The 15% Tax Rate

So we learned last week that the Republican front runner Mitt Romney pays an effective Federal tax rate of about 15%. And guess what? So do the Gotham Gal and I.

That's because the vast majority of Mitt Romney's income comes from capital gains on investments and the same is true of my family's income.

There is a difference between Romney's capital gains and mine. I suspect that his capital gains are mainly real gains on investments he made with his own money. Mine are mostly capital gains our firm has made with other people's money. This is the carried interest capital gains discussion. I've been loud and clear that I don't agree with the current policy on carried interest taxation and I hope that the law is changed on carried interest. It will cost our family a lot of money in increased taxes but it is the right thing to do.

But there is a bigger issue here and that is whether it is good policy for someone of Mitt Romney's or my wealth to pay a lower tax rate than the average hard working american citizen. The theory in taxing capital gains at a lower rate than ordinary income is that the wealth that was invested that produced the capital gains has already been taxed once when it was earned. And it is also believed that a lower tax rate on risky investments vs safe investments (like bank deposits) provides an incentive to make those kinds of investments. I've long been a fan of these arguments and have supported the idea of a lower capital gains tax rate.

But I am bothered by the unfairness of the situation. When I get a big distribution from our funds, I always ask my accountants how much of the distribution I should set aside for federal, state, and local taxes. The answer is usually something like 28% (the difference between 28% and 15% is the state and local taxes). And then I often think of my two brothers who probably pay 40-50% of their income each year in federal, state, and local taxes. It just seems so unfair.

And so lately I've been more and more attracted to the idea of a flat tax where everyone pays the same tax rate on income above a minimum amount. In this model, we would eliminate all tax deductions; for mortgages, charitable giving, for medical expenses, etc. There would be no difference in tax rates for ordinary income vs other forms of income (ie capital gains).

If we did that maybe everyone could pay a 15% tax rate like Mitt Romney and our family does. We would have a fair tax system.

I've heard a number of arguments over the years against a flat tax. One is that a flat tax is regressive meaning that it penalizes lower income earners by taxing them at the same rate as higher earners. But I think we are all coming to realize that the current system may be even more regressive since most wealthy people find ways to pay lower tax rates.

Another argument against the flat tax is that eliminating deductions will cause massive disruption in markets and society. There will no longer be an incentive to own a home vs renting one. There will no longer be an incentive to make charitable deductions. The list goes on and on because our current tax system is chock full of such incentives. I think it would be good long term policy to eliminate all of these incentives and just let the markets work without tax incentives but clearly deductions would need to be phased out over a long time period to reduce the severity of the shocks that eliminating deductions would create.

The President's "Bipartisan Commision On Deficit Reduction" made a lot of noise over a flat tax. And many of the current Republican presidential candidates are in favor of a flat tax. It seems like we may have reached a point in our political discussion where we can seriously consider a flat tax. I would be excited to see that happen.


Comments (Archived):

  1. William Mougayar

    The only thing Taxes should be used for is to efficiently run and provide for local, state & federal services. If 15% across the board does it, that would put a lot of accountants out of business and it will reduce the inner complexities and vagueries of a complex system. Great idea!The US has a lot of complicated things that need reducing: 1/ Tax system, 2/ Health care system, 3/ Elections primaries system. The word SYSTEM should be eliminated except for software engineering and technical/scientific fields.

    1. Rob Hunter

      My dad’s an accountant (once public, but he’s been corporate for a long time now).  At some point, he came home with the observation that a humongous number of jobs exist purely because of inefficiency, and that there’s not a particularly large societal impetus to remove them (he was specifically talking about some subset of lawyers, I think, but it certainly applies to CPAs).I wonder what people DO for a living in such an efficient world.

      1. christopolis

        Maybe you were asking rhetorically, if not the answer is create wealth.

    2. Druce

      Educational system?Not sure why 15% is the magic number… historically Federal revenues have been a bit south of 20% of GDP, and spending a bit north. http://nationalpriorities.o…And demographics are not your friend, with the working population falling and dependency ratio rising.It is a system, because all the different taxes interrelate to create incentives. corporation pays taxes, pays out income as dividends/capital gains, recipient pays sales tax when they consume, estate tax when they bequeath it.which is why I agree with Fred that you can’t reform it, you have to start fresh.personally would go for – flat tax that only kicks in above the poverty line or so. possibly a small millionaire surcharge- tax capital gains as income but index to inflation- VAT, with no tax on necessities like bread and clothes, high tax on luxuries, carbon tax.- no corporate or estate taxone of the issues is complicated taxes make for good rent-seeking. For instance corporate tax raises a small fraction of revenue, is an employment security act for CPAs, lawyers, lobbyists, and Congressmen, and private jet pilots.

      1. William Mougayar

        Sure. Throw in Education as well, of course. – posted via

      2. SubstrateUndertow

        “Rent-Seeking”Is that the same asUnnecessary middleman wealth extraction?

  2. Rob Hunter

    I’ve been thinking about taxes and tax rates for awhile.  My frustration with the recent talks over dealing with our budget crisis is that I agree with both parties – I think we need to reduce spending AND raise taxes.My friends in finance tend to disagree with me, and their statement back tends to be “if you raise taxes on the wealthy, they’ll just not pay”.  This response made me furious, and it took me some time to realize that they didn’t mean through genuine tax evasion but through all the deductions and loopholes that our enormously complex tax code has.I would hope that the cost of eliminating all of the deductions isn’t a flat tax, but that it’s a less progressive tax structure.  I’d be fine understanding how much each bracket genuinely pays now (on average) and drop their bracket to that (ensuring that you have a sanity check to make sure that no higher bracket pays less than a lower bracket).  It might take some finessing, but it does seem like that’d be the closest to fair.That being said, I’d be in favor of eliminating deductions enough that I think I could probably choke down a flat tax.  I do wonder what that flat tax would have to be, though.

    1. William Mougayar

      Reality is somewhere in-between is where that should fall, and with consideration for progressive transitions. But the complexity is not needed, agreed.

      1. Rob Hunter

        To be honest, I wouldn’t mind some consideration for the other side of the argument – if a flat (or flatter) tax is what’s needed, I think it’d be a good thing to show that compromise can be made without vitriol.  And in order to get a thing like this done, you’d need compromise in spades, I think.

    2. Tom Dorsey

      Rob it is natural for anyone to operate within the law and pay as little taxes as possible.A basic principle of taxing is “what you tax you get less of”.  People are human, throw a punch at them, they will attempt to side step it. Increase my taxes on Capital gains and you will get less capital gains from me.  Maryland learned this as did Washington State when they raised the tax on cigarettes $1.  They got much less taxes.  Washington State after they scratched their heads on this (their politicians never had ECON 101) they reduced the taxes and got more revenue.  I would suggest Googling “Laffer Curve”.  If you took all the money away from the rich and gave it to the poor it would not take long before those formally rich would be rich again and the poor would be poor again.

      1. Rob Hunter

        I completely agree with all of that.  I think it’s completely rational to pay the least that you can, and I don’t think that there’s anything particularly wrong with the behavior.What’s wrong is leaving those opportunities open (and I mean wrong as in incorrect or inconsistent with stated goals rather than wrong as in evil).  I tend to be against incentivizing any behavior by tax structure, on the basis that we’re generally pretty bad at it (and before that, I’m not confident that the behaviors that we select for are particularly good).I actually totally agree with the IDEA of capital gains being taxed at a lesser amount, but the notion that it can be used by hedge fund managers to be taxed effectively at 15% doesn’t make a lot of sense.  The next issue though is that if I came into wealth (by way of family), does it make sense that I’m taxed at 15% for investing money that I didn’t personally earn?My point is in trying to reduce complexity, such that you have a system that responds to your inputs properly (raising taxes => everyone pays more), and keeping your core themes functional (rich pay a higher % than poor).  It’s a perfectly reasonable argument to say that raising the taxes could reduce revenue by hurting the economy, however the statement that “raising taxes will cause more legal tax avoidance” should not be true.

      2. SubstrateUndertow

        Well there you go!You’ve got a cyclical solution.Take high levels of progressive taxes off the rich and redistribute it to the poor and middle-class to spend back into the pockets of the rich.Cyclical economic homiostasis and everyone lives happily ever after!Yes – I am kidding 🙂 Still, given the ever accelerating pace of automation and the permanent redundancy of an unsustainably large % of society we will require some form of cyclical redistribution of purchasing power just to keep the system from imploding.

    3. SubstrateUndertow

      “I’ve been thinking about taxes and tax rates for awhile.  My frustration with the recent talks over dealing with our budget crisis is that I agree with both parties – I think we need to reduce spending AND raise taxes.”<hr/>Agreed but what about that third, most fundamental, variable no one seem to want to focus on.Team America’s ability, in the aggregate, to increase production of real tangible wealth in order to raise the necessary tax-scratch required to pay the freight on a minimally decent and sustainable social infrastructure.Below that level of aggregate wealthy production required to secure most everyone’s basic food, shelter, safty, education and health the social contract collapses into a very nasty and counterproductive food fight.The financial class seem to have forgotten the most basic of lessons.Don’t kill the middle-class goose that layer the golden egg

  3. Rohan

    ‘We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.’ | Winston Churchill With taxes, we really need to KISS it. (KISS = Keep it simple stupid.)If only tax rule makers created tax rules they’d like to follow, and not tax rules they’d like to influence and change as per their convenience. 

  4. Jan Schultink

    I think that economists have researched that killing the bureaucracy, complexity, red tape, and opportunities to dodge tax with a simple rate in itself could make it worth while, before even getting into the arguments you make about social equality.

  5. Bala

    +1 flat tax

  6. Tom Dorsey

    When you rob from Peter to Pay Paul, Paul will always be a supporter.  This is politics in it’s most basic form.  The tax is a wedge to get votes.  Just like Term Limits, which 70% of Americans are for and has not been passed, the flat tax it will never be passed.  A flat tax is the exact right tax but they lose the wedge to get votes.  Obama could not have been elected without the wedge. They all know this. 

    1. SubstrateUndertow

      Lets call out that wedge by it real name why don’t we!”collective democratic willfulness”or by its more disparaging name”mob rule”It is a balancing act to be sure!Still there must be some reasonable limit to the wealth that can be justifiably apportioned to one person economic participation.We need to have a serious debate about the cut off point at which that wealth apportioning simply becomes a perverse and counter productive social value system.

  7. Nathan Wong

    I’ve been a long time reader, but this is my first time commenting. I just wanted to say that it’s great how vocal you are about things like this.Too often things like a flat tax get pushed aside as an extremist/activist ideal that has no place in the real world, but I think you nailed it here: for one, a flat tax would be no more regressive than what we have now; and for two, while a sudden change in economic incentives would drastically affect society (least of all for those who are heavily invested in these incentives, including the financial management industry), it’s necessary for the long-term heath of our economy and thus needs to be done.It’s so refreshing to see ideas promoted by merit instead of by self-serving politics.

    1. fredwilson

      thanks Nathan. first time commenters almost always leave great comments because they care enough about the topic to jump into the fray. i hope it won’t be your last.

