Bill Gross vs Marc Faber on Taxation

The November 2013 Investment Outlook published by PIMCO caught my attention with an essay by Bill Gross. Gross wrote remorsefully,

    “Having benefited enormously via the leveraging of capital since the beginning of my career and having shared a decreasing percentage of my income thanks to Presidents Reagan and Bush 43 via lower government taxes, I now find my intellectual leanings shifting to the plight of labor........... .... ... .. .”

I suppose that, by “the plight of labor”, Gross is referring both to the decline of median household income in real terms over the last ten years or so, and to the collapse of labor’s share of US national income since 2000. Personally, I am also concerned about the slump in the labor force participation rate.

Having written about rising wealth and income inequality for the last ten years or so, I have a lot of sympathy with Bill Gross’s views. However, I am far from certain that the inequality was caused by lower tax rates on carried interest and capital gains.

As an example, it is not only the “1%” who have increased their share of national income considerably over the last 30 years, but also the top 10% of income recipients. Moreover even if capital gains are excluded, the top income recipients have increased their share of national income meaningfully. I simply cannot believe that the top decile of income earners would all have benefited from low taxes on carried interest. (This may be different for the “0.01%”.)

Therefore, other — possibly more important — factors than favorable taxes on carried interest and on capital gains may have led to the growing income inequality, such as education (rising cost), outsourcing of production to low labor-cost countries, low interest rates (substitution of labor with machines), rising debts, increasing entitlements, immigration of low-skilled workers, etc. I shall return to Gross’s essay further below. However, I should first like to address some of the problems associated with taxation.

Therefore, other — possibly more important — factors than favorable taxes on carried interest and on capital gains may have led to the growing income inequality, such as education (rising cost), outsourcing of production to low labor-cost countries, low interest rates (substitution of labor with machines), rising debts, increasing entitlements, immigration of low-skilled workers, etc. I shall return to Gross’s essay further below. However, I should first like to address some of the problems associated with taxation.

Everyone will agree that taxes should be fair, but what is fair is hard to determine. Your friend inherits a high income-producing property that allows him a lifestyle of leisure and pleasure, whereas you earn your living on the factory floor through hard work. Assuming your incomes are equal, is it fair that your fortunate friend’s tax rate is the same as yours, or should it be higher or lower?

On the surface, someone could argue that, since you work for your income, you should be taxed at a lower rate than your friend, who does not work for his income. Someone else might argue that, on the contrary, your friend should be taxed at a lower rate since his parents have already paid taxes on the income that allowed them to purchase the property. (This question also relates to taxes on dividends.)

In my humble opinion, the probably fairest tax is a flat tax on incomes (no deductibles such as the interest payments on debts, children allowances, or investment tax credits, and no subsidies for any interest groups) which is levied on all income earners and corporations, churches, missions, charities, pension funds, government officials (and governmental organisations), etc. at a maximum rate of between 10% and 15% per annum (no exceptions).

Naturally, the approximately 49% of taxpayers who pay no federal income tax, as well as the entire industry of lawyers, accountants, and auditors who make a living from a complex tax regime, would object to a flat tax. In terms of indirect taxes, the fairest tax is a value added tax levied on all transactions at a maximum rate of 5%. Regarding property and capital gain taxes, the fairest taxes are most likely no taxes.

I am aware that some readers will consider such a system of taxation to be radical. But I can assure them that, while not perfect, this system would be far fairer and more equitable than the tax system we currently have in most Western democracies, which is so complex and incomprehensible for ordinary people that it requires an army of costly and time-consuming lawyers, accountants, and auditors to calculate the taxes that are owed.

This simplified tax system would also eliminate more than 90% of the IRS’s more than 100,000 employees who have the power to arbitrarily harass people and small business owners, since most of these agents themselves do not have a full understanding of all the tax laws and regulations. Complex tax laws also hurt small business owners far more than large corporations.

It is easy to see that the more tax laws there are, the more corruption there will be.



 Contrarian Investor Dr.Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.