August 2020Some politicians are proposing to introduce wealth taxes in additionto income and capital gains taxes. Let's try modeling the effects of various levelsof wealth tax to see what they would mean in practice for a startupfounder.Suppose you start a successful startup in your twenties, and thenlive for another 60 years. How much of your stock will a wealth taxconsume?If the wealth tax applies to all your assets, it's easy tocalculate its effect. A wealth tax of 1% means you get to keep99% of your stock each year. After 60 years the proportionof stock you'll have left will be .99^60, or .547. So astraight 1% wealth tax means the government will over thecourse of your life take 45% of your stock.(Losing shares does not, obviously, mean becoming netpoorer unless the value per share is increasing by less than the wealth tax rate.)Here's how much stock the government would take over 60years at various levels of wealth tax:wealth taxgovernment takes0.1%6%0.5%26%1.0%45%2.0%70%3.0%84%4.0%91%5.0%95%A wealth tax will usually have a threshold at which it starts.How much difference would a high threshold make? To model that,we need to make some assumptions about the initial value ofyour stock and the growth rate.Suppose your stock is initiallyworth $2 million, and the company's trajectory is as follows:the value of your stock grows 3x for 2 years, then 2x for 2 years,then 50% for 2 years, afterwhich you just get a typical public company growth rate,which we'll call 8%. [1]Suppose the wealth tax threshold is$50 million. How much stock does the government take now?wealth taxgovernment takes0.1%5%0.5%23%1.0%41%2.0%65%3.0%79%4.0%88%5.0%93%It may at first seem surprising that such apparently small tax ratesproduce such dramatic effects. A 2% wealth tax with a $50 millionthreshold takes about two thirds of a successful founder's stock.The reason wealth taxes have such dramatic effects is that they'reapplied over and over to the same money. Income taxhappens every year, but only to that year's income. Whereas if youlive for 60 years after acquiring some asset, a wealth tax will taxthat same asset 60 times. A wealth tax compounds.Note[1]In practice, eventually some of this 8% would come in the form of dividends, which are taxed as income at issue, so this model actuallyrepresents the most optimistic case for the founder.
