Paul Graham wrote an article about wealth tax. In the article he ‘models’ the effect of a wealth tax on the fortune of a person. His assumption for the modeling is a person who earned a lot of money with a startup in her 20s. Paul Graham shows how much of the earned stocks/money would be taken by the government by a wealth tax.

Paul Graham comes to the conclusion that wealth taxes have “dramatic effects” and that “even a .5% wealth tax would start to keep founders away from a state or country that imposed it.”

I think this conclusion is wrong. His model assumes that the earned money just lies on a big pile and is not used for 60 years. A more reasonable model would include interest being earn with the money. For this I will use an extended model:

(growth * (1-wealth_tax)^years

If we assume a reasonable return of investment of 2% per year the number shifts dramatically. Instead of “losing” 25% at 0.5% wealth tax you end up with 242% of your original value after 60 years. Even a wealth tax of 3% would only half your wealth.

Wealth Tax Graham Model With 2% Interest
0.10% 94.17% 308.99%
0.50% 74.03% 242.88%
1.00% 54.72% 179.52%
2.00% 29.76% 97.63%
3.00% 16.08% 52.76%
4.00% 8.64% 28.33%
5.00% 4.61% 15.12%

Paul Graham’s article also misses to mention that a wealth tax only affect people with ALOT of money. Elizabeth Warren’s “Ultra-Millionaire Tax” would only tax assets over $50 million. Once you are affected by a wealth tax you have enough money to live a luxurious life (and your children will probably never have to work to live). Most startup founders never reach this amount of wealth.

As this tax only targets the super rich let’s look at the effect this tax would have on Jeff Bezos (data source: Wikipedia):

Effect of Wealth Tax on Jeff Bezos

Even a high wealth tax of 5% leaves Bezos the majority of his wealth. If Bezos stopped earning new wealth in 2018 he could bequeath $30 billion to his children in 2080 with a 2% wealth tax. With a 5% wealth tax his children would still inherit over $4 billion!

The questions I’m asking myself when thinking about a wealth tax are the following:

  • Should a person have virtually unlimited resources for the rest of her life, just because she had a clever idea in her 20s?
  • Should children have virtually unlimited resources for the rest of their lives, just because one of their parents had a clever idea in her 20s?
  • Should grandchildren have virtually unlimited resources for the rest of their lives, just because one of their grandparents had a clever idea in her 20s?