDP and applying ordinary income tax rates on the gains.
The fact that Matt wrote about taxing unrealized capital gains in the context of INHERITENCE and did not talk about step up is insane. What the hell is he doing in this piece? Did he just inherit his dad's money and was stricken by a bout of motivated reasoning?
I would say he's allowing for some facts he doesn't want to deal with then shrugging. There are a lot of times I think his argument is bad or something I disagree with. This time, it feels like he didn't bother with one
Or a progressive consumption tax instead.
Re the step up on basis, if the estate paid a 40% estate tax, that's more than the 20 something cap gains rate. Of course, that wouldn't be true for anything that passed under the $30mm exemption, so there eliminating the step up makes sense to me.
Amen. The step up basis is an abomination.
One thing I realized even as a teenager is the idea that you’re being double taxed is absolutely absurd. You know why? The person taxed for all that income is dead. God forbid my parents pass away tomorrow, if I inherit any of their estate, please tell me how much “work” I did to earn that money?
Greatest trick the GOP ever pulled is convincing a whole lot of middle class voters that having no effective estate tax* for anyone wealthy was somehow beneficial to them.
* Listen to Felix Salmon. Basically no one pays estate tax.
Why should it matter how much work you did? Your parents did the work, and they want to leave their belongings, accumulated with a lifetime of their work, with you, not the government, as should be their right.
I would like to enjoy my income, accumulated through my work, without giving anything to the government. But someone's gotta pay for the government and I don't see why heirs should be exempted.
Yes, heirs shouldn't be exempted from taxes. My point is that it is just as morally problematic for the government to be raiding inheritances as any other source of income. At best, taxing inheritance is like all the other taxation - a necessary evil.
Taxes are not a necessary evil, they are a necessary good. They constitute willing participation in a common enterprise and a commonweal. They are the hall mark of a functioning democracy. They ensure that the citizens have a say in the behavior of their government.
Countries that have little or no tax, usually because they are rich in natural resources like petro countries, lose the connection between what the government does and the need for the people to participate in it. If my government's actions don't come out of my pocket, then what do I care what it does?
It’s not problematic for the government to raid any source of income or money. It’s all the government’s money!
Why should it be their right? They made their money by living in this country and having the advantages this country gave them. Even with the tax, there will be plenty of money to pass on to heirs. (I am Gen X.)
Great point. I hear this argument a lot from Millennials and Gen Zers. They seem to think that inheriting assets somehow makes them a terrible human being. It seems almost pathological to me
Somebody should start a school for the champagne socialist heirs to large fortunes. Their parents can stipulate that they don't get full access to their inheritance until they pass the class showing they understand all the pro-market arguments. If they still want to be socialists after that, so be it, but at least no one could claim it's due to a lack of education.
The guilt associated to inheritance is thousands of years old, it is not a new thing at all lmao
That’s an argument against all tax. My employer did the work, they want to pay me with the money they earned, does this mean wages shouldn’t get taxed? As long as you want to have an ongoing government you can’t just tax money one-time…
That applies to every single tax.
“Double-taxed” is an idea that feels like it makes sense to ordinary people, but really makes no sense at all when you start to actually think about it. Why should a business pay tax on its income when its customers already paid sales tax? Why should customers pay sales tax when they already paid income tax? Why should anyone pay income tax if it’s coming from taxed sales by their employer?
Could it just be taxed as income for the heirs? The money is literally coming into their possession.
And that paying the estate tax is a middle class concern.
I work hard to pass money on to my kids. Why should my death be a taxable event?
You're not taxed. Your kids are taxed. And they didn't work hard to get the money.
The step-up basis also messes up the housing market, boomers don't want to pay the tax and so stay in their homes until they die.
I mean the alliance with business interests is pretty obviously working out for middle class Republican voters, the median income tax burden in the US is significantly lower than in the EU. A lot of this is due to the lack of VAT, but also lower income tax rate brackets for middle and upper-middle class. In both cases, you can see how voting Republican kept these from ever happening.
Now there are some elected Democrat Senators proposing that even if they do their complicated capital tax idea that probably won't work, they should use the revenue to lower working and middle class taxes even more. So you can see how voting for the center-right political party in response to Bill Clinton's 1993 tax hike has actually helped move the whole conversation of tax revenue rightward to significant benefit of the middle class.
Maybe one thinks this is all bad and both higher estate taxes and a VAT should happen. Fair. But it's pretty obvious how the GOP made the sales pitch to the middle class to oppose all of this and join the same side as the businessmen frustrated with their estate tax rates.
You are correct about the estate tax. I just past my estate planning module. It kicks in at $13M+ (it was $13.99M last year, idk what it is this year), and with careful planning, it can mostly be avoided.
For perspective, in the 2025 fiscal year, the IRS collected $36B of estate tax.
Yeah that's a miniscule amount of federal taxation.
It's never been a large amount of "federal taxation".
But I think many people believe it is never paid at all, which is not true. Its existence also funds a lot of charitable giving (which I would argue is a net negative, but that is a different conversation).
At very large levels of estate value, it isn't as easy to avoid as people think. If you have $100M, lots of strategies to avoid. If you have $5B, those strategies are a LOT harder and often don't pencil out.
Tell us more. Or do you have links about how to avoid it?
Ehh… nothing you're probably not thinking of. Take advantage of spousal deduction, give stuff to charity, put assets in irrevocable trusts, etc. You do basically have to give stuff away. That's of course if your only goal is avoiding estate tax burden at all. If your goal is to maximize the amount that goes to heirs, then at a certain point you might want to bite the bullet and pay some estate taxes.
Thanks. It seems like gifting to a trust can reduce your estate, but the gifts retain the original basis. Except maybe with a GRAT?
Good point. The estate tax escape is actually the bigger issue than the avoidance of income tax through borrowing.
Borrowing requires the payment of interest, which generates incremental marginal taxable income for the lender and as a result, an additional stream of tax revenues to the government.
This incremental stream of taxes would last until the shares were sold and the loan was repaid, ie when the taxes on the capital gain is paid. But it becomes perverse when that capital gain is then avoided either through the step up in basis or through trust planning.
The other issue is that the capital gains rate is so much lower than taxable income.
I don’t think this is just left wing attempts to reclassify gains as income. Many of these founders have gotten massive amounts of compensation in the form of free “out of the money “ options that then skyrocket in value and are taxed as capital gains. These options are rewards for work, does anyone really believe these founders are only earning 80k a year?
Note that the capital gain tax (20ish%) is avoided by paying the estate tax (40ish%). Except for the exempted $30mm, which needs to be changed.
And the use of trusts which just circumvents the entire tax payment.
That money was already taxed when it was earned. It shouldn't be taxed again because you are passing it on to your kids.
My money is taxed when I get earn it, why when I pay someone to install a toilet do they get taxed on that income?
Those kids will get toilets installed too.
At which point they should point out that no one needs to pay taxes on that money because it had been inherited instead of earned.
Neither should it be taxed when I spend it on purchases! Or when a business hires someone to do a job for me! Once one generation pays income tax once, all other tax is double-taxation, and government should just live with no more revenue because it has stopped providing services!
I agree that stuff does need to be taxed. I am fine with consumption taxes, or regular income taxes.
I am opposed to wealth taxes or inheritance taxes.
why?
He likes aristocracy.
Well with the step up basis, it wasn’t taxed when it was earned because gains weren’t realized, yet basis was still stepped up
Why not?
I’ve researched this situation quite a bit and the “buy borrow die” strat is more of a meme template used by academics to communicate complicated tax structures than a consistently deployed specific strategy. Interest rates are between 4 and 6% now for secured loans making this approach way less favorable, it’s less favorable than using trusts and other instruments for passing wealth on, and because it hinges around dying and having a step up in basis for inherited shares it’s more likely to be used and used more aggressively by people 70+ vs musk/zuck/bezos.
That being said step up in basis is stupid, we should eliminate ASAP, and it’s more or less the “fix everything switch” for tax issues around mega inheritance in the US.
Mark Zuckerberg doesn't pay 4% interest. He gets loans from whatever immense bank (JPMorgan Chase, etc.) he has massive investments with, and they give him a really sweet interest rate, like 1%, to thank him for his business.
JPM isn't going to borrow from the Fed at 3.5% and loan to Zuckerberg at 1%.
That was a move in the zero interest rate regime, 2016-2019ish, mostly done by SVB and First Republic Bank, both banks famously killed due to interest rate risk. Back then, the play was to borrow and lend at SOFR, which was 0-1%, a modest loss for the banks but part of their marketing/investment strategy. Nowadays ultra high net worth people are paying SOFR + 50-200, so 4-6% depending on the terms. There is basically no lending below SOFR.