    2. John Revay

      Housing is stalled, if the mortgage interest deduction was eliminated it would only stall an important part of our economy.  Fred did knowledge phasing changing – over a long period – with this one – I think it would need to be done over a period of say 15/20 years

    3. ShanaC

      Hi Nathan.How do we deal with the poor with a flat tax – do we get rid of other kinds of taxes so that they aren’t hurt?  Do we add in a VAT on luxury goods to get more cash from the rich so that an overall flat tax doesn’t bother the poor’s ability to move up.

    4. SubstrateUndertow

      I am not knowledgeable enough about tax structures to have a strong opinion on the merits of a flat-tax but it does call to mind that famous quote from Einstein.”keep it as simple as possible but no simpler” Lets face it, the volitional organics of economic self interest are inherently complex. A simple flat-tax might not muster the fidelity required to stabilize such complexity?

  8. John Revay

    Fred I was going to drop you a note…however w/ this blog topic – let me just say it hear – you should run for POTUS!  ( Not sure what your relationship is w/ Mayor Bloomberg – maybe you guys run together)> the work you are doing to bring tech to NYC> the NYC school system – tech launch that you did you earlier this month> my sense is that you family has made a nice fortune…but has given a fair amount back  – see first two points above just as an example.> Lean – I have heard you talk about Lean as it relates to start ups and even USV, we need to adopt a lean thinking w/ Gov including military> the comment you made about WAR yesterday re: coming from a military family ( & military families don’t like fighting wars)> comments you made in yesterdays post about “TALKING” with entertainment industry (& Chris Dodd), we need more of that vs threatening to fight (aka send the forces in). > link in one of your replies yesterday where you talked about the Union Square Sessions and you gave the links about the hacking education – I just read through those links & comments> lots of good stuffYou ( & the Gotham Gal’s) heart and checkbook seem to be in the right place.Fred Wilson for President 2012, can I register the domain?Edited to fix formating

    1. fredwilson

      mike bloomberg can’t get elected president and neither can i. nor would i want to. he does.

      1. NicolasVDB

        Excuse me for being late and maybe naive, but why couldn’t Bloomberg be elected president?

  9. Justin Ekins

    Great article, but you are wrong about the current tax system being regressive. You seem to confuse tax incidence with tax burden. See and While there are certainly some exceptions, on average federal taxes are progressive. 

  10. Harry DeMott

    My guess is that you’ll get a lot of comments on this thread.As a long time cynic when it comes to government, I’ve always believed that the best tax is close to no tax – because without revenue , the government couldn’t do as much as it does (in my belief inefficiently). I’m beginning to sound a little like Ron Paul here.One side of the argument is that the flat is regressive – and the general definition of regressive is that it forces some people in lower income brackets to pay more than they currently do (remember about 40% of US citizens pay 0 tax whatsoever)I rather like the flat tax myself – it is simple, easy to understand, puts us all on the same footing, and it is progressive.And by progressive, I mean that the more you make, the more you pay into the system – despite, and this is the key point, getting anything more out of the system.In an ideal world, I would love to see a system where the citizens of the country vote on the governmental services they want in true democratic fashion, and then the bill gets chopped up and sent to every citizen for their proportional share. If there are 300M of us in the US and the bill comes to $3B then everyone gets a bill for $10.To me that’s a fair system – and one where citizens would be very careful about what they wished for from a government.In our current system everyone gets a vote, but only half the population gets a bill. That half is then further stratified so that some get much larger bills than others – and in what world is that necessarily fair?The tax debate is one that has been framed in a very interesting way – very rich versus middle class – or poor – as opposed to how we should have a fair system where people who get services pay for those services. It is also framed as a % of income debate and not a $ paid in debate – which is the way it should be.So while Mitt Romney and you pay 15% and your brothers pay in 40% or 50% it sounds terrible. When Warren Buffet pays 17% and his secretary pays 37% it sounds terrible – but the facts are that Warren Buffett paid in over $6M in taxes last year to the IRS and his secretary probably paid in something like $30K – and yet both of them got the same essential services from the government.For all the people who say the rich should pay a higher percentage of their income to the government – I say this: send more of your income to the IRS, they will accept it and you will feel better.If you want real compromise – do get rid of all the loopholes, both personal and corporate and let’s put everyone on similar footing. Put in a flat tax with some floor on it – so that the truly unfortunate in society can get by and hopefully find ways to help them thrive.Then ask the people who are paying the bills what sort of services they think they can afford – and set the tax rate to match the expenditures necessary.Interestingly, if you really want to soak the “rich” – put in a VAT tax. That way if a really rich guy wants to spend money on planes and cars and big houses etc… and live the “fat cat” lifestyle, then charge them a lot for the privilege – but if they want to save, or put the money back into companies that create jobs or simply put the money under the bed – why should we ever discourage that?I think it is the lifestyle of the rich and famous that get people, more than the inequality. Buffett lives in a lesser house than many middle class Americans, so he can always play the folksy card and people don’t get pissed at him because he doesn’t seem to be living high. Steve Schwartzman of Blackstone throws himself a huge birthday bash and buys massive houses in the Hamptons – that’s what people get pissed about.Here endeth the rant.

    1. bsphil

      >remember about 40% of US citizens pay 0 tax whatsoeverPeople that poor spend almost all of their income rather than invest it, so they’re paying tax on nearly all of it.  There are more taxes than just income tax.

      1. John Revay

        Including 7.65% Soc & Med, which is not levied on cap gains 

      2. Harry DeMott

        Which is why I would certainly be in favor of some floor on a flat tax so that people can get by.

    2. Phil Swenson

      “remember about 40% of US citizens pay 0 tax whatsoever”wrong.  Everyone with a wage pays the payroll tax.

      1. Harry DeMott

        Agree. You would have to remove that loophole in a flat tax system as well – so that the first $’s of income up to a threshold would be untaxed.And you will then get into arguments about local taxes – and how taxes on food are a tax which hit the less fortunate harder than the rest – all of which is true.My point is simply that everyone has an equal vote on how we are governed – and those votes end up getting a small group of people to subsidize the lives of a larger group of people – all of it directed by a third group of people (the government) whose sole goal seems to remain in power (i.e. the arbiters of the redistribution).I’m just a big believer in self sufficiency – more libertarian than anything else (and hopefully not out on the Ayn Rand edge)

      2. Morgan Warstler

        You don’t pay the payroll tax.You are forced to make a contribution to your SS payout.”Paying taxes” is about paying the over-priced salary of the shitty DMV worker, the military base, the Washington Monument, Medicare, etc.Most people don’t contribute to this stuff in any meaningful way.

        1. Druce

          the way it works is, when it’s time to score talking points about how the top earners are screwed, it’s not a tax, it’s going into the trust fund.then, when you calculate the deficit, you count the payroll tax as revenue and show how fiscally responsible you are.then, when it’s time to screw the taxpayer, there is no trust fund, it was all just a fiction.

          1. Morgan Warstler

            it doesn’t matter.what matters is MOST people are not paying taxes towards “public goods” they are not HELPING pay for the shared stuff.They are not only mainly just paying FICA, they are getting back far more than they earned.Don’t dance around the subject.

          2. Druce

            is the subject 1) talking points for 100 2) economic growth for 100 3) income distribution for 100 4) ‘deficits’ for 100 5) or perceived wealth transfer and unfairness thereof for 1000?Does the fact that some wealthy people pay 15% and middle-class people 30% enter into that at all, or corporate welfare?there’s no unfairness that people can’t justify on ‘moral’ grounds… but funny how it often seems to coincide with their self-interest.

        2. Phil Swenson

          You are being pedantic.  And wrong to boot.Payroll goes to medicare too.  And money is fungible, so it doesn’t matter.

          1. Morgan Warstler

            I am speaking to the letter of the law AND the spirit of it…when people say half don’t pay taxes they mean half don’t contribute to any of the government shit they are voting for themselves to receive.They do not mean Social Security.  EVERYONE pays Social Security, we all know it, we all expect people to receive it.Look, hard core progressives understand the flip-side of this same point…IF gvt. is all that great, and you really want to have an expansive safety net and stay on budget, you need to actually tell the middle and lower classes that they ALSO have to pay the freight.Right now they don’t. Progressives admit it out loud and when the same thing is said back by those offended about it, the left doesn’t get to switch track and claim they are already paying enough.

          2. Nmelo Cu

            There is no middle class my friend. We have no cash. No dinero.

    3. ShanaC

      Maybe we do need a vat and a flat tax, while getting rid of taxes on food.I mean, a little luxury is fine, a lot can be ostentatious and in bad taste.   Nothing wrong with not condoning that.  And our tax system doesn’t do that.  it could, and it could push people into building things that are for everyone (not just Steve Schwartzman)

    4. Jacqueline Hughes

      I’d argue that Warren Buffet, does indeed, benefit more so from government services than his secretary does. It’s just in a more roundabout way. The $6M that he pays is trickled down to low wage employees he employs through his companies so that he doesn’t have to pay them more to survive. And as Howie said above, this money is also used to support the military. It protects both Warren and my freedoms, but he does have much more to lose monetarily if we were ever to be invaded. The idea behind lowering Warren’s taxes is that he’d then take that $6M and use it to create more jobs. I’m not sure the “super rich” are complaining that if they only could keep more of their money, they’d be able to create more jobs. I do, however, hear that from small business owners. I agree with you that the government creates inefficiency. I’d love to see a system that rewards the super wealthy and their companies who raise their employees wages to livable wages. If they did this we could eliminate many government programs therefor reducing taxes.

      1. Harry DeMott

        Amen to that Jacqueline.It’s not out capitalistic raise my quarterly earnings at all cost system, but an incentive to pay better wages is certainly sensible.Good article in the NYT this weekend talking about Apple outsourcing manufacturing jobs in China. Lots to discuss there but one key point is that if we were self sufficient at home, in the US, we might not need as much spent on defense, because we wouldn’t have as many key economic interests outside the US that need to be defended under the banner of patriotism, and spreading freedom and democracy.

      2. Morgan Warstler

        Warren Buffet has a specific interest in not doing Pipeline XL.It forces US oil producers to keep using his railroad.He’s a world class rent seeker.

    5. inthewoods

      Misses the point of the value of the dollar being different for people at a lower income than those with higher income.  To Warren Buffet, $6m is a rounding error.  To someone making $30k, every dollar is worth much more to them.

      1. Harry DeMott

        I think this is a specious argument. Why should anyone be an arbiter of what the relative value of a $ is to any individual. The same $1 spends the same whether it comes out of the wallet of Warren Buffet or his secretary. Just because someone can pay more, doesn’t mean that someone should pay more. Should Buffet pay $1M for a Big Mac at McDonalds just because he can afford it, and it is just a rounding error? I just don’t see how that is fair.

        1. inthewoods

          This isn’t about being fair in this case, it’s about the perceived value of a dollar as a function of total wealth.

