Bill Gates On Income Inequality: Don't Tax Capital, Tax Consumption

Bill Gates recently read Thomas Piketty's 700-page treatise on income inequality and wrote a blog post discussing the findings. Gates agrees with the main conclusions of the book but not with the solution, specifically a progressive tax on capital gains. Instead he feels that taxing consumption would be a better measure to put inequality in check.

Last spring, Thomas Piketty unleashed his book Capital in the Twenty-First Century onto the economic world, showing with mountains of data on historical trends that income inequality is bad, the capitalist system can't fix inequality on its own, and government can play a positive role in correcting the problem.

For all those big conclusions, Gates is in agreement, but he feels that investors and philanthropists should not bear the brunt of the government's corrective forces -- as in they shouldn't be taxed as much.

"But rather than move to a progressive tax on capital, as Piketty would like, I think we'd be best off with a progressive tax on consumption."
Bill Gates frames his argument like this -- if you have three wealthy people, one spending money on new businesses, one spending money on charity, and one spending money on luxury items for him or herself, the last one should be taxed more because the first two are contributing more to society.

Unfortunately, Gate's blog post doesn't give much thought to how a progressive consumption tax would work. Although plenty of Americans live like IRS hoarders, collecting receipts for all expenditures to maximize their deductions, it seems unlikely that habit would continue if collecting receipts ensured a higher tax rate.

Piketty himself pointed out the difficulty of such a system in a phone conversation with Bill Gates, to which with former Microsoft CEO replies, "almost every tax system—including a wealth tax—has similar challenges."

Bill Gates also thought that Piketty didn't do enough to account for wealth decay, saying that the idea of wealthy families getting wealthier is a thing of the past.

"In America, that old money is long gone—through instability, inflation, taxes, philanthropy, and spending."
He pointed to the boom and bust of the automobile sector and the Forbes top 400 richest people as proof of his point. Bill Gates says that about half of the Forbes list is people who were successful entrepreneurs.

Nevertheless, a quick glance at the top 10 from that list shows that six of the top ten richest people received their tremendous fortunes from family, Charles and David Koch and the Walton clan. The Forbes list might be harmful to Gate's argument, rather than proof.

Bill Gates blog may be well thought out, but some might consider Gates slightly biased on the issue. He is the wealthiest man on the Forbes top 400 list with $79.2 billion. Despite giving away billions in charity, he has continued to accumulate money, much more than he ever left Microsoft with.

Likewise, Gates calls for a lesser tax rate for investors and philanthropists which means a lesser tax rate for himself and like-minded rich people.

Bill Gates' full blog post can be found here.

[Image Credit: World Economic Forum/Wikimedia Commons]