These banks have entire wealth management departments for the extremely high net-worth that are separate from 'normal' lending. They can do things the other department can't do. (Fun fact, one thing that came out in Trump 1 reporting from the NYT was that after he got blacklisted by major banks in the 90s, all of his commercial lending then came through the wealth management department which bypassed normal guidelines). So I'm not sure your information is correct
Yes, I am very familiar with the wealth management industry and how it works for UHNWIs and the information I provided above is correct.
Wealth managers are there mostly to help with structures around capital preservation and tax efficiency. The problem they mostly solve for people is 'I got rich owning a single asset, now that asset is worth 500M dollars, how do I diversify and maintain my wealth". There is no "magical money box" that they can reach into and provide a very wealthy individual with money for free or less than free.
The way that banking worked in the 80s/90s is very different than it works today due to changes tax law, bank regulation, and capital availability. If Donald Trump was blackballed from CRE lending today he would go to private credit providers that didn't really exist back then. There are definitely non bank associated lending mechanisms that could probably structure a secured lending deal against appreciated assets that appears to be below SOFR in interest rate but that would also be necessity carry some equity like risk or fee structure such that in the outcome they expect they pay SOFR - 100, but in many other outcomes they're paying SOFR + 500 or more but saying that you can easily get a loan for 0-1% interest is just not true.
The "magical money box" idea seems as fantastical as the idea that all billionaires are like Scrooge McDuck swimming in a vault of gold coins.
The best available study on the topic finds that on average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income.
Zuckerberg regularly sells massive amounts of his stocks to provide himself with income.
https://economics.yale.edu/sites/default/files/publication-documents/2025-01/UnrealizedGainsandTaxesKeyFactSheet.pdf
Interesting that nobody else has made this point here, but the best available study on the topic finds that on average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income. This will be bridging loans, I think.
https://economics.yale.edu/sites/default/files/publication-documents/2025-01/UnrealizedGainsandTaxesKeyFactSheet.pdf
The US got rid of step up basis once before and then brought it back.
What has changed this time around?
Agree that it is a bit of a loophole, but is there really that much revenue to be captured here? Also, it seems like whatever logic you come up with would impact every secured loan - e.g. a HELOC is a way to spend the equity in your home without triggering taxes, isn't it?
I kind of like the consumption tax idea as a way to pick up this kind of thing, but I am also not a full-on tax wonk...
The problem with consumption taxes is that high income people consume way less of their income than lower income people, so they are often regressive.
For a Western European style welfare state with a lot of universal programs that benefit the middle class that makes sense. But I don’t see it as a way to make taxes more progressive.
You can account for the regressive bit by having a large exclusion though. Like if your first $50k of consumption isn't taxed, many people never even see this tax.
I'm curious how this works? Like I go to the store with cash and want to buy bananas or socks or whatever am I like typing in my ssn into Target's POV machine? Am I expected to keep all my receipts and prove how much I spent to the IRS?
How does the state know if I've gone over 50,000 in consumption? especially when most of these taxes are applied at the point of sale.
If you agree with the theory, I think we can solve the implementation. Maybe not ME, personally, in the comment section - but with the help of experts :)
Even if it is not QUITE the same thing, you could get close by giving a universal payment that covers the exclusion value while collecting the tax on all transactions. This would actually be even better for folks at the bottom.
I wouldn't jump to this conclusion. We're getting close to Matt-in-Maine season, which means we're getting close to jokes about Matt writing a piece about lobster fishing rights or something so he can write off his trip as a "business" expense. I obviously don't know Matt's personal tax situation, but a lot of tax shelters are all about the fuzziness of the line between investment and consumption. With a consumption tax, these implementation details become even more important, and I'm not sure there's any non-arbitrary way to make some of those calls.
Any implementation would read as a massive violation of privacy to citizenry (including me, frankly). Politically DOA. I like your creativity, though.
In Canada there is an annual rebate that you get based on your taxable income (so it’s an estimate and not directly tied to actual consumption).
Exactly the reverse. You have to keep track of your NON-consumptiong. The (progressive) tax falls on the remainder
That seems like it discriminates against people with ADHD. Damn you, I *need* my fucking reminders, and you will have to tax them from my cold dead hands! 😉
You’ll get a credit at the end of the year based on some formula for your income level, I would guess. I think Europe does this sort of things to redistribute for the VAT.
Exactly what Canada does with the GST.
That's right, but it also explains why this whole borrow to consume things is peanuts on the scale of high wealth people.
The step up basis seems like the real problem here.
General Econ thought that the taxes with the least amount of deadweight loss, that are easiest to administer, have the highest compliance and are generally pro growth are land value/property taxes and consumption taxes. When combining actual state and local taxes We already have one of the most progressive tax structures in the OECD.
That depends on how progressive the tax rate on the consumption are.
I'm not sure how you would know. At some level the abstract fairness point is more significant than the amount of money attached to it. That here I am making money by having a job and it's taxed less than selling assets and not selling them is taxed not at all.
>is there really that much revenue to be captured here?<
Probably not.
I do think as a matter of fairness we should tweak the code to tax personal consumption loans over a certain threshold (say, $3 million). Jeff Bezos wouldn't break a sweat if he had to borrow $40 million to spend $25 million.
I want to know what banks are giving out billion-dollar, interest-free loans.
I wasn't supposed to tell you this, but we don't have to pay any of it back.
https://www.youtube.com/watch?v=l_LeJfn_qW0&t=213s
Something akin to an estate tax without a a step up basis that is structured to discourage lenders to participate in this scheme is needed.
If we have to tax income, we should tax indexed capital gains as ordinary income, eliminating the stepup up in legacies.
Is there any research to suggest that this is a thing that moves the needle at all? I could've sworn when researched that people found this wasn't a significant driver of wealth.
I don't think it's a significant driver of wealth but it's a significant driver of division. When you read over a decade ago that Warren Buffet pays less taxes than his secretary and no one is doing anything to close these loopholes around the mega rich it's acid to the bonds of solidarity. Not because it makes them wealthy but because we all end up feeling like suckers.
I don’t think this is a real hack if you have, say, a $10 million portfolio, and certainly not less.
I have professional experience here. A 60/40 portfolio of global stocks + muni bonds is going to throw off about $350,000 in income. Regular rebalancing of stocks (so that your portfolio isn’t crazy high in Nvidia) will generate another $100,000 or so in realizes capital gains.
If you need more liquidity, you can borrow money from your bank, and they’d happily lend it to you, but you’re still paying about 4.5-5% interest right now vs 20% ltcg rate.
So if your need is short term, by all means borrow, but it doesn’t make sense to perpetually pay the bank interest, as 4 years of bank interest is approximately equivalent to your potential tax.
That being said, if certain billionaire can borrow for around 3.5%, then borrowing becomes more attractive.
But isn't the point to finance the consumption *and still own the stocks*? Which may - and historically did - appreciate faster than the interest rate on the loan? And can eventually be passed on to heirs or given to charity with a stepped up basis, avoiding capital gains taxes entirely?
Like the downside of selling the stocks is mostly that you now have fewer shares. Not only about the tax vs. interest calculation.
All this is correct! But it’s leverage. Buying on credit works well until it goes horribly wrong.
A friend of mine had $1m in his brokerage account and recently paid cash for a $600k home renovation. Setting taxes aside, the market has appreciated about 20% since he sold his shares. He would have been way better off borrowing at 5.5% against his shares.
OTOH, if the market tanked, he’d be looking at potentially getting a margin call and being forced to sell into a down market.
If their assets are cooking at 10-20%, which is their average growth this century, then wouldn't it make sense to borrow at 5% rather than liquidate any of those assets to buy stuff? I suppose the rub of it would be that everybody (among the mega rich) has some low-yield stuff to dip into?
Not really. Average growth isn't meaningful here. You need to look at volatility of both returns and the interest you'd be paying (it will not be fixed like an American home mortgage but instead will change on a daily/weekly basis).
At the end of the day it is essentially a gamble, not something that you can linearly extrapolate. It is also somewhat asymmetric in that you're basically capturing a few percentage points a year but putting at risk significant fractions of your fortune -- and if you put less of your fortune at risk then the upside is even smaller.
Consider an example where someone started this strategy in 1966, following 19 years when the average (arithmetic) return was 16% and there hadn't been a big crash since the 1930s. Things cruise along for years until the mid 70s when stagflation kills your portfolio, interest rates turn crushing, and then your stock broker makes a margin call one morning in 1980 and says "hey, you need to send me 4.7% of your net wealth in cash by 5pm EST or I'm going to start liquidating things on my own discretion".
Thanks for the informed reply!
