Comment by coryfklein | Hacker News Reader

Comment by coryfklein | Hacker News Reader

Graham does the classic magician's trick of showing you something shiny so you don't see what he's doing with his other hand.

In this case, the shiny is the scary 45% figure. What he draws your attention away from is the bizarre hypothetical:

> Suppose you start a successful startup in your twenties, and then live for another 60 years. How much of your stock will a wealth tax consume?

Who is this hypothetical 20 year old that becomes indepedently wealthy, and then doesn't work for the rest of her life? And despite being so wealthy, she opts to pay 100% of her taxes by liquidating her stock rather than out of her salary or investment dividends?

Even if we go with Graham's strange hypothetical, oh booh-hooh, this lucky individual can retire in their 20's and dies richer than 99% of the rest of us. But in reality the hypothetical looks more like this:

1. Very lucky 20-something makes it big and now owns $50M of stock in her company

2. She gets $1M per year in dividends, $1M per year in salary, and her stock increases in value by $5M per year (5% annual growth)

3. The first year she pays $1M on a 1% wealth tax, and her net worth increases by $6M. Similar math in following years.

4. She retires sipping martinis on a private island in Florida

This.

The author is playing the typical Rich man's game. Oh woe is me, look at these poor people who this tax will destroy!

The fact that so many people here are defending them, is maddening and disheartening. Arguing that anyone with a value of over 50mm can't pay a higher tax rate on those funds is disengenous at best.

I find PG interesting to follow on Twitter in that I don't always agree at first with what he says, but it can lead me to investigate and confirm or adjust my position. But on these topics I often get the vibe that he's leaking personal concerns.

Maybe it's not purely selfish but the idea that he's looking out for his cohorts of young motivated founders, yet even that feels off. I doubt many start a business desperate for tens of millions; I'd guess the primary motivations are control of work schedule and basic FU money.

It's easy to dream up scenarios that prove your point. How about this one:

Company has a bad year. Dividends are cut to zero. Founder reduces salary to bare minimum required for her expenses. On paper, she still has $50 million net worth of illiquid non-public stock. Government demands $200,000 wealth tax. How does that play out?

If you can't sell it, it isn't worth $50 million.

But try telling that to the California state government when they come to collect their 0.4% wealth tax.

A $50M company that gives $1M in dividends is worth $49M. It would need ~12% growth to be worth $55M. A company deciding to issue dividends does not change the net worth of any shareholder (it can actually have a negative effect due to tax inefficiency).

So to your example: A $50M company grows 5% a year. Lucky 20-something holds a stock+dividend value of $52.5M before tax at year's end. Of her $1M salary, ~$330k goes to federal income taxes, another $30k to FICA. Too bad she's in California, that's another $100k in state income taxes.

Still, she has ~$540K left over in liquid income. Perhaps she can use this to pay off her $500K wealth tax liability and keep full company ownership if she lives modestly.

Next year presents a bigger challenge. Lucky 20-something's company has grown in value by 5%, and so too has her wealth tax burden. However, her salary needs to grow by ~7% to account for income taxes (and a higher growth rate would have made this worse). This is clearly unsustainable and she will need to sell some company shares before her exponentially growing salary eclipses the value of the whole company!

She'll still be rich enough to retire whenever and sip martinis in Florida of course, she just won't hold the majority of the shares of the company she founded.

Edit: I realize that I sort of neglected dividends after the initial bit. A company could pay off 1.2% (to account for capital gains tax) of it's total value as dividends assuming it had sufficient liquid holdings (and it can't sell stock to come up with them, as that would defeat the purpose). In this case, it would cut company growth potential by about 25% but could allow lucky 20-something to retain control, provided the company can always come up with the liquid assets, even in down years. But that's probably the most realistic scenario of this working.

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