My Thoughts On The Millionaire Tax

What's up, Graham? It's Guys here. So, I want to talk about something that I've seen come up a lot lately, and that would be a proposed wealth tax. Now, initially, this is not a topic I was planning to address, but because we talk all things personal finance, investing, and building wealth, I felt like this would be an important discussion to have. Because taxes will inevitably be a factor in pretty much everything you do, no matter who you are or where you live. Unless, of course, you live in the Cayman Islands, in which case, okay, fine, maybe it doesn't apply to you.

But for nearly everyone else, I think this is a really important topic to discuss because this may end up affecting you in one way or another, even if you never reach the threshold from which a wealth tax is collected. Now, I want to make it very clear: I am not at a level yet where this is going to impact me. I think it's pretty obvious I am not worth 50 million dollars. Although the current trajectory, if everything keeps going well and Tesla stock keeps going up, I could reach that level in five to eight years. So, I think this is worth addressing from the perspective of someone who this does not impact yet but probably will at some point in the future.

But, don't worry, guys, I'm not going to be like, "No taxes, guys! Taxes are yucky! Grab for president 2032, like if you agree!" But instead, I'll share my own opinion on this, and I'll be very objective when it comes to the facts, the studies, and the history. That way, you not only know the likelihood of this actually happening but also the most likely outcome of this, which is probably going to be a lot different than what you might think.

Although, really quick, if you wouldn't mind taxing the like button for the YouTube algorithm by making it turn blue, it would help me out tremendously! So thank you, guys, so much! It really means a lot. And with that said, let's begin over at my desk here. You know what? Here we go!

All right, so as some background, no surprise, the pandemic has really magnified the income inequality here in the U.S. As our economy shut down, it was estimated that 40% of low-income workers lost their jobs, while the richest added billions of dollars to their portfolio as their stock values increased. This isn't just a new phenomenon either. Since the 1970s, the top one-tenth of one percent have continued to concentrate their wealth year after year while growing their income to record levels.

In response to this and the growing divide between the rich and the poor, a new proposal was created which would impose an ultra millionaire wealth tax on all fortunes about 50 million dollars. The plan would impose an annual tax of two percent on all net worth above 50 million dollars and a three percent tax on all net worth above a billion dollars. This is an amount that they say will help bridge the gap from the ultra-wealthy paying a lower effective tax rate than the bottom 99%. Which, if you're wondering how that's even possible, I'll explain in a moment because you're capable of doing this too, but on a smaller scale.

But anyway, I digress. The tax revenue generated would help fund a strengthened education system, healthcare system, and would be invested back into community infrastructure. In addition to that, they would call for a hundred billion dollar investment to rebuild and strengthen the IRS, a 30% minimum audit rate for high net worth individuals, a 40% exit tax on net worth above 50 million dollars for any U.S. citizen who wants to leave, and new tools to determine the value of assets.

Basically, what they're just proposing is this: once you reach that 50 million threshold, the IRS would send out a third-party auditor to look over your financials and add up the value of your assets like stocks, real estate, coins, collectibles, cars, artwork, and so on. And then from there, they would determine how much extra tax you would owe. Now, in terms of the small details, they say that they would not include any assets worth less than fifty thousand dollars, so that way small nuanced items like refrigerators, furniture, and non-PSA 10 Pokémon cards are not going to be counted for the sake of simplicity.

However, despite how easy it is just to say we should just tax all your wealth about 50 million, we need to start asking ourselves how realistic is this and is this even possible to do in the first place? Well, I think it's important to mention that historically, taxes were always much, much higher than they are today. In fact, if you're making money right now, most likely there has never been a better time to pay your taxes, as weird as that is to say.

It's also never been a better time to get your two free stocks down below in the description because Webull is going to be giving you two free stocks when you deposit 100 on the platform, and those stocks could be worth all the way up to 1,850 dollars. In fact, I got a free stock right here, so let's open this up and see what it's worth. And I got AR for almost 10 bucks.

But anyway, just consider this: here's a fun history lesson for the day. In the early 1940s, the top tax brackets were as high as 80% on incomes over 2 million a year. But in 1942, right after the attack on Pearl Harbor, President Roosevelt proposed a 100% top tax rate, and he said, "No American citizen ought to have a net income after he has paid his taxes of more than 25,000 dollars a year."