          1. Harry DeMott

            Perception has no place when deciding how to tax people. It has everything to do with the framing od the debate and the media’s spin on it for political purposes and gain, but in reality there should be no place for it. It’s pretty simple – we have a government that needs a certain amount of revenue every year to operate – and its citizens need to pay for those operations or we need to borrow 9citizens paying later rather than now). How we raise those funds from citizens (and how we balance current income raises versus debt) is really the question – and whether there is a perception that a person can afford something is irrelevant in that debate. No matter what their monetary status, everyone in this country gets one vote, shouldn’t we keep this system similarly. If we go down the perception route – then couldn’t we say that warren Buffet, due to his enormous wealth and power, and the fact that he is a son of a senator, can always buy the laws he wants – and thus he should not be able to vote? It is a slippery slope.

          2. inthewoods

            Voting and taxation aren’t the same thing.  Voting is guaranteed by the Constitution – but it says nothing about guarantees around taxation.Calculating the relative value of a dollar is important in the discussion of tax rates – it’s not spin – it’s part of the economic analysis.Funny that you mention the idea of Warren Buffet, because of his wealth not being able to vote – when the opposite is true in this country because of Citizens United.  That is, the wealth in this country, in addition, to being able to lobby for laws that support the policies they prefer, they also have the ability now to spend unlimited funds on elections.

          3. Harry DeMott

            I doubt we will agree on the idea of fairness in the tax system, but I’ll give you citizens united any day. Great for media companies, great for corporations, lousy for America.Harry DeMottRaptor Ventures212-266-6908 Work917-439-6600 CellSent from my iPad

          4. inthewoods

            It’s called modern utility theory btw – didn’t they discuss that in your Princeton economics classes?  🙂 (gotta love google)You might enjoy reading this:… “Here’s what we came up with, again with the incorrect response in parentheses: a dollar means more to a poor person than it does to a rich person (disagree);”In all seriousness Harry – I think you’re right that we won’t agree on this.But I also think you should reach out to the blog owner and ask to remove your phone numbers.

    6. Chris

      Ultimately, it comes down to whether or not you want a society or simply a disconnected group of individuals sitting on the same piece of land.   Taxes suck – on that we can all agree – but it’s not much different than dues for an organization you want to be a part of.  We need to stop equating the word “tax” with “boogie man”.   We need to stop pointing fingers at the wealthy AND the poor.  We simply need a fair tax code, some modicum of rules and regulations, efficient/effective government, and (dare I say) a culture of shared sacrifice and shared success.  Rising tides should lift ALL boats, not just a chosen few.  And before you tar and feather me as a bleeding heart – let me say that I have the selfish position in this argument, because I desperately want a stable country (fairness in income provides this), and I want the 99% to have more money to buy my goods.   Yes – I’m a selfish SOB who wants to invest some of my spare income so that we remain a stable, healthy, thriving economy for decades to come.  It’s all about me and my needs!   PS – If “Job Creators” are such heroes, why do we need special tax breaks to survive and thrive?  Would entrepreneurship just die off if the government tap was shut down?  I’m thinking no, but maybe that’s given ourselves too much credit.

      1. Harry DeMott

        It would be great to get rid of so many of the preferences in our system and just have a clear code.

      2. SubstrateUndertow

        Thank you for zooming out!Well said.

    7. SubstrateUndertow

      “It is also framed as a % of income debate and not a $ paid in debate – which is the way it should be.”<hr/>That all sounds good in theory and I apologize for repeating myselfbut stillThere must be some reasonable limit to the wealth that can be justifiably apportioned to one person economic participation.We need to have a serious debate about the cut off point at which that wealth apportioning simply becomes a perverse economic value system.I think that is the hidden ground on which progressive tax policy hangs its hat.

  11. igniman

    That would imply that all investments small and big have the same potential for revenue generation, which is not true, as evidenced in interest rates or bond rates. 

  12. Jorge M. Torres

    I’m a daily reader and infrequent commenter.Fred, you say:”I’ve heard a number of arguments over the years against a flat tax. One is that a flat tax is regressive meaning that it penalizes lower income earners by taxing them at the same rate as higher earners. But I think we are all coming to realize that the current system may be even more regressive since most wealthy people find ways to pay lower tax rates.”Why don’t we just eliminate the ways wealthy people avoid paying their fair share of taxes?  A flat tax seems to me to be an extreme (and disruptive) approach to doing that. 

    1. fredwilson

      i don’t think you can ever incrementally improve the current system. we need a new one.

      1. Jorge M. Torres

        I doubt the super-rich would characterize the elimination of all their tax loop holes as an incremental change to the current system.  I suppose they’d find it rather shocking to see more of their income go to Uncle Sam. As between the super-rich and the rest of us (especially the working poor), I’d rather see the super-rich bear the brunt of radical change to the tax code.

      2. Morgan Warstler

        I disagree here.I think GOV2.0 “there is an app for that” can fundamentally remake the entire system.The only real issue we face is the power the public employees have gained since 1998.  This is George Bush’s greatest failure.If we kept their compensation at inflation since 1998, we’d be saving just over $500B per year, and would have $7T in less debt.  No one recognizes this has happened.We HAVE to end Davis-Bacon, and then force them at the local and state level  to let the start-up industry get our greedy little paws on replacing the overpriced labor with apps.The small cities that change first go BOOM, and the other cities and states fall by attrition.We just need a state or two (think TX) to shake hands with VC.

      3. LE

        All at once change could not possibly happen to a system so entrenched and legacy with so many stakeholders who have a “vote”. If it stands a chance it would have to be done incrementally (if we could agree on what that means of course).  Change involves getting the agreement of people. All who have different things to gain and loose. And compromise. I don’t believe the equation can be solved. 

  13. rrstevens1

    I am not sure we will see a flat tax, at least not as many imagine one.  There are too many lobbyists and entrenched organizations that have a skin(s) in the game and they will not want to give up.Not to mention the media, the way they frame the issue will influence the debate as well.  It will take a bottom up/grassroots approach to get the idea of a flat tax moving.

  14. JimHirshfield

    Can you imagine all the lobbyists descending on DC on behalf of the real estate, non profits etc. I agree with your points, and hope change is discussed and implemented.Another issue is the practical criminality of corporate tax evasion in this country.

    1. Rob Hunter

      Kinda makes you feel like you’ve got to weaken lobbies before you try to make any real change, doesn’t it?  If that’s even possible, I have a suspicion that it’ll take a really long time.  I’d love for the SOPA/PIPA thing to start that conversation (Chris Dodd said WHAT?), but I won’t hold my breath.

      1. JimHirshfield

        Without lobbying there’d be nothing for politicians to do after they’re voted out of office. :-0

    2. William Mougayar

      This is the age of Online Advocacy. Change starts here in community blogs like this one. Comments & online conversations power us and empower us to take the fights into the real world and win. Look what happened with the anti-SOPA movement. It really started online and connected into the real world vs. the other side who started the old-fashioned way, by lobbying privately in the corridors and hallways. This is the age of FULL TRANSPARENCY. Whatever the ONLINE WORLD WANTS, the ONLINE WORLD WILL HAVE. We are the people with power, not them.

      1. JimHirshfield

        I hear ya, bro.

      2. awaldstein

        Hi WilliamI agree in spirit 100%.Two questions:1. Is this a blog based revolution? There are a few leaderships spots, like avc, that provide a nexus of discussion. But the spread is on the big social nets or so it seems. I’d love to see some data. I want to believe but when I look at the activity in my FB and Twitter streams, the real mass market action is there.2. Both Sopa and this tax discussion are US centric. What is happening in Canada? In the UK?

        1. William Mougayar

          Good questions. Blog comments like this one have a certain ripple effect to other blogs & the whole thing mushrooms into Tweets, FB discussions, other blogs, real meetings, online collective actions (eg Blackout Wednesday, Badges we wear, etc). So, today we have a SOPA badge,- maybe tomorrow we’ll have another badge for the next big issue. I don’t have the pragmatic data to prove this, but we know it’s happening. What happens in the US rubs off to other countries. The US leadership in Technology is real, and it’s respected everywhere, without any political ramifications. We are the actors in this change, whether being a cheer leader, a visionary, a participant, a supporter, a torch bearer or a activist. – posted via

          1. awaldstein

            Well said. I think that blogs are still the center of the discussion and engagement ecosystems. With the platforms as channels of messaging more than places for engagement.I wonder how the ecosystem of blog influence is striated out. I really want to see a list of blogs by topics by engagement by influence.Re: the international question. Just curiosity. My international friends are always pointing out the difference.- posted via

  15. Cam MacRae

    The case for a marginal flat tax better addresses some of the objections you mention. 

  16. AlexisMarin

    I’m not sure if you were at the Founder Showcase event in Mountain View last Thursday, but Mark Suster expressed somewhat similar thoughts on the topic during an on-stage interview. Namely, that while he wants his investment risk acknowledged in how he’s taxed, he’s more than willing to pay more in taxes than he does now.Can’t say I’m a fan of the flat tax, but I’m glad y’all are having this discussion openly. Tax reform needs to happen.

  17. Mahir Lupinacci

    If you “don’t agree with the current policy on carried interest taxation” there’s nothing preventing you from paying a higher rate.  Time to put your money where your mouth is.

    1. Cynthia Schames

      Sense. This makes none. If you overpay your taxes, at some point the IRS usually catches it and sends you a check (it’s happened to me). If you’re implying that Fred doesn’t do anything for society in terms of giving back–you’re dead wrong. 

      1. Dave Hopton

        You don’t have to overpay on taxes – you can make a donation to the Treasury that goes towards paying off the debt:http://www.treasurydirect.g

        1. Cynthia Schames

          @Dave Hopton so you’re saying you would rather entrust the government with your “donation” than to actually choose where those monies go? I wouldn’t. I don’t put much faith in a government that can’t even balance a checkbook and routinely spends billions of dollars it doesn’t have on things its constituents don’t want. At least charities are accountable.

    2. Rob Hunter

      Totally disagree.  That’s a kind of charity (acting against self interest for some higher cause), and if you believe that performing an act of charity will cause all others to follow your lead, then you’re deluding yourself.I understand the sentiment, but I think that it’s a logical trap that unnecessarily stalls out conversation by silencing voices.  Having the opinion that tax structure should be fixed shouldn’t cost you 20% of your income in the interim.

    3. fredwilson

      i prefer to take my windfall and give it away to good causes. and we do that. it is very much a case of looking at that 40-50% vs 28% and saying “we have to give this difference away somehow”. i would feel very guilty holding on to it. the perverse thing is we get a tax break for doing that!!!!

      1. William Mougayar

        If you gave more to taxes, would you give less to your own causes? Or that’s a non-issue? 

        1. fredwilson

          hard to say. i haven’t crossed that bridge yet.

      2. Dave Hopton

        great attitude. And I agree wholeheartedly at the irony!

    4. inthewoods

      A rather standard argument – but that’s not the way tax policy works.  It is not a voluntary effort, and making it so does not change the problems with the system.

  18. jason wright

    Perhaps the US should go Danish.

    1. ShanaC

      by that you mean?

      1. jason wright

        Food for thought – Danes pay 55% tax, but the upside is considerable. 