Andrew, I don't think borrowing avoids much if any taxation. You still have to sell the asset to pay off the loan, so it only defers the gain. And you have to pay interest, which isn't deductible at all for loans against stocks, or on home equity if used for consumption (I could be out of date on this part, I haven't taken out a home equity loan in 20 yrs and never borrowed against other assets). And those soaring lines on Matt's chart are mostly unrealized gains anyway--you "keep your tax bill down" mostly by not selling and so you don't have the actual money to spend. I think the basic "unfairness" is the 15% rate on capital gains when you do sell and spend. Borrowing tricks don't add much to that.
Tax strategies are all about delay of realization. You want to keep compounding as much as possible before you pay tax.
They can pay off their loans with loans. The amount you can stack them obviously gets limited pretty quickly as base rates go up. But it's a strategy.
I'm not sure the math works, but I haven't worked through all the considerations yet.
Option 1:
Borrow $10M at 5% interest for 10-years, collateralized by $100M portfolio with $0 cost basis. Pay bank $500K per year, so spend $5M. Die after 10 years. Estate owes bank $10M. Sell $100M portfolio, pay bank $10M, pay IRS $36M (40% estate tax on $90M). Kids keep $54M.
Option 2:
Sell $6.6M (of $100M portfolio) stock with $0 cost basis. Pay IRS $1.57M (23.8%). Spend $5.03M. Die after 10 years. Estate sells remaining $93.4M portfolio. Pays IRS $37.36M. Kids keep $56.04M.
Option 2 wins...the decedent spends the same amount of money and the kids get more money in option 2.
Mitigating factors: option 2 might require selling some portion of a closely-held business, which the about-to-be-deceased owner might not want (or be able) to do. Also, if the forgone $6.6M investment would earn more than the 5% interest, then that pushes the math toward option 1.
The borrow-spend-die strategy only made sense during the time of 0% interest rate environment. ZIRP created all sorts of unintended consequences and opportunities for banks to push these types of arbitrage opportunities.
As I noted to Tom H above, the wealth management departments of these banks for extremely high-net worth individuals can make loans to Zuckerberg etc. that lose them a bit of money. You can't just look at this like 'normal' lending, it's a totally different world
This is an especially surprising omission given that Ezra Klein discussed the “buy-borrow-die” tax avoidance strategy at length with Ray Madoff on a podcast just 6 weeks ago. Curious whether Matt would refute that this is actually happening.
Also, while I can understand the argument that wealth accumulation in the form of unrealized capital gains is not income, I think there’s broad agreement that the profit from the sale of appreciated capital assets does count as income. And of course, this income is taxed at a much lower rate than the top marginal rate for ordinary income (20% vs 37%). Seems like a stretch to claim that “we keep seeing efforts to kind of redefine the billionaire situation to make it seem like they’re paying unusually low tax rates when they actually aren’t.”
Interesting that nobody else has made this point here, but the best available study on the topic finds that on average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income. This will be bridging loans, so the strategy is effectively a meme and not actually real. I was quite disappointed that Ezra Klein uncritically platformed the idea.
https://economics.yale.edu/sites/default/files/publication-documents/2025-01/UnrealizedGainsandTaxesKeyFactSheet.pdf
It's incredibly annoying that this gets ignored when the lower tax rate for capital gains and dividends than wage income is an ENORMOUS driver of wealth inequality. That and the step up in basis for inheritance is basically the whole thing. Compare someone with $1M in income per year from their work versus $1M in income per year from cap gains and dividends ... You are talking about paying 15% less in tax every single year. If you're reinvesting the tax savings that ends up being tens of millions of extra dollars after a couple decades, just because of the lower tax rate.
I got the feeling Matt got bored writing this and rushed the ending. He added up all the problem stuff and then was, "meh."
Interesting that nobody else has made this point here, but the best available study on the topic finds that on average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income. This will be bridging loans, so the strategy is a meme and not actually real. I was quite disappointed that Ezra Klein uncritically platformed the idea.
https://economics.yale.edu/sites/default/files/publication-documents/2025-01/UnrealizedGainsandTaxesKeyFactSheet.pdf
Instead of the “estate tax” we should just tax it as income to heirs over some exemption. If you have $100m on death and divide it equally among 100 people it should be taxed less than in pure primogeniture. This includes trusts.
This is not how it works
This was on my mind too, since Ezra just did a podcast about it: https://youtu.be/mX5U5DNUfBc
The best available study on the topic finds that on average from 2004 to 2022, the top 1% of wealth-holders only borrowed 1-2% of their annual economic income. This will be bridging loans, so the strategy is effectively a meme and not actually real. I was quite disappointed that Ezra Klein uncritically platformed the idea.
https://economics.yale.edu/sites/default/files/publication-documents/2025-01/UnrealizedGainsandTaxesKeyFactSheet.pdf
I don't think it is coincidence that this growth in asset prices aligns with massive government deficits. As best I can tell, when the government pushes a dollar into the system, it circulates amongst people who NEED to spend until eventually it reaches people wealthy enough to save that dollar. At which point they usually add it to the giant pile of money sitting in the capital markets.
For all the old talk of "trickle down" economics, as best I can tell the mechanism is much more "trickle up" with a few cents of profit getting skimmed off every transaction and sequestered in financial assets.
This is a very good toy model.
This is why pandemic spending was so inflationary- it injected liquidity into accounts with a very high marginal propensity to spend
Pandenic spending was NOT inflationary. Fed policy was inflationary, largely rightly so. If you don't agree address your complaint to Powell, not Biden.
Most economists agree that the pandemic spending was inflationary, though not the sole driver. Basically there's debate over the significance, but not the direction.
Early in the pandemic, we were giving people money with the expectation that they wouldn't spend it. And it somehow worked!
But, it build up massive balance sheets and pent-up demand. By the time of BBB inflation was a powder-keg waiting to go off.
I am not “most economists” That’s te reaso i have a Substack and comment on other Substacks. :)
The models that “most economists” use just don’t work for the effects an policy toward sectoral shocks. More at “Shocks, Lean Back or Lean in“
Hard disagree. Both surely had an effect.
The government was all but dropping money out of helicopters of course that was inflationary.
No it it is not “of course.”
Whatever the deficit, the Fed controls aggregate demand and hence inflation. It was a very good call of the Fed to increae aggregate demand and inflation to facilitate the massive change isn relative prices that COVID/Putin caused. Dit it inflate more thn was necessary to achieve the adjustment? Possibly, but in any case the size of the defict had nothing to do with it.
This does not imply “of course” that the the Trump/Biden deficits were optimal. I think they were excessive, more than called for by the criterion of financing expenditures with NPV>0 when evaluted at marginl costs and revenues of the activities being financed.
How about we conjure $4 trillion once again and distribute it somewhat evenly across the population. You don’t think thst would cause inflation?
I would bet every penny ai have that you are wrong.
It woud depend on what the Fed did. Would it allow aggregte demand to go up by$4trillion, more, or less.
think that people who say thinks like “tariffs are inflatinoary” or “deficits are inflationary” are implicitly assuming Fed behavior that makes that happen. Either that or they have a kind of moral sylogysm working such that
Deficits are bad,
Inflation is bad
therefore
Deficits => inflation
Pandemic RECOVERY spending was inflationary. The actual spending during the pandemic wasn't because the economy was depressed, what with the 1/3 of people not working or going anywhere.
Of course, the fiscal investment in recovery was not the main driver of inflation. It's generally thought to be responsible for 2-3% of increased inflation, meaning that the supply chain was the main problem, and that the lack of an ARA would not have avoided political fallout for inflation.
Plus, the economy would have been worse along many measures. It's annoying to me how people want to keep the Biden economy while removing the things that made it successful, like the ARA and high immigration. It feeds into this "Biden made dumb mistakes" narrative that ignores that he was making real tradeoffs, and that he got quite a bit for them.
It's also a very good model of asset price inflation.
Is that kind of ok though? In that people who need that dollar spend it and get some benefit - more than the person whose bank account it ends up sitting in, even though it increases their net wealth. So in terms of dollar worth, the gap widens but in terms of resources, lifestyle etc it helps out people at the bottom more.
"kind of ok"? I mean for the people who need that dollar, it helps them short-term. But the ever-growing federal debt is an actual problem, so this isn't a permanent fix. You could imagine higher taxes at the top resolving the deficit, and then maybe yes it does work?
I think the ideal would be for the folks at the bottom to be more needed by the folks at the top, so the system balances itself. But I could not tell you how to achieve that.
"it helps them short-term" - isn't short-term in this case a period of decades?
I do take your point about deficits and it could be the more important aspect. But it doesn't really seem like this system is particularly harming workers and "kind of ok" seems fair. Over the last 20 years, the years when lower income americans were doing best were probably the years that had the most cash flooding the system, even if it didn't turn most into long term savers.