Now, even though a 100% tax rate was never enacted, the Revenue Act of 1942 raised the top tax rate to an all-time high of 94%. The issue implementing this, however, was that so many people began spending their money so they wouldn't be taxed on it, and that led to an overall less tax revenue than anticipated. Afterwards, of course, taxes began to decline. Throughout the 1950s, the top effective tax rate was just above 50% for the wealthiest people. In the 1960s and 70s, it was just about 40%. In the 1980s, it was below 40%. In the 1990s, it was barely above 30%. In the 2000s, it was just below 20%. And now we sit just above 24%.

That means that throughout any other time in history, most likely you are paying the lowest tax rate in the last century. However, even with all of that said, how is it then that billionaires are still managing to pay a lower effective tax rate than the bottom 50%? Well, a lot of this really comes down to how the tax system is designed, and amazingly enough, you could take advantage of this too right now, no matter how much money you make.

And it all comes down to the simple term of capital gains tax. See, right now, the tax system is designed to tax the people the most who are actively working. Meaning if you go to a job and you make a hundred dollars, you're gonna have to pay federal income tax, state income tax, social security tax, and Medicare tax, and all of that could very well add up to 40% or more, depending on how much you make and where you live.

However, when you invest your money, that profit you make is not considered active income, and therefore you don't owe any payroll tax on it. Not to mention, if you keep that investment longer than a year, it's considered long-term capital gains tax, which only has a top tax rate of 20% plus a 3.8% investment surtax on incomes above 200,000. That means if you make less than 40,000 a year and you've held your investment for longer than a year, you're not gonna have to pay any federal income tax on that profit.

And even at the top capital gains tax bracket, the person who's making a hundred million dollars a year pays the exact same capital gains tax as the person who's making 250,000 a year. It's just a flat 23.8%. Now, in terms of how the wealthy people generate their money, the majority of that is earned through their investments. As the proposal says, the 99% rely primarily on labor income, while the majority of the 1% rely primarily on their investments.

That just means that when the wealthiest billionaires have all of their net worth tied up in company stock options, when they sell a portion of that long-term ownership, they're paying a flat 23.8% compared with the employees who are paying tax on their active income. Now, the good news is that this tax structure is available for anybody to use and take advantage of, and it was designed like this for a reason.

One, long-term investments like this are not indexed to inflation, so you not only have to pay tax on the real return of your money but also the inflation caused by the Federal Reserve. And that is why the taxes are lower. The second, taxes were already paid on the original money you invested, and so by creating another tax on top of this, it's said to be double taxation. And third, a lower capital gains tax was found to have led to a higher amount of spending, which helps our economy. That's because investors were more likely to sell if they pay a lower capital gains tax rate, and then that money is dispersed back into the economy, which then helps it grow.

So really, beyond a certain threshold, most ultra wealth is derived from investments and not so much from working a traditional job. And given the tax brackets between the two, that is how the top 1% are able to pay a lower effective tax rate than the bottom 99%. Now, in terms of the actual wealth tax in question, here's where things get interesting. Practically calculating the net worth of the wealthiest households and then taxing them on that is going to be very challenging.

Most assets are not publicly traded like stocks, and determining the agreed-upon value of potentially hundreds, thousands, or even tens of thousands of individual assets is going to be nearly impossible. Second, there's also the concern that the wealthy would begin hiding their money if such a tax went into effect. The billionaire Leon Cooperman said that if the wealth tax passes, "Go and buy yourself some gold because people are going to rush to find ways of hiding their wealth."

Third, other critics argue that a 3% tax would require those investments to grow beyond 3% adjusted for inflation just so those investments don't lose money, and that's a tall order. For example, if you invest a hundred thousand dollars in a treasury bond that makes 3%, but inflation is 3%, you're not making any money at all. If a wealth tax of 3% is then enacted, beyond that you would have to make a 6% return on your investment just to break even adjusted for inflation.

The fourth, because this would be a tax on net worth, it might be necessary to sell off some of those investments to pay the tax. And by selling those investments to pay a tax, you would be subject to more taxes because you sold. Fifth, if a wealth tax is implemented, it's said to have a negative consequence in the economy. It would reduce national income, discourage saving, encourage consumption, and lead to more foreign investment.

At six, there's also the concern that a wealth tax would be unconstitutional and would face a plethora of legal challenges that would ultimately be decided by the Supreme Court. Other countries have tried implementing a wealth tax as well, but without much success. Since 1995, over 60% of the countries that have enacted a wealth tax have now repealed them, and their findings were that it disincentivized risk-taking and entrepreneurship, it harmed innovation, and it impacted long-term growth.

So, given the challenges of actually and successfully implementing this, as with the CEO of Starbucks calling it ridiculous, here's what you came for, and here are my thoughts. You know, I think when it comes to this, we have two ways to think about it. Number one would be practically and number two would be fairly.