  19. John Revay

    I did a Post yesterday when I went on a rant about using the internet to bring about disruption and change w/ our political system.  I referenced the fact that I used many of the items that my roommate from college had tweeted earlier this year #myvote. His # 4 was;Rule #4 if you want #my vote: Fix the Tax Code. Start by eliminating all deductions. Add them back in sparingly. Finish with a flat tax I don’t necessarily agree w/ this re; for the reason Fred mentions above – Home interest, charitable deductions…..and certain other incentives that the government uses to help stimulate action re: R&D, ITC, 30% credit for adopting renewable energy re: Solar etc.I agree the Tax code needs fixing/simplifying  just not sure if you scrap the whole thing

  20. Michael Swaine

    Everybody who argues for a flat tax presents this “flat tax with no fraud, loopholes, or special deals” vs “progressive tax full of fraud, loopholes, and special deals” choice. 

    1. fredwilson

      is there a better way to explain it?

      1. Dave Hopton

        Basing arguments for a flat tax on its simplicity is a red herring. You can make a progressive system simple – just remove the loopholes. 

      2. Brice Tebbs

        Yes. There is no tax policy can’t treat all types income as the same and still be progressive. The rate table is not what makes taxes complex or full of loopholes.

      3. lonnylot

        I think @Michael Swaine is saying you should consider the possibility of a progressive tax with no fraud, loopholes, or special deals.

        1. fredwilson

          yup. that makes a lot of sense.

    2. Mark Essel

      Part of the appeal of a flat tax is that without the complexity it’s harder to find loopholes, conceal fraud, etc. I think that’s why it’s compared that way, but you’re right it’s not a fair comparison.We’re comparing reality (always uglier) to an idealized standard.

  21. Dale

    A 15% flat tax would ultimately be more fair.However, what would truly be fair is a head tax where everyone pays the same amount per year to the government.15% of 1 million is $150,000 while 15% of $100k is only $15,000. Does the person paying $150k in taxes get 10X as many government services? No. We need to come up with an appropriate definition of “fair” when we start thinking of new tax rates.

    1. fredwilson

      that is not fair in my opinion. i have the means to pay more. and so i should. its the same way every community works. some people give $1 to their church every week. some people give $100 to their church every week.

      1. Adrian Sanders

        I agree with Fred 100% on this.I never understood the wealthy argument of “i don’t get 10x services.”that’s bullshit. where do you make your money?’s the same problem with libertarians – “i did this all by myself”as if all the people that buy your services / products didn’t contribute to your wealth. you owe it to each and every American to support the common infrastructure that makes your wealth possible. that’s what you’re paying for. 

        1. Dale

          Libertarians don’t claim that their success, if any, is due to doing everything by themselves. This is a false charge brought against libertarians.They believe in maximizing individual freedom, contributing the minimum necessary to ensure government protects those rights and freedoms, and letting people reap the benefits of their work (or accept the consequences of not working).You also simply the origins of wealth to the argument that “your wealth comes from American customers.”Those customers also receive something of equal or greater value (if it’s a good product/service). There are also many other factors outside of America that makes those goods and services possible. Apple produces its products in China. Should we make it mandatory that we pay taxes in China as well? Should Apple customers pay an extra tax to China because they contributed to making this exchange of value possible?The common infrastructure that everyone should pay for is the protection of fundamental human rights and liberties. People should pay the same amount for those protections.

          1. Adrian Sanders

            By that rationale, services and goods all have inherent value out there somewhere in the cosmos.It’s polarizing and basically untrue that if you work hard you get paid a lot of money. libertarians believe in that myth that there is this 1-1 transfer of work to wealth. it just happens to break down when you look at jobs and careers outside of business. how do teacher’s reap the benefits of great students? they don’t monetarily.there is more to common infrastructure than “fundamental human rights and liberties” – things like clean water, education, and the idea that the capitalist market is simply better if everyone is benefiting, irregardless of how business savvy they are. 

      2. Dale

        The primary difference between paying taxes to the government and donating to the church is that donations are voluntary. Would you want to be a member of church that forces you to “donate” more based your income? It violates the spirit of giving back.It’s also undemocratic to have people pay far different amounts to the government. Half of Americans don’t pay federal income tax. This makes it easier for the half that does pay taxes to claim that the half that doesn’t owe everything to them.Using the “each according to his ability, each according to his means” gives people the incentive to downplay their abilities, reduce their means, and ultimately contribute less to society.

      3. kidmercury

        lol @ using church as an example…..religion is the one entrepreneurial opportunity that is even better than government. at least government has to pretend to do stuff (i.e. create wars, regulate stuff, etc) religion just involves some dude wearing weird clothes telling you not to have sex and of course give him all your money otherwise some monster will come get you. talk about a high margin business!!! damn i gotta find a way to get in on that

    2. Dave Hopton

      Does the person paying $150k in taxes NEED as many government services? No.

      1. William Mougayar

        Let’s not go that far…roads, law & order…just a few essential services, not all of them.

    3. Alec

      If you believe that a significant part of government’s function is the protection of private property (and the maintenance of a society in which that protection is even possible), then it makes sense that those who have more should pay at least proportionally as much to protect it.  If might made right, it is unlikely that an entrepreneur could keep his winnings without hiring an expensive squad of thugs.  If it costs less to pay the government than to pay the thugs, the government is preferable.

    4. Matt Straz

      I’d be truly embarrassed if I were paying the same in taxes as someone that made ten times less than me.I’m proud when I pay my taxes. It is a privilege and an honor to do my part.I agree that it should be less complicated, if possible.

  22. andyswan

    The Utopian politicians will never go for this, because to them, a heavily progressive income tax is a means to redistribution, the destruction of private property rights, and their idiotic goal of “equality”.   How would politicians like Obama even function without the ability to bribe large voting blocks with other people’s money?   Without the ability to turn the 99 against the 1?  It all collapses for the Statists without the tax system as a tool for coercion and control.  

    1. fredwilson

      i am not as cynical as you are andy.

      1. andyswan

        You mean the 1% that pays 30% of the federal income tax collected?

        1. PD

          yes, the 1% that controls more than 30% all of the wealth in the U.S.

          1. andyswan

            Replace “controls” with “creates” and you are onto something

          2. PD

            if by “create,” you mean “holding a third of the nation’s financial assets and about 28% of non financial assets (e.g. property, jewelry, etc.),” sure, they’re creating.

          3. andyswan

            1. How did they get it to hold?2. If you are concerned about hoarding, why do you wish to increase the incentive to do so (by punishing successful re-investment with higher taxes)?

        2. inthewoods

          Two things:1. The top 1% is paying a larger portion of the overall tax burden, but you fail to ask why – the reason is that wealthy have made the majority of the income gains, thus resulting in them paying more of the overall tax burden.2. Why is it that people think that the current tax code which clearly benefits the top earners is not redistributive?

          1. andyswan

            Lol how does it “benefit” top earners?

          2. inthewoods

            By providing them lower marginal tax rates than people making lower incomes, mainly due to them earning most of their money from capital gains vs. regular income.

        3. gorbachev

          They pay 30% of the taxes, but make 48% of the income.Hardly seems fair in that context, eh?

          1. andyswan


          2. gorbachev

            So turns out Mr. Swan is correct.Top 1% make about 23% of the total income and pay about 35% of the total INCOME 10% make about 59% of the total income and pay about 64% of the total INCOME taxes.Seems like a perfect curve for progressive taxation especially given the 15% of Americans living below poverty levels.

      2. andyswan

        It isnt cyncism…I am quite optimistic that the tides are shifting away from the welfare state!

    2. PD

      totally, dude. and those 1%’ers have absolutely no interest in maintaining a system (and supporting politicians) which affords them lower taxes than the 99%ers, especially when money = speech.

    3. Adrian Sanders

      yeah, stupid equality…

      1. Aaron Klein

        Equality of opportunity, or equality of outcome?That’s a huge difference.…CC @andyswan:disqus 

        1. Adrian Sanders

          The difference being that one is the utopian dream of capitalists and the other the utopian dream of socialists. 

          1. Aaron Klein

            Another difference: one actually allows individuals to work as hard as they want and be all that they can be. The other leads to mediocrity and stagnation.We may never perfectly reach the utopian dream of either approach…but we will assuredly be better off tilted towards equal opportunity.

          2. Adrian Sanders

            Some people work really hard at things and get paid very little. Other people work somewhat hard at things and get paid very much.That’s not a systemic problem, it’s the reality of abstract valuations.The only thing that combats the tyranny of abstract valuations (ie how you manage a fund is worth more than how I perform heart surgery) is to have taxation and societal structures that fundamentally believe there should be a minimum standard of living. This dream of “be all you can be” often carries the assumption that such dreams need to translate into monetary quantifiable outcomes, and personally, I’m not convinced that that is always the case. 

    4. steveray

      If people voted solely based on their economic interests the GOP would be a marginal party.

      1. andyswan

        Yes, the 51% could vote to steal from the 49% legally. Awesome

    5. Mark Essel

      I read this comment in Kid Mercury’s voice, and liked it very much.

  23. Cynthia Schames

    I’m fairly apolitical so I’m only going to comment that I also believe in a flat or significantly flatter tax.  It’s simply FAIR.  I do not believe that high net worth individuals should pay more, percentage-wise, than average citizens, but at the same time I feel wrong taking advantage of the inequity you describe as well. Not for nothing, also: a flat tax would do away with an amazing amount of inefficiency, confusion, paperwork and criminal activity around our current taxation system.  I’d love to abolish the entire IRS and the industry of tax preparers.

  24. Jim Tousignant

    I totally agree with the concept of a flat 15% tax for EVERYONE and eliminating all the crazy and often counterproductive tax breaks, deductions, exemptions, etc. Great post Fred.

  25. Securities Guy

    “The theory in taxing capital gains at a lower rate than ordinary income is that the wealth that was invested that produced the capital gains has already been taxed once when it was earned. And it is also believed that a lower tax rate on risky investments vs safe investments (like bank deposits) provides an incentive to make those kinds of investments.”There’s another reason to tax long-term capital gains at a lower rate: inflation. Consider a person who realizes a 15% capital gain over a 5-year period during which inflation runs at 3% per year. What’s the appropriate tax rate on this capital gain? In real terms, the investor has not gained any wealth, so a 15% tax rate actually makes the investment a loss for him.We could, of course, index all investments for inflation and then charge a higher tax rate on real gains, but this would be an administrative nightmare for both the IRS and taxpayers. So instead we take a shorthand route of giving taxpayers a reduced rate on long-term capital gains. But short-term capital gains are taxed at ordinary income rates.Perhaps 15% is too low of a rate to compensate for the impact of inflation, but taxing long-term capital gains at ordinary income rates would certainly result in levying taxes on non-real gains.

    1. fredwilson

      great point. i’ve heard that one too but left it out. thanks for adding it.

    2. Ramon Leon

       Unfortunately, it only takes a year to call something a *long term gain*.  How about no reduced rate and let the investor worry about whether inflation will eat up his gains.  That shouldn’t be the governments job to ensure inflation doesn’t mess with your investment.