I'm genuinely unsure. I agree that short-term fixes tend to require more short-term fixes, and eventually decades have gone by without real repair.
My intuition is that the post-war period had a better balance where workers were actually needed and therefore "normal" people has better outcomes.
My other thought is about the financialization of everything, like I wonder if you used to have to actually find a use for your money versus being able to confidently park it in liquid secondary capital markets that just seem to keep going up. The money that goes into the stock market isn't exactly "doing anything", you know? And that feels like a problem.
This stuff is complex enough that I'm not certain about anything, but my first thought on your financialization point is to consider countries where there's much less of it, and I'm not sure they look too much better.
China has much less of a stock market, and instead their money just gets absorbed into a real estate bubble. In Europe I suppose you could say that their spare money gets largely taxed into government revenues?
Ideally we'd recapture a higher percentage of those dollars sitting in savings and put them back into the hands of people who need them rather than having to make new dollars to go to the people who actually need to spend them.
Maybe I don't understand inheritance tax policy, but why is it common knowledge that inheritance tax should be on the lower end?
Dynastic wealth seems like an unmitigated bad for a liberal rawlsian society. There's better grounds for fairness when people are in fact on the same starting ground. It would also encourage institution formation, as older people have marginally less use for loud consumption in cars and more incentive to philanthropy/legacy building.
I think there are important reasons to encourage this but also because I view the velocity of money as a very very rough indicator of equality at a macro level. Use it or lose it inheritance laws force more wealth through the economic system on average and allows for more market discovery. I also think people in the last years of their life are less prone to the pursuit of veblen goods as they have less time to consume them.
I remember talking with a guy who had his own plane. He said that the government picked up 40% of every trip (the estate tax is 40% on amounts subject to tax), so it was a powerful incentive for him to spend money rather than keep it invested in other assets.
Perhaps this is good (to your point about velocity and spending), perhaps it is bad due to encouraging consumption over investment. But I always thought it was an interesting perspective.
I think this mostly argues for taxing private planes at higher rates.
Congress did that in the 90s and it completely failed because rich people just bought their planes and yachts in Europe. It also killed the American yacht building industry.
Have to tax consumption and not purchase.
How? Increasing taxes on avgas hits pilots on the bottom end of general aviation flying old Cubs and Cessna 152s just as hard as the wealthier individuals flying around in their Cirrus. Taxing jet A is a whole other can of worms because it's the standard fuel in most commercial aviation.
The ultimate problem is that it's not practical to separate the student pilot scraping up enough money to train for a PPL from the wealthy individual with a million dollar private plane when it comes to consumption. They use the same fuel and the same runways. The student is often doing more flights to build time and practice. Even if you are okay with pricing normal people out of general aviation, the airline pilot pipeline in the US is set up such that pilots self fund their own training through PPL, CPL, IFR, and multi-engine ratings. Unless they're former military, airline pilots start in GA.
I agree. I wish we had a progressive consumption tax instead of an income tax.
A progressive consumption tax would be a good complement to this
As in all things, it is a balance. The more one discourages wealth transfer via estate taxes, the more likely the ultra-rich liquidate their investments as they age. Which at the margin reduces the amount of private capital available for investment and transfers it to consumption.
All depends on how one prioritizes various goals -- growth, equality, dynamism, investment, consumption, wealth concentration and the like.
"Which at the margin reduces the amount of private capital available for investment and transfers it to consumption."
In the long run the dominant effect on the economy if you don't tax inheritance is that the productive assets and capital pools get trapped with bad management/ownership by staying with the failsons/faildaughters of long dead entrepreneurs and becoming hugely underperforming assets that need to be liberated from bloodline inheritance to become productive again. Historically, these consequences have clear analogies with aristocratic concentrations of land ownership, like in latin america pre 1900s, or england pre 1800s, adam smith literally wrote about this as a huge problem for england in "the wealth of nations", large pools of land that the owners did not have the desire nor ability to manage or make productive.
I did not and would not advocate for an elimination of the estate tax. Don't know where you got that idea.
I think it is fine as-is. I'm even fine with the step-up rule with the rate at 40%. I'd also be fine with taxing any inheritance in the year received as "income", though that path is pretty complicated due to the use of trusts in estate planning.
yea not accusing you of that.
A mistake I see a bunch of people make when thinking about this stuff is treating the things billionaires own as if everything is in S and P 500 index funds and you just sell it and pay the tax and there is no other consequence on the economy. At the level of UHNWIs, theres a lot of concentrated private holdings in things like hotels, or ranches or medium size manufacturing businesses and who owns and manages the stuff really does impact economic growth.
I find this perspective confusing, economically. In general, isn't it better for the economy to have marginal resources invested rather than consumed? (To a point, obviously need some consumption, but we're well on the side of still wanting investment on the margin).
So why would it be better to extravagantly consume wealth, rather than transfer it to the next generation? The next generation is likely to keep at least some of it invested.
Is it for social status or political power reasons? Like money carries those things to an extent, and inheritors deserve them less than earners? Or are less likely to use them well?
Yes I suppose it's an empirical question, but my understanding is that the high ROIs available indicate lots of room yet for productive investment. And that over-saving was a problem in some times and places specifically because the marginal available investments were unproductive. Do you believe that is currently the case here?
"Indeed the broad strokes of economic history suggest that increased labor share of income and increased consumption do more to drive innovation than increased savings and capital formation, when it comes to leading economies."
Hard disagree. It's investment that drives scientific advancement. It's investment that drives efficiency gains.
One counterpoint is basically that it’s unnecessary. The wealth of the guy who owned the US oil market 100 years ago is almost completely dissipated, along with all of the other massively wealthy people from that era. And that didn’t happen because growth outpaced savings or inheritance taxes, but because the man has hundreds of descendants. The dynamics of multigenerational wealth inheritance are brutal, which is a major reason why most of the people we’re complaining about are newly wealthy that isn’t really reflected on in Matt’s piece.
"The wealth of the guy who owned the US oil market 100 years ago is almost completely dissipated"
This is probably the single worst example to pick for the point you're trying to make. His wealth was never split -- it is held in a trust established in 1934 -- and the Rockefellers are still the #42 richest family in America according to Forbes.
Nothing has been dissipated and certainly "almost completely" so.
Their finances and investments are largely private but my guess is simply that the family shifted from caring about growing their wealth even more to having other priorities. Rockefeller Sr gave away $500 million while he was alive. His son gave away another $500 million. A 2008 profile of David Rockefeller claimed he had donated almost $1 billion during his lifetime.
Forbes estimates the family is worth something like $15 billion and has 200 descendants. $75 million a piece is a very comfortable life, especially given the vast portfolio of paid off real estate the family owns, such as "The Rocks", the largest residential property in Washington DC.
Not to mention their affiliated charities. The Rockefeller Brothers Fund alone has an endowment of another $1.5 billion.
I agree, that’s the worst choice I could have picked. And yet, on an individual level, they’re only about the .1st percentile of wealth. At this rate, in another generation or so, it’ll be top 0.5 or 1 percent; a sixth generation and they’ll be on the level of wealthy professionals.
In retrospect I think you probably were thinking about the Vanderbilt family which is sort of known for their 1973 family reunion where none of the 120 family members were even millionaires.
https://www.earlytorise.com/how-the-worlds-richest-family-went-broke/
But even that is a bit misleading because there were rich family members who simply didn't attend. For instance, Anderson Cooper's family.
People don't have large families to dilute wealth inheritance as much anymore. A dynastic family with 2 kids after 25, who have 2 kids after, etc., can sit on the money and cover that division, barring economic crisis that hits their portfolio hard.
OK, let's go down the list of the top ten billionaires and count their children:
- 14
- 2
- 3
- 4 and 3 step-children
- 3
- 2
- 5
- 2
- 3 (does not plan to leave most of his wealth to them)
- 3
People don't plan their lives around these weird Bene Gesserit-esque schemes. If you have a problem with their wealth, it's that they have so much of it and are influencing politics right now, not that decades after we're all dead their children will be multi-trillionaires.
So one extreme outlier and people with fairly normal numbers of children will enable their offspring to be vastly wealthy and influential for many, many generations (also, with smaller numbers, when you have kids has a dramatic impact on how quickly your family tree grows, so leaving that out misses a lot). And the guy at the top show just how dangerous a single one of these nutters is.
Tax their wealth, tax their estates, tax their loopholes.
Exactly, that’s my point — an inheritance tax basically doesn’t do anything to solve the problems we’re talking about. Simply having kids later or leaving it to your younger wife can massively defer a tax bill that already pales in comparison to the 50% that comes from dividing it between two descendants. We might need a wealth tax, or to eliminate buy-borrow-die, or to get money out of politics, but an inheritance tax is basically superfluous chaff. That’s the argument against it.
