The renowned businessman and philanthropist isn't shy of controversy and added to debate about whether the "rich" should be taxed more heavily. That such a prominent person made such a detailed set of proposals, ahead of an election year, should get wealth managers' attention.

Predictions are always risky but as the US enters its election year and the Democrats choose the man or woman to lead them into November, one can be sure that taxes on “the rich” (however they are defined) will be a hot topic.

Whether the term used is “the one per cent” or not, it is now an embedded feature of political discourse that the wealth of ultra-high net worth individuals has increased relative to the rest of the population, both at national level, and globally, and that this is a bad thing. In a global marketplace, an entrepreneur who can sell products and services for even a few dollars apiece can earn a fortune, although if this is via voluntary exchange it is arguable why the resultant unequal wealth position is unjust. Where, perhaps, the issue gets more cloudy is when some of the inequality is caused by forces such as state barriers (tariffs, restrictive practices, overbearing licensing on certain ways of earning a living, etc). Another is central bank money printing, aka quantitative easing. QE has inflated prices of assets, such as equities and real estate, and hit cash and similar assets. Another problem is that far too few people leave school and the home equipped to thrive in a modern economy.  

And one feature of debate has centered on business tycoons promising to give away the bulk of their fortunes during their lifetimes or after they die. And perhaps the best example is Microsoft’s Bill Gates, who called for higher taxes on the super-rich in an end-of-year blog post. 

“I’ve been pushing for a fairer tax system for years. It was nearly two decades ago that my dad and I started calling for an increase in the federal estate tax and for an estate tax in our home state of Washington, which has the most regressive tax system in the country. In 2010, he and I also backed a voter initiative that—had it passed—would’ve created a state income tax,” Gates wrote. 

“I start with the understanding that the US government simply does not bring in enough money to meet its obligations. This isn’t a value judgment; it’s just a fact. The government collects about 20 per cent of GDP in taxes while spending about 24 per cent. And the cost of commitments is going up,” he continued. 

“Meanwhile, the wealth gap is growing. The distance between top and bottom incomes in the United States is much greater than it was 50 years ago. A few people end up with a great deal - I’ve been disproportionately rewarded for the work I’ve done - while many others who work just as hard struggle to get by,” he wrote.

Of course, Bill and his wife Melinda have already taken steps to transfer much of their wealth to philanthropic causes via their eponymous foundation. They also created the Giving Pledge, along with investment titan Warren Buffett and others, to transfer much of their assets. 

Gates goes on to argue in favor of tax hikes on capital gains – a point that might go down well with some voters but will anger a wide number of investors, not all of them wealthy by a long shot. Arguably, one big issue today is that America isn’t as fecund in generating business start-ups as some headlines might suggest. (An era of QE-driven equity market gains might have obscured this point.) So hiking capital gains taxes might not be a smart move.

(This publication has talked about issues such as “Wealth Justification” and reviewed the arguments for higher capital taxes from French intellectual Thomas Piketty, and reviewed a recent robust defense of wealth and capitalism, by Rainer Zitelmann. We will continue to track such debates because they form the environment in which the wealth industry operates.)
 

A narrative
There’s no doubt though that Gates thinks he is tapping into a wider course of public opinion. We have already seen ideas such as how the existing swathe of federal and state benefits and entitlements could be replaced by some kind of single, flat-rate benefit, variously described as a negative income tax, or universal basic income. (Milton Friedman, let it not be forgotten, advocated such an idea, showing that this is not a narrow ideological issue.) The Republican Party, taking a more populist turn in rhetoric, if not always in action (estate tax exemption increases) is arguably less likely to hold the line on taxes than in the Reagan era. And Gates’ argument about the shortfall of revenues and spending cannot be gainsaid, whichever side of the tax debate one is on. Like the coming of the seasons, Congress and the White House perform their regular theater of debt ceiling arguments and threatened government shutdowns. It suggests there is a cross-party need to be honest about the state of the public purse.

Meanwhile, and not discussed nearly enough, is the financial solvency of Medicare, Medicaid and Social Security. The arguments made about the effect of an aging population remain as true today as they have been in recent decades. Taxing the “rich” more might assuage some public disquiet about inequality, but it is unclear whether any real reform of entitlements is affordable without confronting the broad public with some difficult choices in the years to come.