The Nonlinear Library LW - Economics Roundup #2 by Zvi
Jul 3, 2024
35:50
Welcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: Economics Roundup #2, published by Zvi on July 3, 2024 on LessWrong.
Previously: Economics Roundup #1
Let's take advantage of the normality while we have it. In all senses.
Insane Tax Proposals
There is Trump's proposal to replace income taxes with tariffs, but he is not alone.
So here is your periodic reminder, since this is not actually new at core: Biden's proposed budgets include completely insane tax regimes that would cripple our economic dynamism and growth if enacted. As in for high net worth individuals, taking unrealized capital gains at 25% and realized capital gains, such as those you are forced to take to pay your unrealized capital gains tax, at 44.6% plus state taxes.
Austen Allred explains how this plausibly destroys the entire startup ecosystem.
Which I know is confusing because in other contexts he also talks about how other laws (such as SB 1047) that would in no way apply to startups would also destroy the startup ecosystem. But in this case he is right.
Austen Allred: It's difficult to describe how insane a 25% tax on unrealized capital gains is.
Not a one-time 25% hit. It's compounding, annually taking 25% of every dollar of potential increase before it can grow.
Not an exaggeration to say it could single-handedly crush the economy.
An example to show how insane this is: You're a founder and you start a company. You own… let's say 30% of it.
Everything is booming, you raise a round that values the company at at $500 million.
You now personally owe $37.5 million in taxes.
This year. In cash.
Now there are investors who want to invest in the company, but you can't just raise $37.5 million in cash overnight.
So what happens?
Well, you simply decide not to have a company worth a few hundred million dollars.
Oh well, that's only a handful of companies right?
Well, as an investor, the only way the entire ecosystem works is if a few companies become worth hundreds of millions.
Without that, venture capital no longer works. Investment is gone.
Y Combinator no longer works.
No more funding, mass layoffs, companies shutting down crushes the revenue of those that are still around.
Economic armageddon. We've seen how these spirals work, and it's really bad for everyone.
Just because bad policy only targets rich people doesn't mean it can't kill the economy or make it good policy.
I do think they are attempting to deal with this via another idea he thought was crazy, the 'nine annual payments' for the first year's tax and 'five annual payments' for the subsequent tax. So the theory would be that the first year you 'only' owe 3.5%. Then the second year you owe another 3.5% of the old gain and 5% of the next year's gain.
That is less horrendous, but still super horrendous, especially if the taxes do not go away if the asset values subsequently decline, risking putting you into infinite debt.
This is only the beginning. They are even worse than Warren's proposed wealth taxes, because the acute effects and forcing function here are so bad. At the time this was far worse than the various stupid and destructive economic policies Trump was proposing, although he has recently stepped it up to the point where that is unclear.
The good news is that these policies are for now complete political non-starters. Never will a single Republican vote for this, and many Democrats know better. I would like to think the same thing in reverse, as well.
Also, this is probably unconstitutional in the actually-thrown-out-by-SCOTUS sense, not only in the violates-the-literal-constitution sense.
But yes, it is rather terrifying what would happen if they had the kind of majorities that could enact things like this. On either side.
Why didn't the super high taxes in the 1950s kill growth? Taxes for most people were not actually that high, the super-high marginal rates like 91% kicked in...
Previously: Economics Roundup #1
Let's take advantage of the normality while we have it. In all senses.
Insane Tax Proposals
There is Trump's proposal to replace income taxes with tariffs, but he is not alone.
So here is your periodic reminder, since this is not actually new at core: Biden's proposed budgets include completely insane tax regimes that would cripple our economic dynamism and growth if enacted. As in for high net worth individuals, taking unrealized capital gains at 25% and realized capital gains, such as those you are forced to take to pay your unrealized capital gains tax, at 44.6% plus state taxes.
Austen Allred explains how this plausibly destroys the entire startup ecosystem.
Which I know is confusing because in other contexts he also talks about how other laws (such as SB 1047) that would in no way apply to startups would also destroy the startup ecosystem. But in this case he is right.
Austen Allred: It's difficult to describe how insane a 25% tax on unrealized capital gains is.
Not a one-time 25% hit. It's compounding, annually taking 25% of every dollar of potential increase before it can grow.
Not an exaggeration to say it could single-handedly crush the economy.
An example to show how insane this is: You're a founder and you start a company. You own… let's say 30% of it.
Everything is booming, you raise a round that values the company at at $500 million.
You now personally owe $37.5 million in taxes.
This year. In cash.
Now there are investors who want to invest in the company, but you can't just raise $37.5 million in cash overnight.
So what happens?
Well, you simply decide not to have a company worth a few hundred million dollars.
Oh well, that's only a handful of companies right?
Well, as an investor, the only way the entire ecosystem works is if a few companies become worth hundreds of millions.
Without that, venture capital no longer works. Investment is gone.
Y Combinator no longer works.
No more funding, mass layoffs, companies shutting down crushes the revenue of those that are still around.
Economic armageddon. We've seen how these spirals work, and it's really bad for everyone.
Just because bad policy only targets rich people doesn't mean it can't kill the economy or make it good policy.
I do think they are attempting to deal with this via another idea he thought was crazy, the 'nine annual payments' for the first year's tax and 'five annual payments' for the subsequent tax. So the theory would be that the first year you 'only' owe 3.5%. Then the second year you owe another 3.5% of the old gain and 5% of the next year's gain.
That is less horrendous, but still super horrendous, especially if the taxes do not go away if the asset values subsequently decline, risking putting you into infinite debt.
This is only the beginning. They are even worse than Warren's proposed wealth taxes, because the acute effects and forcing function here are so bad. At the time this was far worse than the various stupid and destructive economic policies Trump was proposing, although he has recently stepped it up to the point where that is unclear.
The good news is that these policies are for now complete political non-starters. Never will a single Republican vote for this, and many Democrats know better. I would like to think the same thing in reverse, as well.
Also, this is probably unconstitutional in the actually-thrown-out-by-SCOTUS sense, not only in the violates-the-literal-constitution sense.
But yes, it is rather terrifying what would happen if they had the kind of majorities that could enact things like this. On either side.
Why didn't the super high taxes in the 1950s kill growth? Taxes for most people were not actually that high, the super-high marginal rates like 91% kicked in...