      1. Securities Guy

        Government’s job should be, among other things, to create policies that encourage investment and job creation. When you earn a dollar, you have a choice to consume it or save it. If by consuming it you receive 100% of the benefit of the dollar and by saving it you receive less than 100% its benefit (in a case where inflation wipes out your gain), you will naturally be more inclined to consume it than save it. Government will also be marginally more inclined to debauch the currency (to create phantom capital gains) whenever it wishes to raise more revenues.A secondary effect will be that people will be less willing to realize capital gains if they will be forced to pay taxes on non-real gains, which will discourage the efficient allocation of capital and ultimate retard economic growth. You always have the option of holding the asset until you die.Lastly, it’s simply not fair to tax people on non-real gains. It’s called an income tax for a reason. Non-real gains are not income.

    3. Gopi

      Actually indexing for inflation to calculate capital gain is what many countries (india for example) do.

    4. Morgan Warstler

      Inflation is a tax on all saved money, not just dollars invested. A 15% capital gain over 5 years is a gain compared to the money sitting in a shoe box.Investors SHOULD NOT don’t get special treatment over savers, because it “pays them off” to not scream about inflation.There can be no special treatment from bad government effects, or you get splintered opposition.

  26. Wille

    A flat tax doesn’t need to be regressive: if you give a sufficient tax free allowance for incomes under a certain amount, you effectively have a progressive system a taxation, but with only two marginal tax rates: 0% and X%.As far as the US tax system, it’s time to realize it is a swiss cheese of exemptions and special rules for special interests. Best thing to do is just chuck it out the window and start over. A flat tax with no exemptions is a good way to ensure fairness: if you can make your tax return on the back of a postcard, a whole industry built around tax avoidance will be killed in one go and you give people a sense of certainty: they know the rules and can easily comply…though I’m sure getting such a thing into law is impossible, for one thing, the law- and accounting industry built around tax avoidance will lobby heavily against having their golden goose killed, all those special interests with their lobbyists who have special rules will howl bloody murder, and I’m not sure the massive IRS bureaucracy would be all too happy either about the job cuts and lessened power that would follow..

    1. Dave Hopton

      i’m absolutely with you on simplifying the system, but the fact is that the tax code is complicated for a reason – having a system that is ‘fair’ can’t just be done with two marginal tax rates. What happens if you just qualify to pay X%, by literally $50? You get loaded with paying the same amount as someone earning billions. I don’t see how that is fair to you, or a productive way to generate revenue at a time when it is desperately needed. there’s loads of crap that needs to be cut, absolutely, but there should be no shame in admitting that we live in a country where income diversity demands a more thorough system. 

      1. Wille

        What happens if you just qualify to pay X%, by literally $50?—Uhm, no, that’s not what I meant..Say you have a tax free allowance of $15000/year, a tax rate of 20% on anything on top of that.If someone earns $15050 a year, they would pay 20% on the $50 that exceeds the tax free allowance.Marginal tax rate on the last $50 is 20%, as for anyone making more than the allowance, but actual effective tax rate for a low income earner would be closer to 0.06% given the example.Effective tax rate creeps closer to the marginal flat tax rate the more people earn..

        1. Dave Hopton

          ah, my mistake. Thanks for the clarification, I agree with you

      2. Gopi

        Dave, i am not sure you understand the tax system. If you earn $50 more, then you will pay X% only in the $50 not on the whole income!

        1. Dave Hopton

          See below. My apologies

  27. Mitch Haile

    I’ve been averaging 16-18% the last few years because a lot of my income has come from long term capital gains.  It’s way too low; I could afford to pay more.However, my main complaint about the tax system is that it’s far too complex.  I have to have a professional do my taxes and advise me on my quarterly payments throughout the year.  We spend time every September guessing what my final situation will be in April so I can get the last few quarterly checks correct, and sometimes we still goof and I overpay by a lot or underpay by a lot.My tax paperwork ends up being a huge number of pages.  It should be simple and one or two pages.On the state sales tax side, my accountant has 1,200 clients and says I’m the ONLY ONE who pays any use tax.  That’s disturbing too.

    1. fredwilson

      yup. totally agree. i can’t even review my tax return anymore. i don’t understand a bit of it. i used to do my taxes until about 10 years ago. so it’s not like i don’t have some competence in this area.

      1. Stephen Purpura

        I lost the ability to compute my taxes in 2007, when homes in multiple states made the process so complicated that I viewed it as hopeless to continue to do my own tax returns after 20+ years of doing them. My returns now exceed 100 pages of schedules and supporting docs when printed.

        1. ShanaC

          You and lots of other people.  Most of america can’t prepare their own tax forms.

          1. Avi Deitcher

            And believe me, Shana, the tax attorneys have their own lobby….

          2. ShanaC

            I know, I dated a former tax attorney once upon a time.- posted via

      2. LE

        Growing up in a military family as you did and operating in what has primarily been the corporate world (with the exception of your wife’s parents company) I think you would be amazed at the amount of cheating that goes on among SMB’s. When someone buys a SMB it’s almost assumed there is extra cash flow to be had even if you emphatically state that there is no cheating going on. In fact the more you don’t, the more they think that’s not what’s happening and they value the business higher.  These business by the way are less likely to cheat at a lower tax rate.

    2. LE

      “We spend time every September guessing what my final situation will be in April”It’s much easier if you have the cash flow to just guesstimate it on the high side.Years ago in another business I had overpaid state sales tax by maybe $20,000 over the course of many years. So I contacted the state and they said “send us the info on what you should have paid and what you did pay”. About 7 or 8 months later I got a check for the full amount. Just like that. Just based on a spreadsheet I had sent them.”On the state sales tax side, my accountant has 1,200 clients and says I’m the ONLY ONE who pays any use tax.  That’s disturbing too.”Is there something I am missing here, or are you saying the 1199 clients are not paying something they should be paying?

      1. Mitch Haile

        Yes–it’s OK to overpay, but I’d like to overpay by as little as possible.  I’ve gotten a few big refunds and I view it as a waste.On use tax, I don’t KNOW that the 1,199 clients should be paying.  But I think it’s far to guess some of them are ordering stuff from Amazon and in this state, Amazon isn’t collecting sales tax.  (As well as many other out-of-state, the goal here isn’t to pick on Amazon in particular, just a concrete example.)I’m not a fan of vendors having to collect sales tax, but if this sample is indicative of the rest of the country, few are paying use tax to their states.  Of course, businesses are more likely to do so as part of their monthly/regular sales tax reporting.

        1. LE

          “far to guess some of them are ordering stuff from Amazon and in this state, Amazon isn’t collecting sales tax.”Consider this with respect to states and taxes. Take it for what it’s worth.I have a neighbor that is running a business out of their house. Their activities really annoy me. So far I haven’t been able to get the township to take action (I even bought a time lapse camera to record the activity. I’m not adverse to spending money to solve a problem).  Township rules clearly state what you can and can’t do in a residential neighborhood.Anyway, knowing a little about the business they are running I am certain they aren’t paying either payroll taxes let alone income tax. So I am now working on that angle to try and get them shut down for not paying their taxes.I’ve started with the state agencies. The people that I’ve spoken to have essentially indicated that I would have to provide literally super compelling written insider evidence in order to get them to act on this company. I haven’t decided where to go with this (and I haven’t in all honesty contacted everyone that I can it’s a time issue) but the early indication that I get is that something that should be fairly simple is going to be difficult. 

  28. HowieG

    I agree with you reasoning. When the GOP crows that so many fail to pay any federal income tax my response is: if they were paid higher wages (80% of US jobs pay $30k or less per year and that is F-ed up!) they could pay taxes. And if you paid into the system you would feel you owned part of the country.The one exception is the military. Unless you are wealthy the military really does nothing for us. The fact I have zero assets to lose if invaded by china vs say you or Bill Gates means I should pay less for the Military since there is much more of a need to protect your assets than just my freedom. And while the military ensures our companies can do business over seas safely like protecting trade routes again this enormously benefits the wealthy over the poor.But the reality of my first point is the most important. We need the poor making more and the rich making less. People should be able to afford to live in a decent place, have healthcare and eat properly even if they work at McDonalds or Walmart and today they can’t.

    1. Cynthia Schames

      Whoa.  The military does nothing for you because you don’t have massive financial assets?SMMFH. 

      1. LE

        It’s like the “I don’t use oil argument” which ignores the use of petroleum products in buses, roads, plastics, food and other every day life products.Our “military industrial complex” has air craft carriers positioned to protect oil in the middle east which is essential for the country we have become. People always ignore the benefits they enjoy from our military leadership in the world. As if other leaders are just going to do the right thing.I think it was Al Capone that said “you get more with a gun and a smile than a gun alone” or something like that.

        1. HowieG

          I spent 5 years working on advanced Hydrogen Fuel Cell Programs with the major auto manufacturers. In Japan and Germany they get a lot of Government investment because they don’t have oil industries. Our government blocks such advances because of the Oil Lobby. The auto makers just want to sell cars and when Japan and Germany come up with the solution to get off oil it will happen. And I am sure the jobs making those energy systems will not be here.

      2. HowieG

        I have zero at risk so no need for the size of our military. That is a fact Cynthia. People with assets should be the ones paying for the size of our military. I have so much less to lose. I prefer paying for National Park rangers than drones that kill people who can’t hurt me in Pakistan.

        1. Cynthia Schames

          @Howie That’s truly about as self-centered an argument as I’ve ever heard. “Military” covers a lot of ground, including prevention of terror attacks on US and international soil, waters and airspace. Just because you don’t have anything to lose doesn’t mean no one else does. I’m sure I’m not the only person here whose support of the military increased exponentially on September 11, 2001 as I watched my city burn and thousands die.

          1. BN

            @cynthiaschames:disqus , not to get this topic too far off-based, but a part of the reason why they even attacked NYC on that day was because of the U.S.’s highly interventionist foreign policy. Look at the reach of the U.S. military alone:…. If you have spoken to anyone from the Middle East, or heck, almost every other part of the world, the U.S.’s military presence does not garner the U.S. any affection. Quite the contrary.

          2. Cynthia Schames

            Yes, I am aware of that claim, and certainly disagree with the majority of the US’s intervention in other countries. Regardless, the argument that a person who has nothing to lose shouldn’t have to contribute to a military is nonsensical to me.  When you live in a town, you pay taxes to the school district whether or not you have kids.  It’s called the common good.  You and I may disagree vehemently with US policy and how they spend those dollars, but the fact is that it’s our responsibility as Americans to pay taxes, period.  Our choices are: vote, run for office and change it, or leave. Oh, and complain on the internet. 

    2. LE

      “have healthcare and eat properly even if they work at McDonalds or Walmart”Raising labor costs at either company to the level you seem to be indicating (and I won’t even ask you what you mean by “decent place”)  will change the product cost and result in a significant change in the value provided by those companies and the goods sold and people employed in related businesses (like the company that does their advertising). The price of goods changes demand. The price depends on the cost of labor. Part of that labor (in addition to the chinese labor that makes the goods that are sold at Walmart) is sales floor help.  McDonalds, a well oiled machine, has already figured out optimum pricing points for their products. If they could raise prices and make more money that’s what they would do. It’s fairly easy to experiment with the amount of locations that either of those organizations has.

