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.
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.
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.
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.
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.
>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'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.
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.
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.
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.
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 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 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.
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?
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.
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.
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.
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.
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.
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 feed 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.
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
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 would be much more sanguine about this if the biggest winners were the owners of Amazon, Tesla, Microsoft, and a bunch of world-changing hard-tech, new manufacturing, and biosciences firms that were making life better for everyone.
Instead some of the most famous winners other than the three above have created... (checks notes)... digital crack, digital meth, decaying empty office space, omnipresent casino-on-phone...
No one here is going to agree with this, but the point of regulating markets/capitalism is to regulate for moral behavior. In the sense that we can make it so only things that are actually good for society are profitable. IDGAF about libertarian objections to this notion when 20% of Zoomer men are going to die rotting on a couch smoking high-potency weed and staring at a 19-leg parlay bet on which they placed the last $3.50 in their account.
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.
So how do you think society functions with a small batch of people who are vastly wealthier than everyone else?
Like it seems like we are just going to replicate medieval Europe with a small batch of feudal lords who own or could buy vast assets with the slight difference that there is an infinitesimal chance someone could found a unicorn start up and enter into this nobility.
Like aristocrats are generally something which good public policy should seek to minimize and avoid. The estate tax is not so much about revenue, but to prevent the rapid growth of a hereditarily wealthy subset of society.
The situation may be bad, or it may not be, but what it definitely isn’t is comparable to feudal Europe.
In feudal Europe, being a rich aristocrat gave you the ability to deploy large numbers of hairy men to kill people. Even then it wasn’t just wealth doing the worth—military and therefore political power was also mediated by a complicated system of reciprocal obligations and rights (including direct personal military service in many cases) and religious structures. Late Republican Rome is a better example where you got a pretty pure money = power situation, where the richest men in Rome all had giant private armies they used to seize the state.
Today we live in a world of powerful and well developed states, the institutions of which actually control the power that matters—hairy murder blokes.
Ask the billionaires in China or the oligarchs in Russia how much a bunch of money untethered from force of arms protects you.
Rich people definitely have more influence than poor people, but we are talking about their ability to buy more ads or media platforms to influence elections. That’s not the same thing as direct rule by the richest and their private armies by a long shot.
"Today we live in a world of powerful and well developed states, the institutions of which actually control the power that matters—hairy murder blokes."
The point is, exactly how long can that prevail under present circumstances?
I'm not confident the answer is "it cannot," but I am also not at all certain the answer is "indefinitely," which is obviously the answer we want.
Elon is on track to have like 200 kids. We should encourage all billionaires to do this and dilute their heirs' political influence. Billionaires having less than a dozen kids should be shunned from society.
- 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?
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
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.
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.
And that paying the estate tax is a middle class concern.
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.
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.
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.
>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'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.
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.
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.
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.
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.
You heirs sell and the step-up basis ensures they pay nothing.
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 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 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.
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?
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
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.
Encouraging extravagant consumption is almost certainly better than encouraging the intergenerational transmission of large sums of unearned wealth.
I think this mostly argues for taxing private planes at higher rates.
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.
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.
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.
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
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 feed 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.
>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
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
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.
I would be much more sanguine about this if the biggest winners were the owners of Amazon, Tesla, Microsoft, and a bunch of world-changing hard-tech, new manufacturing, and biosciences firms that were making life better for everyone.
Instead some of the most famous winners other than the three above have created... (checks notes)... digital crack, digital meth, decaying empty office space, omnipresent casino-on-phone...
No one here is going to agree with this, but the point of regulating markets/capitalism is to regulate for moral behavior. In the sense that we can make it so only things that are actually good for society are profitable. IDGAF about libertarian objections to this notion when 20% of Zoomer men are going to die rotting on a couch smoking high-potency weed and staring at a 19-leg parlay bet on which they placed the last $3.50 in their account.
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.
So how do you think society functions with a small batch of people who are vastly wealthier than everyone else?
Like it seems like we are just going to replicate medieval Europe with a small batch of feudal lords who own or could buy vast assets with the slight difference that there is an infinitesimal chance someone could found a unicorn start up and enter into this nobility.
Like aristocrats are generally something which good public policy should seek to minimize and avoid. The estate tax is not so much about revenue, but to prevent the rapid growth of a hereditarily wealthy subset of society.
The situation may be bad, or it may not be, but what it definitely isn’t is comparable to feudal Europe.
In feudal Europe, being a rich aristocrat gave you the ability to deploy large numbers of hairy men to kill people. Even then it wasn’t just wealth doing the worth—military and therefore political power was also mediated by a complicated system of reciprocal obligations and rights (including direct personal military service in many cases) and religious structures. Late Republican Rome is a better example where you got a pretty pure money = power situation, where the richest men in Rome all had giant private armies they used to seize the state.
Today we live in a world of powerful and well developed states, the institutions of which actually control the power that matters—hairy murder blokes.
Ask the billionaires in China or the oligarchs in Russia how much a bunch of money untethered from force of arms protects you.
Rich people definitely have more influence than poor people, but we are talking about their ability to buy more ads or media platforms to influence elections. That’s not the same thing as direct rule by the richest and their private armies by a long shot.
I'm reminded of Marcus Crassus' (co-triumvir of Caesar) boast "No one should be considered rich unless they can fund an army from their own income"
"Today we live in a world of powerful and well developed states, the institutions of which actually control the power that matters—hairy murder blokes."
The point is, exactly how long can that prevail under present circumstances?
I'm not confident the answer is "it cannot," but I am also not at all certain the answer is "indefinitely," which is obviously the answer we want.
Our institutions are famously doing really well right now so nothing to see here.
This is mostly true now. There's nothing cast in stone to make it so in the future.
Elon is on track to have like 200 kids. We should encourage all billionaires to do this and dilute their heirs' political influence. Billionaires having less than a dozen kids should be shunned from society.
Gonna be a tougher sell for the lady billionaires.
Should the last sentence be "has raced ahead" instead of "is racing ahead?"
In other words is there a reason to think this is the new normal? Or could it go into reverse in the next decade?
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?
Matt’s not appreciating enough that billionaires are replacing real discretionary income with loans against their stock holdings.
I think it’s plenty fair to subject these sorts of loans to progressive income taxation.