So, let's talk about the practical aspects first. I think it's going to be a logistical nightmare to enforce, and I guarantee it's going to turn into a lengthy legal battle for anyone who disagrees with the valuation of their net worth and what they owe in tax. In most circumstances, a good tax attorney would argue each and every item, and then tie it up in litigation for years before any money is actually collected.

Not to mention, you can't accurately place a value on certain items that don't actively trade hands like rare art and coins and collectibles and cars. So, it would be unusual to impose a 2% to 3% tax on certain items where the price is really just pulled from thin air. It also becomes very challenging to tax somebody who's equity-rich but cash poor.

Like, what about a startup founder who has their entire net worth tied up in a billion-dollar company, and they have not taken out a single cent for themselves because they reinvest it all back into the business? In that case, do you force them to sell equity for paper profits that they've yet to realize on a business that might not be successful? I just personally believe that accurately enforcing this on a large scale is going to be difficult, if not pretty much impossible, and it's gonna be a battle every step of the way that's just better served elsewhere.

Not to mention one could argue that the recent increase in stock price is attributed to the Federal Reserve inflating the dollar and devaluing the currency, thereby causing everything else to go up. So, to call that a gain and then tax it is a bit flawed.

The second, there's also the issue of income inequality and finding a reasonable way to address that. I'm a firm believer that the best way to address income inequality isn't so much in taxing as many people as possible, but instead through education. I think financial literacy needs to be taught in schools. College tuitions are way too high, and when people get caught up in the cycle of poverty, it's very difficult to break out.

I think if we find a way to improve financial literacy across the entire country, we're all gonna be in a better place. But in terms of taxes, I don't even have 50 million dollars right now, so this would not affect me. But I personally believe that this would be the wrong path to take.

Instead, I would certainly be a proponent of raising the capital gains tax, even on myself, but to a reasonable level. Studies have actually shown that the optimal capital gains tax rate is really 28%. This is the point of maximizing tax revenue without causing people to run for the hills, and I tend to agree with this as well. Just purely anecdotally, raising the capital gains tax rate like this would increase the tax revenue. It would not be difficult to collect, and there wouldn't be any legal challenges to do so.

Use that money to reinvest back into education where more people could learn about finances, the importance of saving, how to budget, and long-term, just how to make more money. The issue that I see with taxation being seen as a solution is that it assumes that extra money is going to go towards the people who need it the most, and it's not going to be mismanaged.

Like when a person has a spending problem, very rarely does making more money actually solve the root of that problem. Instead, if you throw more money at the problem, that enables that person to continue spending and the cycle repeats itself. Think of it a little bit like filling a bucket with a giant hole at the bottom.

Going and filling the bucket up with even more water is not going to cause it to leak any less. And the bucket first needs to be fixed before it could hold more water. I think the same thing applies here with taxation and government spending. Fix the spending problem first, and then tax later as needed.

In all reality though, I would be surprised if this ever passed, and most likely it's not going to happen. And you're not going to have to worry about your fortune above 50 million dollars. What I do think will happen though is that eventually all the tax brackets will end up going up over time, especially if you're making over 200,000 a year.

And I wouldn't be surprised if at some point the capital gains tax rate is increased, and if it's a little bit, I would be all for it. The capital gains tax is absurdly low to be capped at 23.8%, regardless of how much money you make, whether it's 300,000 or 300 million dollars.

Maybe for every million dollars you make above 4 million bucks, you have to pay an extra one percent in long-term capital gains tax or something like that. I'm just spitballing ideas here. I also think the government needs accountability for their spending and to try to figure out why it's not currently working for what we already have. Once they find the precise problems, they could better work to create new policies and regulations to fix them, like smashing the like button for the YouTube algorithm.

But overall, my final thoughts on the wealth tax are really just this: it's too complicated, it's not gonna happen, and it's not the right solution. Instead, let's address financial literacy, let's raise the top capital gains tax rates on the wealthiest households, and let's make sure, most importantly, that the tax revenue is properly allocated. If that could happen and you get your two free stocks down below in the description, I will be 100% happy!

So, with that said, you guys, thank you so much for watching! I really appreciate it. As always, make sure to destroy the like button, subscribe button, and notification bell. Also, feel free to add me on Instagram. Posts are pretty much daily. So, if you want to be a part of it there, feel free to add me there.

As my second channel, the Graham Stephan Show, I post there every single day. I'm not posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. And don't forget to get your two free stocks down below in the description that's worth all the way up to one thousand eight hundred and fifty dollars. So enjoy! Thank you so much for watching, and until next time!