      1. HowieG

        We do not have an inherent right to cheap stuff. I am ok paying more. And the economy would be more robust if people had money to spend. And there is nothing wrong with upper management making less and the bottom making more. In fact it would be healthy for the US. The countries with the most parity on wages in general are happier. Every year the Economist visits this. In Europe they are more upwardly mobile than in the US (surprisingly) and happier (not surprisingly).When I say decent play to live I just mean place without gun fire that you can let your child play outside is all.

  29. jason wright

    Do Fred’s LPs pay tax on their gains from Fred’s investments on the same basis as Fred?Or, does each LP have their own ‘arrangements’?

    1. fredwilson

      some do. some don’t. we have a bunch of employee pension plans which i believe are tax exempt.

  30. Phil Swenson

    Fred, what would you do with the payroll tax?

    1. fredwilson

      let me read up on the issues before commenting

  31. darrellsilver

    We may agree there’s a mistake in investment income tax rates, but it’s a pretty big leap to conclude that we should adopt a flat tax nationwide. Marginal rates, scores of deductions, et al evolved over time because the system is big and complex, and sometimes flawed.The counter argument to the evolution of our tax code shouldn’t be just to throw up our hands and advocate a flat tax. At the very least, throwing up our hands isn’t a good way to arrive at a thoughtful tax policy.Removing the special treatment of investment income from our existing tax system would both simplify the tax code and remove a pillar of regressive taxation. Let’s start there.

  32. Scott Barnett

    Fred, I give you a lot of credit for writing about this – it’s such a touchy issue you know that you’re going to get creamed no matter what you believe.  My wife and I were talking about this exact topic last night as I was watching this week’s Daily Shows (I can’t stay up that late, so I record them and watch them on the weekends).  I pretty much said exactly the same thing to her last night (a 15% flat tax would be the “most” fair of all the unfair options) but I am still enamored with a consumption tax as well – adding a consumption tax seems to me to alleviate the regressive nature of our current system – since it’s quite likely that the more money you have, the more you will consume (and hence, the more taxes you will pay).  I would even be fine with keeping the charitable deduction – which could be applied dollar for dollar against your consumption to reduce that “tax”. It is high time to trash the current system and start fresh.  We have way too many loopholes, riders, special cases that have made it a real mess. Sadly, I don’t have much hope that our politicians today will ever be able to do this, but it’s nice to dream…

    1. Avi Deitcher

      +1 Scott. It is touchy, but so important. Kudos to anyone willing to discuss it rationally.

      1. Avi Deitcher

        Actually, I am fairly convinced the politicians do not want us discussing it. From both parties. The more obscure, the more they can dole out political favours without us (the unwashed masses) interfering. The real issue with flat tax isn’t progressiveness or rates; it is that it eliminates a huge power base for politicians and lobbyists.

    2. Jonathan Nation

      Scott, have you studied The Fair Tax?I have lived in Tennessee most of my life & have seen a state can run without an income tax. Texas & Flordia are also good examples … each still struggles with spending more then the income, but that has more to do with a natural thing with people wanting to spend more then they have.With the combination of eliminating the current system, the consumption tax, and the prebate, I really like the Fair Tax & hope you will pick up one or both of the books by Neal Boortz on it. The second one (answerig the critics) is probably better to start with.

      1. Scott Barnett

        Jonathan – do you mean…  At first glance, it looks interesting, I will research more. I live in NJ and we do a horrendous job of raising more than we spend – it is such an expensive state to live in, and we now have college tuition coming upon us, and the cost of college is ridiculous. I am starting to learn that I will be penalized for having saved all these years for my kids to go to college – I will go very little (if any) aid since I am a saver.  There is so little incentive to save in this country, I think that needs to change.  

        1. Jonathan Nation

          Yes, that is it. There are two books that Neal Boortz co-authored on it (those would be the best books) … and I think I remember the second one (answering the critics) as doing a good enough job explaining the whole thing that it’s a great starting point.

  33. Elia Freedman

    The problem really isn’t a flat tax versus a progressive tax, the problem is really how the US tax code has been used as a means to reward favored constituencies on both sides of the aisle. We say the term “flat tax” but what we really mean is “eliminate the special give-aways.”For the record, I’m in favor of getting rid of all deductions except charitable donations. I used to be in favor of all but have talked to enough people who won’t donate to charity without it that I am in favor of keeping that one.One other point: Canada has no mortgage deduction and they have a higher home ownership rate than the US.

    1. Tom Labus

      Canadian banks avoided the mortgage trading mess too.

      1. Adrian Sanders

        Canada also has less people than Californa.Economies of scale can’t be ignored.

        1. Tom Labus

          Look at Iceland and Greece.Smaller populations didn’t stop them from going financial insane.

          1. Adrian Sanders


        2. JamesHRH

          Sorry Adrian, but its not scale that makes the difference here, it is the difference in approach to core institutions.The legal system is less politicized and commercialized here – lawyers are intended, expected and generally fulfil a role as an ‘officers of the court’. And, judges are appointed, which is not a big deal because the courts have fewer ridiculous lawsuits, because we award costs.More like in the UK.Banking is also far less politicized and commercialized. Donations are capped, there are no PACS, etc. and capitalization standards are way different. Banks are also properly regulated (that’s me editorializing but given the last 5 years in international banking, I’m rolling this way).Sure, there are only 4 or 5 major banks in Canada, but that would just translate in to 25 or 30 in a properly structured (assuming some consolidation here) US banking system.The interesting question regarding scale is: would the US be the home of the ‘American Dream if it were the size of Canada’? 

      2. Elia Freedman

        That’s apples and oranges. Canadian banking regulations are very different than US.

        1. Tom Labus

          So does Germany but their banks bought some of the worst CDOs at the end of the run.The willingness to loot and pillage customers has nothing to do with regs.

    2. ShanaC

      Buying houses is not linked to community development.  There are strong communities in rented areas.Plus it means people could move more easily for job reasons (something we want right now)

      1. andyidsinga

        wow.. this is such an interesting area of discussion – ratio of ownership to community development?why don’t you think they’re linked?It seems the density of the community might be a factor. I’ve generally lived in much less dense communities both when renting and owning. When I lived in apartments and owned a home in the suburbs the communities seems much weaker vs when I’ve owned a home in slightly more dense city neighborhood here in Portland.Interesting that there is much more community spirit in the city than the suburbs – just in my limited experience.  …neighborhood meeting attendance, local oriented attitude and desire to help others.

        1. FAKE GRIMLOCK


        2. ShanaC

          The reason I don’t think they are linked has to do with studies like this one:…There are other factors at play. I also wonder about density, but then you would need to compare rural communities to confirm.Either way, it would be interesting to see, because if renting has no negative aspects on community development, then it may make sense to not subsidize housing the way we do for buyers.- posted via

      2. Elia Freedman

        There are definite advantages and disadvantages to both home ownership and renting. My guess is elimination of the deduction would have a very small impact on home ownership rates in the country.



        1. ShanaC

          Note: I’m never telling you where I live, better to keep you away from my building when you’re hungry- posted via

      4. Mark Essel

        I dig the mobility aspect. Physical mobility sucks in the US. Most jobs require you to be in a location, and getting a job in a chosen destination is like pulling teeth, let alone landing a remote access job (temp work yes, regular work offsite not so easy for many good reasons).For recent home buyers moving is rough, even for long time home owners moving is a pita because of going through the process of selling a home (prepping, etc).

        1. FAKE GRIMLOCK


        2. ShanaC

          Right, moving to a rental heavy market would allow for that flexibility.- posted via

    3. LE

      ” US tax code has been used as a means to reward favored constituencies on both sides of the aisle”The tax code also rewards and encourages behavior that the government views as good or positive for the country.  It provides incentives for certain behavior by directly dollars into areas or activities that result in a positive gain in the economy.States have done this as well. Pennsylvania had a few “sales tax holidays” to encourage the purchase of certain goods.If you’ve ever worked with companies and incentives companies are motivated by deals and the perception that there is a better time to do something based on even a deadline where the deal will change.We send out paper invoices. There is no question that many companies pay their invoices early (if they have sufficient cash flow) in December/January in order to take advantage of deducting the money in the previous tax year.”Canada has no mortgage deduction and they have a higher home ownership rate than the US”I’m never in favor of country comparisons like this. (They also have better hockey players and turn out really good comedians.)

      1. gorbachev

        “The tax code also rewards and encourages behavior that the government views as good or positive for the country.”That’s what it’s SUPPOSED to do. It’s not doing it.The following chart will make it abundantly clear:…Also, if the US tax policy was actually doing what it is supposed to do, much of our infrastructure wouldn’t be in such a shameful state.

      2. Elia Freedman

        LE: this is about basic fairness. This is about all Americans, no matter their background, getting the same treatment. The government has all kinds of policies that favor one action or one group over another and they often have adverse affects that were unforeseen by the original author. I’m tired of this activity and feel the only way to get back to core American standards is to put everyone in a position to succeed. And the only way to do that is to not play favorites.As for hockey players and comedians, I don’t understand your point. The argument for tax incentives is that it creates more home ownership. That just isn’t true, as demonstrated by our Canadian brothers and sisters. This isn’t like comparing the US to Iran, two very different countries with very different cultures. This is the US and Canadian, two countries with similar values, cultures and origins.

        1. LE

          I will assume this article tells what you are saying or close enough?http://dallasdirt.dmagazine…”learn that home ownership rates in Canada are actually higher than in the USA — 69% there to our 67.2%””As for hockey players and comedians, I don’t understand your point.”Because you are tying one thing “no mortgage deduction” as if it is the major reason for another thing “higher ownership rates” or to say changes the mortgage deduction won’t change home ownership. I’m sure you would acknowledge that there could be a multitude of reasons why home ownership is higher in Canada than the US. The article addresses a few possibilities.  Also, taking away the mortgage tax deduction will immediately decrease housing values. Monthly payments will go up so the house someone can afford will go down.   This is different than perhaps a country like Canada that never (I don’t know the history) had a mortgage deduction. Just like the decrease in mortgage rates (until the bust) caused an escalation in home prices.

          1. Elia Freedman

            I see what you are saying regarding US-Canada comparison. The mortgage deduction, as it stands today in the US, was enacted in 1986. Until the real estate boom of the late-2000s the rate of home ownership didn’t drastically change from before the tax code change. There are other incentives in the US, too, to own a home.As for value decrease, I don’t buy that. My home payment is not tied to my house’s current value but instead the value when I bought it. My payment won’t change today. Will it decrease home values? I will refer you back to my previous comment on the law of unintended consequences. We can only speculate what the impact would be, if any.