Long long ago on the individual level wealth was more highly concentrated such that your median top 1%er had the large majority of their net worth in concentrated holdings like a small business they own and built themself (ex: car dealership, small accounting firm etc), productive commercial real estate holdings (family farm/ranch). Ownership of things was less “I have 5m of a and p 500 etfs in my brokerage” and more “I have a 5m partnership interest in this local business that I created that pays me 250k/year”. Selling 5m worth of s and p 500 etfs to pay a tax bill is simple and anyone can do it, selling a 40% plus interest in a farm or small business is very complicated and much more likely results in a full liquidation as there are few buyers for minority stakes in these things. The idea behind some of the structure in the tax code was that these farms and small businesses should be able to remain “in the family” from generation to generation, and that it’s better for the local small businesses or farm to remain locally owned vs selling to a large conglomerate in order to pay the tax bill. What we see now though is the heirs largely don’t want to work the farm or the accountancy and either the original owner before death or the inheritors after death sell the stuff anyway.
Yep the next generation doesn't always want to take over the family business (though I have seen plenty that do).
Also, it can be harder to make work with multiple heirs.
But either way, that should be a family decision not one forced by the tax man
The Olds might not spend on veblen goods, but they spend a LOT on medical and end-of-life care.
But in my model that's a good thing. And preventing old people with money from spending it in necessary healthcare is pretty hard... It's almost textbook price inelastic in most cases
I don't think a majority of Americans want a liberal Rawlsian society.
Majority of people don't know who Rawls is or what his main ideas are
Lol, if the point was that something has changed dramatically in the 21st century, this is grossly misleading.
1. Plenty of sources for this (eg Jorda-Schularick-Taylor macro history series). Post-war:
Long-run return on equities: Risk-free rate + ~7%
Long-run return on housing: ~5% (you need to include rental value here, not just price appreciation)
Long-run GDP growth: ~3%
The weird thing is that these kind of line up from 1995-2010. Obviously, if you plot series like these over a long horizon, you’ll see a massive divergence. (This also illustrates why it’s a terrible idea to draw conclusions about long-run returns/growth rates from short samples like this.)
Contra the post, a risk premium on equities is nothing new!
2. Are you at all familiar with the literature on time series asset pricing? I’d want to have some familiarity with the basic facts before positing a structural shift in the returns to capital in the 21st century.
You’d also find that the puzzles about returns on capital are very distinct from equity return puzzles. (Equity is a risky, levered return on capital. Of course the return on equity is higher than the return on capital, which is what Piketty studies!)
3. If stock returns were much higher than GDP growth over the past 25 years, but earnings grow at roughly the rate of GDP, what will happen to stock returns going forward?
Put differently, you have a provocative chart showing past returns. Is your expectation that the stock market will continue to return about 20%/year? If so are you levered to the hilt?
4. Risk-free bonds are a massive asset class. What has happened to the returns on these relative to GDP growth during the period you study?
5. If you’re trying to understand how individuals build wealth, clearly the housing return you’re interested in is
(House price appreciation - mortgage rate) x Leverage ratio,
not just house price appreciation.
I'm not in the weeds on this literature, but looking it up US GDP has grown by 2.0x since 2012 while S&P 500 earnings have grown 2.25x, that's not nothing!
There's a pretty coherent story you can tell about why returns to capital are growing. We see that a larger and larger share of the S&P 500 is composed of IT companies, which due to the nature of IT (especially software) can scale without as much capital or labor as other industries. This also leads them to have higher P/E ratios: because growth is easier more of it is expected in the future, which again increases their value. Now I know finance academics will say those P/E ratios will come down in the long run, but will they? Big tech seems to have demonstrated that they can keep growing at fast rates even as huge companies.
And of course, there's a real possibility that AI progress in the near future further increases returns to capital, especially if it is commoditized and/or it can replace human labor.
The other reason for the disconnect -- the earnings are worldwide but US GDP is domestic only. Growing earnings in Mexico, Europe, China, Indonesia doesn't show up in US GDP, but it does show up in S&P 500 earnings.
I'd clarify things like this. The first two points are the main things Matt confuses in his article, and then the last one is about AI.
1. Expected future equity returns aren't the same as past returns, and in fact the two tend to be inversely related in the long run. Think of the Gordon growth valuation formula:
P/D = 1/(r-g),
where P is the stock price, D is the current dividend, r is the expected return on equity, and g is dividend growth. What happens if P/D (the valuation ratio) increases much more than g (basically the consequence of the huge S&P returns of the past decade)? r (expected *future* equity returns) must come down.
2. Returns on physical capital and equity are different things, because equity is a levered, risky claim on capital. The return on capital is a combination of returns on equity + debt issued against that capital, and real interest rates have fallen a lot.
The return on capital can be measured in various ways, but it's very much not clear that the returns on capital have trended up. These authors use NIPA data to calculate returns on capital and basically find a flat trend:
https://ora.ox.ac.uk/objects/uuid:861de3fd-66e5-4d48-97d4-5864b6906348/files/s2r36v110b
3. AI is relevant to capital's share of output, but it's less clear how it'll affect the returns on capital. It'll certainly increase investment demand, but if (as Matt fears) people are worried about losing their jobs and all the wealth is accruing to a few people, savings demand could expand as well. So the net effect on rates of return isn't obvious.
I big part of this is also the Fed put (the idea that the Fed will step in whenever stocks go down)
The line going up recently is concerning because it correlates with the estate and capital gains tax codes becoming more friendly to capital and heirs. Beyond this, the risk of equities I think is meaningfully different now as a result of easy, broad diversification.
The 20% growth I think corresponds both to this, and relatedly to massive public debt increases in this time period. The fear for me at least, is that "r > g", regardless of what they are, really does mean that wealth keeps concentrating, but there is no government action on taxing r.
It’s been a while since I took finance but I learned the standard equity return is 5.5%+risk free? If it’s now considered 7%+risk free doesn’t that support the idea that returns have been higher in recent years?
The question isn't whether they have been higher in recent years, the question is whether that will continue.
Normally that answer is no (PE ratio's are quite high). AI might change things.
In the flip side of this, if you, like me, lived in a fairly low cost of living place for a while and just put money into the S&P 500- literally latte money, like 50-60 bucks a month- starting in 2004 or so you’re wealthy enough to be the people nailed by some of these tax proposals but not nearly wealthy enough to avoid the taxes ( to a point).
Some of these loopholes stay loopholes because it drives a truck into people with 2-3 million dollar net worths.
"Drives a truck" is hyperbole. You will pay slightly higher taxes on your higher net worth. It's not armageddon. I'm in the same place.
I think an electorally meaningful number of people would get hopping mad if they did something to change the taxation on something like whole life life insurance (that people are using to game FAFSA, for the record).
Like sure that’ll gore some very rich people trying to hide money, and I’m not totally opposed, but the modal person with one of those plans is probably around 350k HHI in California
"whole life insurance (that people are using to game FAFSA"
Wait, the value of whole life insurance doesn't count towards assets on FAFSA? I'm serious when I say I would have bought twice as much coverage 20 years ago if I'd known that!
Do you mean whole life insurance? AIUI term life insurance has no cash equivalent.
Yeah whole life, my bad. Edited
Thanks-- wasn't sure whether it was a lack of understanding on my part.
I am still not really hep to the ways of tax avoidance, and in a certain moral sense am okay with that, but I suppose education is never a bad thing.
I wonder if Matt knows he is cheating by starting in 2012.
$1 million in 2000 in total stock market, reinvesting dividends, after inflation in the year 2012 leaves you with ... $1 million.
Seeing how little taxes I'll pay in retirement off of investments has scandalized me. I want capital gains generally taxed like income. Index them to inflation, maybe exempt the first 5K completely and maybe the next 25K at 50%, but just add it to total income to be taxed.
Seems like most people in your position (it’s also my position) are well-shielded from capital gains tax by 401ks, IRAs, 529s, HSAs, etc. all of which are tax-free?
Not so much for college expenses though. And an advisor will tell you to avoid a 529 and get something that shields you from the financial aid office AND has tax benefits.
It’s a wild world out there.
Huh? A 529 is a super-charged Roth. Growth is tax-free, and growth over a whole childhood is substantial. Plus you can deduct contributions from state tax in a lot of states.
And what do you mean by shielding you from the financial office? YMMV but I feel like hiding assets in order to get financial aid is kind of unethical…
I think what he’s saying is that it’s better to try to hide that money from the financial aid office which a 529 very much doesn’t
I read it as that too, but wanted to make sure because that seems pretty unethical and not a good sign for society if people are advocating that openly.
