poorbill.md

"POOR BILL"
2019-Nov-07

@teddyschleifer wrote:

"Bill Gates on a wealth tax:

'I've paid over $10 billion in taxes. I've paid more than anyone in taxes. If I had to pay $20 billion, it's fine.'

'But when you say I should pay $100 billion, then I'm starting to do a little math over what I have left over.'"

Huh, that sounds a little odd.

Let's actually do some math.

Search google.com for "bill gates net worth". Result: 106.8 billion USD.

Elizabeth Warren's website, https://elizabethwarren.com/ultra-millionaire-tax/ , says:

"Rates and Revenue

Zero additional tax on any household with a net worth of less than $50 million (99.9% of American households)

2% annual tax on household net worth between $50 million and $1 billion

1% annual Billionaire Surtax (3% tax overall) on household net worth above $1 billion"

Assume Bill Gates neither spends nor makes any more money (for simplicity) and that he never dies (vampire).

I write some Python:

networth = 106.8 * 1000 * 1000 * 1000 
for year in range(2020,2321): 
	print("{:.0f},{:.0f}".format(year, networth))
	taxable1 = networth - 1000 * 1000 * 1000
	taxable2 = networth -   50 * 1000 * 1000
	if taxable1 > 0:
		networth = networth - taxable1 * 0.01
	if taxable2 > 0:
		networth = networth - taxable2 * 0.02
	networth = int(networth)

I import the CSV into Numbers and make a chart.

The amount of money is so great, the chart is hard to read! I had to made it logarithmic scale to even see what was happening. Here's what I found out.

Even making no money at all, it takes all the way until 2189 for Bill to stop being a billionaire under Warren's wealth tax. At this point he is 234 years old.

By 2313 (age 358) Bill will have to sell his house :(

But wait! It's not reasonable to assume Gates neither makes nor spends money. Gates' money is invested. The wealth tax means his wealth automatically decreases. But investment means it automatically increases, even if he does no work at all.

The web page https://www.thebalance.com/best-mutual-funds-for-safety-and-stable-returns-2466369 says:

"A good example of a bond fund that invests in short-term US Treasury bonds is Vanguard Short-Term Treasury Fund (VFISX). Since inception of the fund in 1991, VFISX has produced and average rate of return of approximately 3.9%. Past performance is no guarantee of future results but it's long history suggests that the fund can outpace inflation.

...

One of the best balanced funds with a history of stable returns above the rate of inflation is Vanguard Wellesley Income (VWINX). This 40-year old fund has averaged 9.7% since its inception in 1970. This is an incredibly high return, considering that its portfolio consists of roughly two-thirds bonds and one-third stocks."

So an average nobody who does 20 seconds research on Google can invest at 3.9% per year with the lowest risk possible and 9.7% at okay risk.

Bill Gates can get much better rates because he's investing billions, but never mind. With the most conservative reasonable investment (3.9%) his wealth still increases faster than the wealth tax drains it (3%).

Can we model this?

Let's try again. This time let's have Bill invest his money, we'll have him pay the "average effective property tax" for Washington according to smartasset.com, and we will give Bill and Melinda an allowance of $1 million per year for living expenses (adjusted for "the average annual inflation rate...since 1913" according to inflationdata.com).

Now the Python script is a little more complicated:

house = 127 * 1000 * 1000
expenses = 1.25 * 1000 * 1000
inflation = 0.0315
propertytax = 0.0103

# Track two possible net worths with two investment rates
investrate = [0.039, 0.097]
networth = [106.8 * 1000 * 1000 * 1000 for _ in range(2)]

for year in range(2020,2521): 
	# Print net worths this year
	print("{:.0f},{:.0f},{:.0f}".format(year, *networth))

	for i in range(len(networth)):
		# Living expenses
		networth[i] = networth[i] - expenses
		networth[i] = networth[i] - house*propertytax
		if networth[i] < 0:
			raise Exception("BANKRUPT!")
	
		# Investment income
		investable = networth[i] - house
		if investable > 0:
			networth[i] = networth[i] + investable*investrate[i]
	
		# Wealth tax
		taxable1 = networth[i] - 1000 * 1000 * 1000
		taxable2 = networth[i] -   50 * 1000 * 1000
		if taxable1 > 0:
			networth[i] = networth[i] - taxable1 * 0.01
		if taxable2 > 0:
			networth[i] = networth[i] - taxable2 * 0.02

		# Round
		networth[i] = int(networth[i])

	# COLA
	expenses = int(expenses + expenses*inflation)

This is actually pretty sloppy. In reality the house would appreciate in value and this would increase both the property and wealth tax paid. I increase the $1 million allowance to $1.25 million because I assume when he converts invested savings to cash he loses 20% to long term capital gains tax, but he could probably do better than 20% in reality.

It probably doesn't matter because the point here is to show that with reasonable ballpark numbers the wealth tax fails to make a dent in Gates' wealth within even several human lifetimes.

I plug the results into Numbers anyway. Poor Numbers can barely make sense of it because the numbers get so large. But:

My script actually crashes in 2347. Bill (age 392) has gone bankrupt! Why? Not the wealth tax. Inflation. Bill's $1 million allowance, in 2347 dollars, costs him $31 billion a year. His net worth actually increases until 2288 (Bill's 333rd birthday) but then inflation outruns his 3.4% investment and eventually bleeds him dry.

That's the Bill that invested at 3.4%. If he invests at 9.8% (and remember: Bill can do better than 9.8%) his money just increases forever. At 9.8%, by 2347, paying the wealth tax every year, Bill has 71 sextillion dollars.

I don't know exactly what investment rate Bill needs to outrun inflation. But I notice if I set an investment of 5.7%, which Bill can definitely get, I can run the script for a thousand years and Bill's wealth only increases, while he pays the wealth tax the whole time.

Conclusion: Bill Gates will be fine.

I'm not against wealth taxes, but I understood his comment to be in response to the additional(?) 6% wealth tax presented in the M4A plan:

If Gates paid a 6% tax on his wealth above $1 billion, he would pay an estimated $6.5 billion per year to the IRS on his fortune, excluding any other income and investment taxes and the 2% additional wealth tax proposed by Warren on wealth above $50 million.

https://www.cbsnews.com/news/elizabeth-warren-would-love-to-explain-wealth-tax-plan-to-bill-gates/

Different articles are contradicting whether the 6% is in addition to the 2% or is a raising of the 2%:

by increasing her proposed wealth tax on net worth above $1 billion to 6 percent annually

https://www.nytimes.com/2019/11/07/us/politics/bill-gates-elizabeth-warren-wealth-tax.html

Rerunning the code with Warren's proposed 4% additional wealth tax on money over a billion instead of the 1% does change things and make Gates' claim seem more reasonable. According to the code he'll have spent $100 billion of his money within 46 years.