          2. LE

            “The mortgage deduction, as it stands today in the US, was enacted in 1986″Not true. In general, and and dating back  to about 1913 all interest was deductible such as credit card and consumer loans as well as auto loans (I’ve been around long enough to have gotten those deductions and remember when it changed).…” I don’t buy that. My home payment is not tied to my house’s current value but instead the value when I bought it. My payment won’t change today.”If you decide to sell the value of your house will decrease. The majority of people buy homes based on the ratio of their income to the monthly payments. They factor in the deductibility in order to determine what the net monthly cost will be. It’s also how they buy cars as well. In a similar example, please see the attached graphic of a coop for sale in NYC. The monthly maintenance is $1800. Below that there is a line that says “50%” tax deduct. This is because the property tax is paid by the building as opposed to the individual. By using the deductible figure of 50% a buyer can determine the net monthly cost of the property after deduction for real estate taxes.When monthly costs shift in a downward direction there are people who enter the market who would not be able to afford houses and change demand.

          3. JamesHRH

            LE – to my knowledge, interest on investments is deductible here, but mortgage interest never has been allowed.

    4. andyidsinga

      I agree – I still think it should be progressive – in 3 or 4 tiers – but keep the charitable deduction.

  34. R Hemmanur

    Isn’t this just an extension of Reaganomics? A lower tax rate means a weak economy and more and more money hidden in Cayman islands. Not to mention the inflation. What we need to do is separate income from capital gains and file two separate tax returns. Income tax would be fixed, while the capital gain tax will float depending on the economy over the last year. 

    1. LE

      ” while the capital gain tax will float depending on the economy”Creates uncertainty, not good for business. And then you have people unproductively hedging uncertainty and acting as they did trying to divine Alan Greenspan’s last emotion and word in order to make financial and market decisions. Where will interest rates go? Remember that? Ultimately people spending their time guessing what others will be guessing and doing (just like the stock market).

      1. R Hemmanur

        Good point LE. What i meant by ‘float depending on the economy’ is to construct an algorithm that takes into account the market performance over the last year and tax accordingly. Nonetheless, financial engineers will find a loophole in anything of that sort way too quickly!

  35. testtest

    picking from imperfect choices results in an imperfect the heart of economics is the allocation of resources (“scarce resources” in economic parlance). regressive taxation doesn’t help society unless resources are reallocated under free market conditions. which they often aren’t. resulting in wealth condensation; to the benefit of only the individuals (and to the detriment of society). this creates inefficiently in the market, reduced supply, and inhibits Say’s Law (” supply creates its own demand”).under a progressive system, individuals are incentivised  to be less productive — due to diminishing marginal returns. resulting in less growth and an inevitable reduction in living standards.i was informed, the elimination of income tax and a transference to VAT would solve the problem. the visibility of the tax was given as the main counter to it not being done.I would do that.only done a limited number of books on economics, so my answer may be different if i’d read a bit more on it.

  36. Tom Labus

    And the IRS, what happens to those guys?For whatever reason, people don’t respond to this idea. Steve Forbes ran twice for president on this idea and no one would pay him any attention.  It may have been the messenger.

  37. Avi Deitcher

    Fred, your math is off. You are confusing marginal rates with effective rates. Your marginal and effective rates are roughly the same at 15%. But for earned income, your brothers *marginal* rate is 40-50%, not their effective rate.Last I checked, in 2011, median US household income was ~$60k. With a spouse, 2 kids and no other deductions, their 2011 taxes owed would have been just over $4k, or around 12%, much less than you and the Gotham Gal.I need to recheck my numbers using official stats and tax tables, but as far as I can recall, the average American pays under 15% in tax.

    1. fredwilson

      that’s a fair point. but it still feels strange when my marginal rate is lower than theirs

      1. Avi Deitcher

        I am happy to have a 90% marginal rate and effective 12% any day. All i care about is cash in pocket.Of course, that is not totally fair, as it is marginal rate that affects the incentive to work, but still.Look at it this way, Fred. You have 1MM options in a firm with a strike price of $1. They have 900k with a strike price of $0.50, and 100k with a strike price of $2. Sure, your millionth is cheaper than theirs, but whose is really costing more overall, yours or theirs?

        1. Druce

          Possibly a teachable moment: If your marginal rate is 90%, your incentive to do anything to get any additional earned income is small.Maybe you don’t have any opportunities, but a lot of people do. So it changes their behavior a lot, with little increase in revenue.The ideal ‘efficient tax’ raises the revenue needed without changing people’s behavior, proverbially plucking the most feathers from the goose with the minimum of squawking.Maybe a stretch, but it’s similar to bankers who say they paid back the government investments, so they really weren’t subsidized. But the possibility of getting a bailout is of huge value, reduces their interest costs, changes their behavior in risky ways.So, a lot of value can be created or destroyed, even when cash doesn’t change hands.

          1. Avi Deitcher

            Yeah, I agree, which is why I said it isn’t totally fair. I just interviewed a candidate for my alma mater (Columbia) and I made him argue taxes with me, just to see how his mind works. I took the opposite approach of whatever he did, of course.To summarize your point, Druce: incentives matter.

          2. StreetEYE (@streeteye)

            go Lions – Druce

      2. LE

        “still feels strange when my marginal rate is lower than theirs”I’d love to be your personal coach and get to the root of what appears, from what I read, to be the feeling of guilt that you have. 

    2. Elia Freedman

      I have come to the conclusion that you may be right. But it is so confusing that few will understand that. The beauty of a flatter tax without deductions is that the confusion of terminology goes away. What did you pay in taxes last year? 15%. You make $50,000 you pay 15%, you pay $15 million you pay 15%.Ask Fred: confusing markets with huge inefficiencies are ripe for disruption. Seems like government funding is ripe for disruption.

      1. Avi Deitcher

        Definitely ripe. Minor problem when the rules and regulations, including enforcement power and exclusive right to the use if force, are owned by the incumbent player.

  38. Avi Deitcher

    This I respect. I trust Fred Wilson to distribute the extra 22% far more than it being lost in the system and subject to political whims,

  39. No Name

    You jumped straight to a regressive flat tax w/o any deductions. Why didn’t you consider a more progressive tiered tax rate w/o any deductions? 

    1. fredwilson

      that could work too. i just am attracted to the simplicity of a flat tax.

  40. ErikSchwartz

    Two issues, taxes on carry and the flat tax.That carried interest is considered investment income is just laughable. If you can’t lose your principal it’s not your investment. The GP’s at a VC firm can’t lose their principal. The flat tax, the only way it’s not hugely regressive is to exempt a flat amount for everyone which is basically the same minimal cost of living in the country and make that the only exemption (no mortgage interest or anything else). Say it costs $15K per peson to live. A family of 4 would not pay tax on the their first $60K. A single taxpayer would pay the flat tax on everything over $15K

    1. fredwilson

      yup. i agree with that last point. i thought i said that in my post.

    2. ShanaC

      Cost of living is very location dependent though.  Should the tax adjust to that fact? (could create weird incentive problems)

      1. ErikSchwartz

        No. You have no inherent right to live somewhere expensive so that it should not be subsidized by everyone else.

        1. ShanaC

          Jobs are more plentiful where it is more expensive to live. Especially well paying jobs….- posted via

  41. celestus

    I don’t know.  To me a “fair” system would be “you pay for what you get.”  When I order pizza, it costs the same as when Mitt Romney or Fred orders the same pizza.  To me, that’s fair.  The only reason we don’t do that for the portfolio of federal government goods and services- we spent $3 trillion this year, everyone gets a bill for $10,000- is because it’s stupid.  Fairness is often stupid.The same is true for preferential treatment of capital gains.  It’s just not smart to treat a dollar of capital income the same as a dollar of labor income.  This is particularly true for VC actually- you see more investment where/when cap gains rates are lower, controlling for state, year, and other factors.  As for carried interest- no opinion really, I haven’t seen any data, but it’s possible that for every Fred there’s a VC or PE guy who’d quit if you doubled their taxes and then you’re clearly worse off.

  42. Ken Hirsh

    Great post!  I think massive tax simplification would be a huge win for our country. I’d offer two major modifications to the below proposal:1. Have a 20% or 25% rate for income above $1mm (adjusted for inflation over time). I have mixed emotions about the fairness and economic sensibility of this, but I think it could be necessary to get a tax system like this passed. 2. Phase out the biggest deductions (mortgage, charity, others?) over 5 to 10 years. This could reduce the transition problems for people and organizations that made long-term plans based on expected tax policy.

  43. Matt

    May i make a humble suggestion? Why must it be flat? Why not have a progressive system, just without deductions and complexity. If a 30k incomeearner knows they must pay 10% and a 300k income earner pays 30%, its just as easy to calculate and plan for as a straight 15%. And then there’s no regressiveness.$300 to someone making $30k tends to be a heck of a lot more valuable than $30k to someone making $300k.. i used to be rather against the progressive model, but if government funds things like basic research, you and i benefit far more than those at the lower end of the income spectrum.

    1. fredwilson

      there’s a lot of comment activity in this thread to suggest you are not alone in this view. i wouldn’t be opposed to a tiered tax system with no deductions. however, i am drawn to the simplicity of a flat tax.

      1. bbxcountry25

        While it is simpler your post does not get into revenue at all. Republicans support a flat tax because it does not raise as much money for the gov’t as the current system. I’m not sure how you feel about that but a discussion of a tax system without examining how much revenue would be raised is incomplete.

        1. fredwilson

          i am assuming that moving from our current system to a 15% flat tax would be revenue neutral or possibly even revenue generating. i know that’s a big assumption. but i think it may be correct.

          1. Noam

            Without changing payroll taxes? Then overall federal income tax would be extremely regressive.

          2. Avi Deitcher

            Can someone explain to me why tax at the same percentage on an average family earning $60k, top decile earning $100k, and top 1% earning $1MM is regressive? I know this is loaded political terminology, but I have a hard time understanding how the next $1 in income after $100k is any more or less valuable than the next $1 after $50k or $1MM, and how taking it at the same rate (10%, 15%, 20%, whatever) is any more or less moral?But I definitely understand the incentive side, that there is more damage in taxing the $1 above $1MM at a higher rate causes more damage than the $1 above $60k at a lower rate.

          3. Noam

            In reply to Avi: a) A flat income tax would be regressive federal income tax in combination with a regressive payroll income tax. Payroll income tax (~ 15.3% for entrepreneurs or split btwn employer and employee) applies only to the first $100k earnings or so (a bit over that) mostly. If there’s no regressive payroll tax, then a flat income tax would mean a flat federal income tax. b) That is, it would mean a flat income tax from earned dollar zero, not per dollar available for saving or surplus consumption. Say every earner requires $20k to live at a poverty level: roof, food, etc. Then if you tax a $25k earner 20% and a $250k earner 20%, you’re taxing the low income earner 100% of her surplus income that she could otherwise save, invest in a venture or spend on other than necessities, while you’re taxing the higher earner 22% of her surplus income. It’s one reason why the rich should get relatively richer, even if rich and poor get the same return on investments, when income is taxed from a low threshold rather than from a poverty threshold. 3. You say you understand the incentive side — I don’t. I’d bet most high earners care more about income or toys relative to neighbors or peers than about absolute income. If that’s true, modest changes to tax rates on high earnings may have little motivational consequence. Goolsbee and others have studied this a bit. See, e.g., Goolsbee’s “What happens when you tax the rich?”:…

          4. The Butler

            Cuban doesn’t care. He got lucky to get his money and now wants to keep more. Turns out he is just like every other money grubber that is rich.His whole post is about him whining he pays too much and the deal with the family, if he really cared he could take care of them. He doesn’t!