I'm a broken record on this but ELIMINATE THE STEP UP BASIS AT DEATH. And while we're at it, I'm fine with pushing the estate tax to the top of the Laffer Curve. In exchange we can eliminate the gift tax. You want money for heirs? Buy life insurance or give it away while you're alive.
The variance of assets late in life is WILD. At least once a week, one of our clients who is already well-off calls in because one of their parents died and they inherited $1M. They're either in their peak earning years or already retired, and have zero plans to spend the money. Good for them, I don't resent them for this! Most of the time this is because they had a good job with a 401k they maxed out. They played their cards right. At this same time, I don't get the point of having tax policy cater to these people, whether it's in the form of making sure they can sell their non-qualified inherited assets tax free, or giving them property tax breaks as so many states want to do now. Meanwhile there are other people who keep calling in trying to take money out of their IRAs two weeks before they turn 59.5.
I love the idea of getting rid of the step up basis at death *and* getting rid of the gift tax. That would be a great way of finding out how many of these rich parents actually love their kids -- enough to give away their wealth while they're still alive rather than after they're dead and no longer care.
Yep exactly my thought. If you want to give your assets to your kids, do it while you're alive.
If you remove the gift tax, won't people just pass on most of their assets as a gift instead of inheritance?
I'm fine with eliminating step up basis, but let's combine that with inflation adjusted basis when we do.
I think that's the idea.
I have an incentive to not gift my appreciated stock to my kids while they are alive. That's nuts. I can give it to them now, with the basis, and that seems like an entirely sufficient tax break.
I also have an incentive to stay in my giant house. Between this and Prop 13 nonsense we are encouraging people to stay in places way too big for them.
As I wrote in response to JSG, removing gift taxes almost completely negates any inheritance taxes.
But when they sell the stock, they'll pay taxes on the gains. I'm at work right now so I don't have time to type out a long response, I'm just unconvinced we need to adjust basis for inflation. There are brackets within the capital gains tax. It makes sense to adjust those brackets for inflation, but not the basis itself.
If there is a set formula established by the SEC that dictates how to adjust the basis, seems like it would be pretty simple to do now. Especially with the rule changes requiring firms to track basis now, they could probably do that pretty easily for most clients.
What would you say is the big objection to doing so?
As for paying taxes on the gains when they sell, why would billionaire inheritors sell the bulk of their inheritance? Let's say they inherited 10 billion dollars. They could sell 1 billion, live on that for their entire life. The remaining 9 billion dollars continued to grow without ever being sold until its inherited by their kids who sell $5 billion out of the $50 billion that the 9 turned into.
I'm pretty much cool with people giving away assets while they're alive.
I don't think we should adjust basis for inflation, that's (hopefully) already factored in when the assets are purchased. Also, that would kick off a bunch of gaming the refs for your preferred calculation of inflation.
My problem with not adjusting for inflation is that if your parents bought a stock for $20 in 2000 and you now inherit it with a current price of $30, you have to pay taxes on that $10 gain with inheritance taxes. However, in *real* dollars, the investment was a loss! So you are forcing people to pay taxes when they lost money for investing. Its bad enough when you that happens to people when they are alive, but at least they have a choice not to sell yet and hope it appreciates more. If we apply inherited taxes to such an investment, there is not option to way to sell.
As for what preferred measurement of inflation, I'm fine with using CPI or some other government set method for this calculation even if its not completely accurate.
I think gifting can gamed. I setup a trust for my kids with them as the beneficial owners while I maintain control. Shift more and more assets over to that trust every year. If I do this with 90% of my assets, I could avoid almost all inheritance taxes.
I just remain unconvinced we need to adjust basis for inflation. We don't do this with pretty much any other part of the tax code. Fwiw, I favor relying more heavily on consumption taxes anyways, so ideally you'd just pay your taxes at the point at which you spend the money, regardless of your gain or loss on what you sold. But yeah I think we'll just agree to disagree there.
As for gifting assets, yeah I think we should encourage aging owners of capital to pass the baton earlier and it seems fine to me if they choose to.
Aren’t the big social entitlements (social security, Medicare etc) indexed to inflation? 401k limits are, there is plenty of stuff indexed to inflation.
The big revenue generator for most governments are income taxes which are inflation adjusted! We already accommodate that some with capital gains taxes being lower than income taxes. We could/should reduce that difference if we adjust for inflation.
I'm a really strong proponent of inheritance taxes so the idea that we negate them by allowing gifting to avoid them seems bad.
As for consumption taxes, I'm a big proponent of not having "one tax to rule them all" but instead multiple reasonable/moderate taxes. That makes it harder to game the system IMO. For example, to replace income taxes, you would need consumption taxes probably at the 30-40% level. That seems incredibly high and likely to lead to enormous efforts to avoid.
Lots of thoughts:
- If you are a someone that was 55 in 2012 chances are that you'd have a standard 40/60 portfolio, which is appropriate for the age, and it did not 6x over the past 13 years as a result. Part of the issue here is that the richer you are the less you need to dedicate to bonds as insurance for a falling stock market, and the more you can capture from equity's gains.
- If you look at valuation metrics (like Shiller PE https://www.multpl.com/shiller-pe) you can roughly see a regime shift happening at around 1990. The most convincing explanation I find is that this is the advent of globalization and the stock market went from tracking the US's growth to the world economy's growth as the top US economies all became multinationals. Which also explains the divergence with US salaries. Tech stocks, the most valuable subset, get 3/5 of their revenues from outside the US.
- Picking 2012 as the starting point and making these observations in 2026 feels a bit like picking a bottom and then yelling "wow assets are high" near the top of a bubble. Let's see where we are in 3-4 years.
- Not a single sentence about QE in a post about asset prices exploding since 2010?
Regarding point 1, you're missing how people actually behave. I was 58 in 2012 and was probably 70/30 (I don't remember exactly). In the back of my mind I kept reminding myself that I needed to rebalance soon and, being a human being, I kept procrastinating and didn't do so year after year. As a result, I did very well in my retirement account! Only in the past few years, noticing that the stock market has been kind to me, I finally decided to cash in my winnings and move money into safer harbors.
The key to smart investing I've found is to not have the stock market crash on you while you're not paying attention. (Please buy my book.)
A lot of people have target date funds now that auto rebalance.
I can name one who didn't.
70/30 is an appropriate ratio for age 58.
Vangaurd's 2030 retirement fund is 60/39/1 stocks/bonds/cash. 2035 is 68/32.
Has anyone had a 60/40 portfolio for generations? Ever since interest rates fell off after the GFC I think it’s been generally understood that owning bonds is stupid and most bondholders are institutional investors who legally have to own bonds.
Claiming this is about globalization ignores the fact that other countries’ stock markets have not gone up nearly as much. The story is largely about extraordinarily high margins for US companies.
Owning bonds is "stupid", unless you're 10 years away from retirement and want insurance against a stock market downturn preventing you from extending your retirement date. You'd be surprised! A lot (most?) of people's IRAs these days are invested in fairly simple target date securities which follow pretty basic rules about asset allocation.
Why would other country's stocks go up if US companies get a portion of those shares and if foreign companies prefer to list in the US rather than at their relatively tiny exchanges instead?
Bond funds were dumb to own when we were in a ZIRP market.
Bonds did poorly when stocks did poorly in 2020 and 2022 but that was the particular situation. Bonds are weakly but positively correlated with stocks. You don't want something anti-correlated with stocks, because that's just shorting the market. You want something as uncorrelated as possible, so if stocks go down your other thing has a decent chance of not.
It’s always seemed strange to me that income you get from working is the most heavily taxed whereas there seem to be lots of way to dodge inheritance taxes.
IMO it would be better if we taxed inheritances more so people started out on a more level playing field.
But there are two family farms in the nation that would suffer so we can't do that, I'm sorry, I don't make the rules.
Most people receiving inheritances today are people in their 60s whose elderly relatives have died, it isn't that relevant to leveling the playing field
Knowing you'll eventually get that inheritance affects your financial decisions in your 30s, 40s, and 50s. Speaking from experience. I don't have to worry as much about having a super high emergency fund. I know if things got really bad my parents would give me some money and deduct it from my future inheritance, for example.
Because income bears some theoretical relationship to your use rate of government services. Estate taxes should not exist at all.
My income tax rate is far in excess of my use of government services.
Yes, that's a problem that can occur, although bear in mind that (i) there's debt service and (ii) abstract services like national defense that your income taxes are paying for too. That said, government services should be converted maximally to direct fee-based payments by users and income tax rates adjusted downward to the greatest extent possible.
Why shouldn’t inheritors pay a user service fee for national defense?
Because that's already being paid for through income tax.
