Bill Gates: Tax Code Cost U.S. His Billions
Government could lessen many of the country's social issues
Multi-billionaire Microsoft founder Bill Gates has communicated that the U.S. government’s tax code doesn’t tax him to the level that it should and if it did to him and the uber wealthy, it would help the United States alleviate many of its problems.
"If I designed the tax system, I would be tens of billions dollars poorer than I am," Gates says. He doesn’t see a downside, adding that the tax code "could be more progressive without significantly damaging the incentive to do fantastic things,” societally and business wise.
Hearing and reading about Gates feelings these days inspires the question about whether it is reasonable to ask whether a man of his status, influence and power could have pushed harder for a change decades sooner.
“It’s a fair question,” says Neil Winward, founder and CEO at Dakota Ridge Capital, a renewable energy and sustainable investing partner firm.
He talks about alignment of words and effort.
“What Gates and (Berkshire Hathaway Chairperson and CEO Warren) Buffet have done is to create something called ‘The Giving Pledge.’ This publicly commits them to giving away most of their wealth, either during their lifetime or in their will. “So far, he has donated approximately $59 billion to the Bill and Melinda Gates Foundation. His remaining wealth is estimated to be approximately $156 billion. His actions certainly speak loudly of his commitment to use his wealth wisely,” Winward begins explaining.
“The comment about the inadequacies of the tax system to deal with extreme wealth concentration, is less persuasive.”
He elaborates, arguing that the common conclusion may not be the root problem.
“Arguing for the taxation system to confiscate more of his wealth is unhelpful,” Winward contends. “It is not clear that the system of taxation is to blame here.”
What is, he asserts, is another issue.
“Rather, the governance structures that allow such wealth to accumulate in the hands of a CEO is a more productive area of inquiry,” Winward suggests.
“The stock-based compensation system is, to a large degree, the result of constraints imposed during the Clinton administration on executive pay,” he reasons, going on to add the illuminating detail. “Cash compensation limitations led directly to an increased stock and option component to executive compensation.”
Gates may not be inferring that the government is the best placeholder for more tax dollars despite his claim that he would have been at ease being taxed billions more.
“I am not sure he would advocate for the government being a better arbiter of allocating philanthropic funds,” Winward says. “I know a number of extremely wealthy — though not Gates wealthy — individuals whose main objection to high levels of taxation is precisely that the discretion for allocating funds is taken away from them.”
Their concern or cynicism is clear.
“They have no confidence that the government would do a better job of deciding where their money should be spent and invested,’ Winward says. “It is true that the effectiveness and efficiency of spending is eroded by the inherent friction of government bureaucracy.”
Gates touched on a common anger and regular American business talking point and argument that the most wealthy are deserving of the financial excess they earn and accumulate because they are taking and tolerating risks — and that taxing them significantly more would disincentivize investment and growth that benefits society.
By saying that the tax code "could be more progressive without significantly damaging the incentive to do fantastic things,” Gates acts as a contrary viewpoint that could have credibility because of his status in society.
Winward says while that could prove accurate, the belief could err on the side of being simplistic and the outcome of such action would be uncertain.
“I think he may have a point here but how much more progressive remains to be seen,” Winward offers less definitively.
“The percentage of Federal Receipts as a percentage of GDP has fluctuated within a tight band of 15-20% over the last 75 years.
“The higher the rate, the greater the avoidance incentive and vice versa. A variation of 5% is relatively small but does hide a considerable range of marginal tax rates.
“In the 1950s, the top Federal rate was 90%. This has come down gradually but consistently to the current rate of 37%. This would suggest that the marginal rate and the inherent progressivity of that has not been the main determinant of the total tax take as a percentage of GDP.”
Gates additionally says that it is his opinion that wealth and power should not be found primarily in a small amount of families because of their past success.
"I don't think we should — generally, generationally — let families whose great grandfather, through luck and skill, accumulated a lot of wealth, have the economic or political power that comes with that," he proposes.
That likely will not resonate well, emotionally or psychologically, with families that pass down tremendous amounts of wealth. It’s a valid debate however, Winward says.
“There is no doubt that the accumulation of wealth intergenerationally or even within a generation is profoundly corrosive to a cohesive society,” he says. “Wealth and the influence it buys has a major impact on shaping the policy that keeps wealth in the hands of the wealthy.”
He does see the value in understanding the risks and costs of passing down wealth.
“The argument that incentive of potential wealth accumulation is key to the generation of societal wealth runs in reverse when that wealth is passed down the generations and the incentive to work and be a productive member of society is replaced with a silver spoon,” Winward says.
At the same time, there is doubt that government action is the answer.
“This is a major policy issue because I am not sure the confiscatory nature of an estate tax is the best tool to address this problem,” Winward says.
More time researching, discussing, debating and fleshing out approaches would help.
“Gates might productively expend more of his considerable brain power on this thorny issue than the questions above suggest he has so far,” Winward states.
When it comes to income disparity and anger towards the most wealthy, it’s important to gain clarity and how people see it and make conclusions about power, politics and policy.
“The charts from the Federal Reserve Bank of St. Louis — one of my favorite sources — show the share of total assets held by the top 1% (first image below) versus the bottom 50% (second image),” Winward says.
“It is not pretty. The trend is awful,” he admits, stressing that, “The key is perception.”
Winward goes on to explain specifically why.
“If the bottom 50% correctly perceive that the top 1% has so much wealth that they can drive the political and legislative process in whichever direction they choose, they are left with only one tool — violence, proportionate to the leverage they do have — their numbers.”
Stress, pain and suffering that is ignored or dismissed in society is not good for mental health or trust and allegiance to the status quo.
“The erosion of the middle class is unhealthy because it puts beyond reach the key elements of the American dream: a good education, available healthcare, home ownership and upward mobility,” Winward says. “If people feel they have no stake in society, they will be tempted to tear it down. That helps no one.”
Despite efforts to promote philanthropy among the most wealthy, Gates says that is never the ideal or sufficient part of the equation to solve disparity and lack in society.
"The big work still has to be done by government," Gates says. "Philanthropy is not a substitute for government. Making sure everybody's educated, has food, has shelter — it's the government who's going to create that safety net.”
Winward agrees.
“Philanthropy is not the answer because its fruits are unearned and deny people the agency of earning their own future.”
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