If it was also paid by inheritance tax the income tax to pay for it could be lower
I think that it is under appreciated how the money flows have led to much of the wealth increase. The rise of the 401K vs pensions and the changes to 401K auto enrollment have created a continuous spring of money going into the stock market. (Ray Dalio taught me the analysis of the numerous possible movers to the actual price of stocks.) So much of the current wealth that is out there is sitting on top of self inflated prices. For instance Walmart is floating around a 40 PE, where it has been historically been around 20. The current stock market pricing is based on recency bias vs. anything resembling future earnings.
One thing pushing up valuations is just a savings glut. The population is getting older and will soon be shrinking; that’s fewer people buying diapers and cocaine and more people bidding up securities.
No, no, this time it's different don't you see.
Dow 360,000!
“ For instance Walmart is floating around a 40 PE, where it has been historically been around 20”
Because it has transitioned to a tech stock and has successfully negotiated logistical advantages (their stores) better than Amazon has the ability to do.
And no - Walmart is not a technology company.
Tech stocks are usually those that are trading overall growth for current earnings and have great unit economics and are primarily selling a technology product. And are priced at a P/E equal to their growth rate. So using that metric Walmart should be growing by 40% a year, which would be feat. But its growth rate is 5.5%, which is great for a company that size.
But your comment really shows how everyone is taking the recent price as a meaningful measure of its intrinsic value. The lack of a real stock downturn for 20 years has warped everyone's perception. And the lack of a good alternative place to invest is stopping the needed reevaluation of stock prices.
Their profits (in contrast to revenue) have grown an average of 17% for several years in a row. Probably not a 40 PE but not nothing, either.
But supposing you're correct, this still means that the rich really have been getting much richer in the past decade, and there's nothing in the immediate term that looks like it will change that, so that doesn't seem to contradict Matt's overall point.
This gets hard because AI is making things very uncertain. But absent that I would say the chances of a significant correction within the next 5 years are really good.
As Miles has already mentioned, I imagine that this is in significant part* a function of the massive federal budget deficits we've been running since the global financial crisis. I'm no economist, but it strikes me as obvious that those deficits did (and do) two things:
1) They pushed a massive amount of liquidity into the economy, which is going to result in inflation because a lot more money is chasing supply. That inflation is going to go into prices of some sort. We all hate it when it goes into consumer prices, but a lot of people love it when it goes into asset prices. You focused on the stock market but all that liquidity also went into housing prices in places where a lot of people wanted to live.
2) All that stimulus drove a lot more economic growth than in most of the rest of the rich world. That (and other things, like rising global instability) attracted a lot of foreign money into the US dollar, which was very helpful because it financed those insane deficits without us having to pay very high interest rates.
The fraught policy question in the counterfactual is this: Had we run much smaller deficits since 2008, would the adverse effect on the incomes of ordinary Americans have been even worse than the inequality driven by all that deficit spending? We may learn the answer to that question at the point in the future when it becomes much more expensive to finance our deficits.
*No doubt smarter people than me will point out that various aspects of our economy have become "winner take all," because of network effects and the ability to tap into a global market for many services, including software, finance, and so forth. No doubt that has driven a certain amount of wealth inequality as well, but I think that the huge surge in Walmart stock value is evidence that sheer liquidity is behind a lot of it.
Remember, the deficits were specifically creted by reducing collections from high income people. We created a assive drag on economic growth so high income peopel can accumulate wealth at low or zero tax rates. Reducing the estate tax, and the step up of capital gains are not an accident.
I don't believe the facts bear that out. I believe that spending on the GWOT, to deal with the GFC, pandemic relief/subsidies, and the rapidly rising entitlements because of the aging of the population overwhelm the effects of tax cuts.
Good point. I was thinkit about relaively recent policy decisions. The “miscalculation” of social incurance formulae goes back to the ‘80’s. And the cuts (except of corporate raes) were bad whatever the % contribution. My VAT+prgressive consumption tax undows the damage whenever it occurred.
"Remember, the deficits were specifically creted by reducing collections from high income people."
except federal revenue as a percentage of GDP is up
https://fred.stlouisfed.org/series/FYFRGDA188S
Sorry. Its a professional quirk to discus policy as cheteris paribus. :) The changes in tax law compared to not changing them reduced collections. We were never anywhere near the “pay for themselves” part of the Laffer curve.
I agree we aren't there now. I think in the 80's when we first started discussing the Laffer Curve we might well have been.
The interesting thing to me is looking back over the last 60 years and seeing how steady revenue as a percent of GDP has been despite large changes in marginal tax rates over the years.
Either way, I think the only way we get a handle on the deficits is bipartisanship. Which will mean tax increases paired with spending cuts (in particular entitlements)
I agree. W may disagree about which party is more in the wrong but neither is right.
It probably would have been quite bad to not have run deficits in the immediate aftermath of 2008. In fact, deficits probably should have been even higher than they were.
I do think an interesting question though, is what would have happened if Trump hadn't increased the deficit in his first term, and if we had brought the deficit back to 2015 levels post-covid? (Remember that Obama had actually cut the deficit significantly by 2015/2016.) That's plausibly a better world for the average person.
Yes it would be interesting to read an article 20 years in the future talking about this period of calamitous deficits (at the expense of revenue from normal taxes and ridiculous stimulus spending, among other wastes of money. I mean what do we have to show for near $40 trillion in unfunded liabilities? The Japanese are even worse off but at least they have a ton of public infrastructure/transportation efficiency to show for it).
Well, we blew up some ayatollahs, so... yay?
A lot of our "self-made" plutocrats came from pretty privileged backgrounds, to boot. Warren Buffett is the son of a Congressman. Bill Gates's father was an elite Seattle lawyer. Zuckerberg is the son of a dentist-doctor couple who raised him in one of the country's richest counties before sending him to Phillips and Harvard. Growing up, Jeff Bezos used to spend summers on his grandfather's 25,000 acre ranch (he then went to Princeton). And so on.
I'm glad America's economy is unequaled as a dynamic engine of innovation and creator of great wealth. It's a genuinely precious national asset. But the rags to riches thing has always been something of a myth (not impossible, obviously, but comparatively rare): the US has a really weak record on this score among high income countries.
https://en.wikipedia.org/wiki/Socioeconomic_mobility_in_the_United_States
It’s true that these are mostly not “rags to riches” stories, successful founders are generally from comfortable backgrounds with educated professional parents. But there’s still an obvious distinction between founding a company and inheriting a fortune.
I always find these international mobility comparison studies to be really weak. They don't do a good job of accounting for migration, either of immigrants or emigrants. They also tend to measure everything on a quintile basis, without accounting for how different the spreads between quintiles are in various countries. It's all apples-to-oranges.
That is particularly problematic when the measure of mobility is the chance of moving from the bottom quintitle to the top. Eg: I once struck up a conversation with a student at a cafe in Berkeley. He was from France, but of Vietnamese ancestry; his parents were "Boat People." https://en.wikipedia.org/wiki/Vietnamese_boat_people
I had many former students whose parents had similarity fled Vietnam and who had gone on to attend Cal. Suppose one of them majored in Accounting (as did the student I met) and got a job paying $120K. Suppose the student I met did the same, but worked in France. I am pretty sure that would put him in the top quintile in France, while my former student would not be. But both experienced the same life improvement.
It’d put him in the top quintile in France and he’d make half of what the guy in the U.S. does gross, let alone after taxes
What is the argument that it is impossible or even hard for a rags to riches story to happen ?
It is impossible to tell without a massive RCT. Lots of people who fled the Soviet Union or the Nazis made billions after having lost everything (often having had successful grandparents).
In a meritocratic society talented people will rise up which means the parents of extremely talented people are likely to have had somewhat talented parents who could get good jobs.
He didn't say it's 'impossible', he said it's 'something of a myth', ie it happens less frequently and/or as a share of very wealthy people than you would expect from the popular discourse. 'Or even very hard', well I think it's safe to say that it's 'very hard' for anyone, including very wealthy people, to end up amongst the very richest in the world (unless they are heirs), even if they started with big advantages in life.
>the US has a really weak record on this score
As is often the case with economic statistics, that might not be true outside of the South:
https://opportunityinsights.org/wp-content/uploads/2025/08/OpportunityAtlas_DataToolSummary.pdf
I listened to a How I Built This podcast with the founder of Starbucks- he mentioned that when he got into early legal trouble with one of his investors, he hired Bill Gates' dad as his attorney, because he was the most feared attorney in Seatle
Yeah, I used to live down the road from the private school Bill Gates went too in Seattle (wasn't really a high income area, just the luck of it being a somewhat old school placed in what was the outskirts of Seattle in 1919 that was the deeply suburban part of Seattle by the early 2010s.
You could tell when it was some big event because all of the sudden, it looked like a high end luxury vehicle dealer in parking on the side of the road near the school.
Two thoughts:
1. I think it would be worth thinking through how these incentives impact "normal" workers at the beginning of their career. It seems to me like building savings/investment as early as possible is much more important and that having children in your 20s is therefore much more costly.
2. My understanding is that stocks have shifted away from dividends and towards share buy-backs as a method of distributing profits over time. To what extent is that exaggerating the change here? There are probably more sophisticated ways to determine the net return on owning stocks.
Completely accidentally and through blind luck I put about $600 or so into index funds a month starting in 2009. This is separate from retirement funds. My rent was about $400 for a room in a college town. This has gotten LARGE.
Similar stories to friends who had decent jobs at their high schools and parents who put the money into like a Fidelity or Schwab account. A couple grand in a summer has turned into a… fucking massive amount of money. Let alone if they messed with bitcoin after hearing about it on Reddit or something.
The same engine driving this decoupling of the UHNW has also led the median college educated millennial with bog standard investments to shrug at their job being disappeared. I mean, I sure could, and most of my friends could probably survive a couple years only on the savings we started tucking away right after college during the Great Recession.
Yeah I had a decently lucrative internship for two summers at the beginning of grad school (2004&2005), and my now wife and I lived together in a 1 bedroom apartment so I didn't need the extra money and invested most of it. That's been very good for me.
I think the amount of money necessary as a starting point to be a beneficiary of this is such that it doesn't create any incentive for regular people at all. We're mostly just bystanders.
It doesn't take all that much for someone to reap substantial benefits in the long run.
It doesn't but I think at that age most people don't have even that. Or at least I didn't. But possible I'm just projecting here.
At what age? You said, "it doesn't create any incentive for regular people at all. We're mostly just bystanders." But now you seem to be making a much, much narrower claim.
I was responding mainly to JM's #1 which I read as being specifically about what you should be doing when just starting out/in your 20s.
Of course it's a good idea to invest if you can generally and/or once you have established yourself in the upper middle class specifically, including as a high earning W2. That's still nothing remotely like what's going on in the chart though, where people are turning singular or a handful of big earning events few will experience into truly massive wealth (millions into many billions, etc.).
Well, of course most people cannot earn truly massive wealth. But, again, that was not your original claim. Regular people simply are not "mostly just bystanders" to the stock market's rise.
I'm thinking about the decision to have a child around 25 or around 35. Having even just one kid can mean a bigger house and daycare adding up to 30k+ per year.
High market returns means 30k invested now is worth maybe 70k in ten years. I think that might be a factor delaying kids for people in their 20s.
I totally hear you. But how many ~25 year olds have 30k to invest?
My first thought reading this was “wow we don’t tax capital gains nearly enough and we should have some sort of trading tax”.
To be clear, I’m not advocating taxing unrealized gains (although designed right I don’t know why it couldn’t be much different than a property tax but discussion for another day). But just noting that based on this huge jump in stock appreciation you should be able to increase the capital gains tax to 90s levels (indeed it’s hard to look at the capital gains tax rates from this era as any serious headwinds against economic and stock growth). Furthermore, given the huge ROI with tech, a small tax to make a stock purchase seems a pittance. Honestly, how would this be much different than a sales tax?
Matt has been correctly noting we need to address rising deficits. It seems to me the two taxes I’m proposing (are proposing increasing) has pretty small deadweight loss. Especially if we consider that increasing tax revenue should bring down the deficit and therefore bring down interest rates…which should also lead to even further stock appreciation.
One last thing. I think we underrate the political backlash to the tech brows brewing. People HATE data centers. You can say all you want people are being unreasonable but just ignoring Normies for being dumb would be a category error. Add in that all these tech titans keep saying how massive unemployment is coming with AI, if you don’t find someway to “smooth” the transition to an AI world and find someway to distribute the “winnings” of stock/tech/AI growth, the political backlash is going to be quite ferocious.
Yes, that was my first thought. We know how zoning and property taxes distorte the housing and rental market in the USA. How can super low capital gains taxes NOT support these trends?
It also raises an important question of what an economy is FOR and whether all this speed and emphasis on liquidity are distorting the market. I'm no communist, and a free market has proven itself to work. But there used to be this aphorism - "Day trading is gambling, swing trading is speculation, long-term ownership is investing." Why is there such a disconnect between the well being of companies and the well being of regular people?
"Add in that all these tech titans keep saying how massive unemployment is coming with AI, if you don’t find someway to “smooth” the transition to an AI world and find someway to distribute the “winnings” of stock/tech/AI growth, the political backlash is going to be quite ferocious."
It's not great that the major tech figures, rather than advocating for the above, are building self-sustaining fallout shelters on private islands.
An AI tax would at least put a little friction in the bubble and at best pre distribute coming productivity gains.
If by 90s levels you mean 1981-1996, the capital gains tax rate was 28%, as far as I can tell.
It's currently 23.8% for top income brackets.
Lower, yes, but not exactly a lot lower...
That's a LOT lower than ordinary rates! That tax differential compounds to a massive difference if you take a too earner who only pays cap gains rates versus one who worked for the income.
I get the argument for higher capital gains taxes, but what relevance does a trading tax have to this discussion?
Given that I think day trading is not particularly economic useful (as opposed to medium to long term investments), my case is the deadweight economic harm is likely low. And given that based on Matt's post, we really need to consider that there needs to be some way for the public at large to capture the enormous gains accruing to the few, this seems one of the less economically harmful ways of doing it. It's no panacea by any means but it's something.
Now here's maybe my hot take. Are we sure it's so bad for the government to take equity stakes in companies like NVIDIA? I mean the methodology and the way the Trump administration is going about taking these stakes is just horribly corrupt. Besides the disgustingness of the mafia style tactics used, are we really sure where that money generated by the equity stakes are going? But a way less corrupt process for the US government to capture the gains from stock appreciation? One where US citizens can be given a "dividend" based on stock performance like happens in Alaska? In theory, I'm not sure how against this I am. I know, I know devil in the details; how do you avoid a situation where the US government continuously intervenes to prop up NVIDIA in say 25 years when it's no longer cutting edge and is the future version of the Big 3 car makers today. But the Obama administration bailed out the Big 3, took a stake and then really did sell at a profit. Again, questions asked why the Big 3 are bailed out but not other firms. But point is we have a recent example of this turning out...kind of well.
I think the arguments for a trading tax are pretty weak overall, but specifically to the underlying question - the people who have this immense wealth aren't trading such that a trading tax would impact them!
I think the better argument is to have companies pay tax on their profits and those who get dividends pay tax on the cash they receive. Holding equity positions does little to raise actual revenue for the government unless its sold. Which if it does in a meaningful way will cause downward pressure on what it sells. Beyond that, holding equities means that the government gets involved in voting for company positions, whose on boards, etc. all of which I think are too likely to become incredibly politicized. You already see this with with what Trump has been doing with IBM, TikTok, etc. from a corruption side, but Biden's everything bagel progressivism being pushed into company decisions would also be corrosive.
“We keep seeing efforts to kind of redefine the billionaire situation to make it seem like they’re paying unusually low tax rates when they actually aren’t.”
This is such a silly statement. No one is a billionaire because of W2 income. When you consider that much of a billionaire’s income is dividends or capital gains, they are paying an unusually low tax rate.
We can debate whether this is good or bad but shouldn’t pretend it’s not true!
Hey, I read Piketty's book (the first one anyway)! I think what the pure economic analysis doesn't capture, and what Matt alluded to here, is the social-political impact of this trend. In my view, this is a least partially responsible for the feeling of unfairness that both Trump and say Bernie have tapped into.
One important thing to note: the US having it's richest people have new fortunes, and the US having relatively low tax rates on the top 10% of incomes, are probably closely related. One long-term feature of a tax structure like the US is that the wealthiest positions in society turn over. A lot of advocacy for changes in the estate tax seems to be funded by older fortunes - it's often worth thinking "is this intended to preserve the relative wealth of the Rockefellers and Mellons?" when looking at proposed tax policy.
Doesn't Matt say that the US does NOT have relatively low tax rates on top earners?
Not on the very top, but on the 110% to 880% earners I believe it does.
It looks like the lower bound of the top 10 percent is $345K https://fred.stlouisfed.org/series/CXUINCBEFTXLB1511M which is about 800% of the median. https://fred.stlouisfed.org/series/MEPAINUSA646N
So, maybe the top 9% or so are taxed the same, rather than the top 10%?
I attempted to figure out which "average" MY is using, since US top bracket starts at $768k for married filers. I'm guessing that the comparison is to median FAMILY income, which is $105.8k as of 2024.
I suspect, but don't know, that the lower tax rates on incomes from $150k to $750k, relative to Europe, give a significantly higher chance of people being in position to grow wealth to the point where there is some churn at the top.