          5. Benji

            @deitcher:disqus Ever heard of diminishing marginal returns? Since you asked about morality and not pure economics, I’ll avoid beating around the bush with concerns of interpersonal utility comparisons and call it like we all know it is:When I spend more than 40% of my disposable income on necessities, the marginal value of another dollar of income has far greater implications for my standard of living (not my purchasing power) than it does for the Buffets and Romneys of the world, who spend a fraction of a percent of their disposable income on necessities. People may argue about the hypothetical super-miser who loves every single dollar he earns as if it were his firstborn, but the realities (and the results of many studies in behavioral economics) clearly demonstrate this effect. Money is like any good – at some point, more of it, on margin, doesn’t change your life.Thus, if morality (read: equity) is indeed a consideration in taxation (which I certainly believe it ought to be), there’s no denying (at least by any reasonable standard) that a flat tax is, in fact, grossly regressive.

          6. Michael Kogan

            I think the main problem with a flat tax is that in order to raise as much revenue as currently, it would have to be too high on most Americans.  That’s the main problem and a downside of ita far better alternative is consumption taxes.  See… 

          7. Byron Gibson

            Good article.  TLDR:  Reform the tax system with four major changes:1.  Broaden the tax base by eliminating all deductions.  Broadening the base allows govt to reduce rates of each individual tax.2.  Tax consumption not income.  Income is a measure of what one contributes to society, consumption a measure of what one takes.  When you tax something you get less of it, hence we should be taxing the taking not the contributing.3.  Tax bads rather than goods.  Again, you get less of what you tax, so remove taxes on hard work, saving, entrepreneurial risk-taking and other drivers of economic growth.  Add taxes to gasoline and other ‘bads’.4.  KISS.  Like Fred says, reduce the complexity as much as possible.  The more complex, the more likelihood of undesirable unintended consequences and gaming of the system.  “And if a few accountants and tax lawyers were induced to become engineers and doctors instead, society will have moved a big step in the right direction.”I do wish he’d take a look at the Fair Tax proposal.  It’s almost exactly what he describes, except it is a completely blind consumption tax that omits #3 (targeted taxes on ‘bads’).  Not sure why guys like Mankiw ignore it.

          8. Avi Deitcher

            I have been thinking about a consumption tax instead of any form of income tax for a very long time. I am not yet convinced of it, primarily because I don’t believe the politicians will stand to put it in place at the same time as removing the income tax, but rather will keep both, causing even worse damage than they do.But the advantages to my mind are:- we want to encourage income and saving/investment, whereas income taxes (and cap gains, etc.) all discourage them- enforcement is easier- gets government out of the business of dealing with people’s income- most importantly, the moral issue: cash is useless if you cannot buy anything with it. If you earn $1MM, but are restricted from using it, it is worth less than someone who has $10k but is unfettered from purchasing to his/her heart’s content.If Joe earn $100k/year over 20 years, i.e. $2MM, and Jill gets one $2MM payoff in 20 years (ignoring TVM for the moment), she is taxed at a much higher rate than Joe. Income taxes (unless they are flat) inherently treat timing of income differently, hence all of the tax management and avoidance that goes on, and is incredibly wasteful. However, if it is simply consumption, then I don’t care when Jill and Joe get their $2MM, or when they spend it. If they spend $2MM, they get taxed equivalently.However, I will agree that a flat tax has similar characteristics.On the other hand, the usage of a flat tax has been an unbelievable boon to growth and near-elimination of evasion in many countries – Hong Kong in the 80s-90s, Russia, many former Warsaw Pact countries. 

          9. Harry DeMott

            “it would have to be too high on most Americans.”Which is exactly why we also need to cut back on the size of the government.

          10. Dave Hopton

            the complete opposite Fred. Government would lose massive amounts of revenue (already does from tax breaks for the wealthy, which is pretty important when you’re trying to pay off the debt)Read this article if you can (it’s quite long). The charts are simply mind-blowing:

          11. Mark Essel

            Did you catch Fred’s remarks about removing incentives. That would generate a heft amount of tax revenue.

          12. inthewoods

            All the studies I’ve seen indicate that it would not be revenue neutral.  If you drop that assumption, the argument becomes a lot more challenging.

          13. FAKE GRIMLOCK


      2. maxxxxx

        The complexity of the current tax system is not in calculating the tax rate but in determining the taxable income. The math of a progressive curve is not exactly hard so I don’t buy into the argument of a flat tax being simple. 

      3. Lucian Armasu

        Non-flat tax rate will always lead to increased complexity and politicians trying to tweak the system in the favor of their friends. A flat tax rate is much more stable than either a progressive or a regressive one. I also think it’s more fair. Who gets to decide how much a certain group should pay and why should they?

      4. Matt Hodan

        I couldn’t agree more.  I’m OK with a flat tax because I too believe there is value in simplicity.  Simple is a movement that has transformed the way we think about everything from start-ups (minimum viable product), to corporate strategy (Steve Jobs’ focus on fewer product lines), to programming (agile development).  Perhaps government could benefit from a dose…

      5. Dave Pinsen

        The 1987 Reagan-Brady tax reform had two rates, if memory serves, 15% and 28%, respectively, with the same top rate for cap gains and dividends. Having the same top rate for both is all you need to keep Buffetts from paying lower rates than their physicians (interestingly, I never hear Buffett blaming Bill Clinton for this state of affairs, even though it was Clinton who raised taxes on income and lowered them on cap gains).The Bowles-Simpson commission suggested something along these lines, but there are two political obstacles to implementing it: Dems would have to accept a lower top income tax rate, and Reps would have to accept a higher cap gains rate.

      6. Phil Swenson

        progressive taxation isn’t where the complexity comes from. I can describe a progressive tax system very easily:1) first 20K, 0%2) next 50K, 10%3) next 100K, 20%4) everything past this: 30%done.

        1. Outside Perspective

          I live in the UK, which has a progressive tax system, with four bands, all of which I have to pay, happily for me.  I did my tax return online last night in an hour.One hour.Having worked in the US, and dealt with your tax returns, I doubt I would have identified all the forms I needed to even start filling in within that one hour.

          1. JamesHRH

            Lots of happy tax accountants in Britain these days?Absolutely the answer.

        2. fredwilson

          not as simple as a straight 15% but simple enough. i can get behind something like this easily.

        3. account reconciliation

          Ya, it is more easy to understand. Thanks. 

      7. Michal Illich

        Our governement changed the tax system a lot in the past 10 years. Right now we have flat tax (15% people, 19% institutions) in Czech Republic. It’s good. Before that we used to have progressive tax (15, 20, 25 and 38% in layers). I don’t know the details but I think that overall tax received is similar.

      8. Jim

        Do you know how many people are employed due to the current tax system?This is the problem. Go to flat tax and all these people would be unemployed and thus…. raise the unemployment rate.It’s a DEAD issue. Trust me.

        1. fredwilson

          that’s ok. we are allowed to discuss dead issues here.

        2. Victor Agreda, Jr.

          I would like to know how many people are employed due to the current tax system. I think knowing how many people are gainfully employed (full time, all year, not just a few months in Q1 prepping stuff at H&R) would be a salient point. And I say that with the assumption that the total employed population that owes its annual income solely on the vagaries of the current tax system is rather small and would have a negligible impact on the economy in the long run.

        3. Aaron Klein

          That is the DUMBEST argument I have ever heard for preserving our ridiculous tax system in the history of mankind.Do you know how many people are UNEMPLOYED due to the current tax system?Seriously, get real.

        4. Jamie Fallon

          wouldn’t they add more value to the world by working on something other than taxcode?

      9. bsoist

        I’ve always been drawn to a flat tax myself, but in recent years have warmed up to a progressive system that is simpler than our current system. From the time I started doing my own taxes, I was convinced that the forms were designed to hide what is really happening. Policymakers don’t want simple. Simple will lead to simpler forms which will make it too obvious to non-mathematicians what is really going on. 

      10. The Butler

        Just a bunch of losers who think by agreeing with Mark they will get some of his money. 

        1. fredwilson

          mark who?

    2. kfotev

      The money a flat system does not collect from the high income spectrum will be far better invested into our collective future than a government can do. The flat rate system seems simple and fair. This is coming from a person working on a startup with a negative cash flow (the form of taxation for all short sighted purposes seems irrelevant personally; or is it so?!). The conclusion about ineffective distribution of funds at a larger scale is driven by past budget allocation experience within a large corporation.

    3. LE

      “300k income earner pays 30%”People cheat more if there is more to gain. Even if there are no deductions cheating can be done as far as income that is declared or not for certain taxpayers.

    4. Andrew J. Sellers

      I am all in favor of flat tax. It’s truly the only fair way but I disagree with a tiered system. That defeats the purpose of a flat tax anyhow. $30K is a heck of a lot more than $300 so why should we penalize them further? The flat percentage is the way of making them pay more.Also, who’s to say that $300 to someone making $30K is more valuable than $30K to someone making $300K? When we attempt to determine the value of people’s money, we get into a mess.Flat Tax for all is the way to go.

  44. Carl J. Mistlebauer

    Well, talk about David taking on Goliath, Fred wants to do it again!  I really don’t believe that getting down to a flat tax is all that hard, but getting rid of all the deductions and special rulings is going to be next to impossible!  Imagine the banking, mortgage and real estate market without mortgage interest deductions, or depreciation for that matter.Imagine the health insurance business without their deductions and special tax treatment for research and development?Imagine what kind of investments people would make if they could not write off their losses?The reality is that most lobbyists focus on the tax code and on the bureaucracy who implement the laws more than they do on the law creators; which is why you have 40 lobbyists in Washington for every elected official.Since I am preparing to go to Tax Court, after one of the most ignorant IRS audits I have ever experienced, my opinion just might be a little jaded….But from a big picture perspective you first have to deal with the fact that payroll taxes, for social security and medicare, have to finally be acknowledged as separate from income taxes and cannot be used by government for funding daily operations (aka the lockbox argument).Then in all fairness, you will have to look at the issue of ecommerce and sales tax; maybe we need to implement a national sales tax for internet sales and determine a way to share those receipts with the individual states; or use those receipts for national infrastructure projects and consider education and healthcare part of the “national infrastructure.”I believe a flat tax, with no deductions, or special treatments would solve not only the issues with our tax code (and hopefully downsize the IRS) but it would also go along way in curbing the influence of money in politics.

    1. fredwilson

      and that would be a good thing

      1. Carl J. Mistlebauer

        THAT would be an AWESOME thing! The only request I would make is that I get to personally fire 7 IRS employees and when you are successful I will provide you with their names and IRS badge numbers! :)Looking back I realize that the biggest mistake I made was assuming that since I had nothing to hide and no reason to fear an audit I let my staff deal with the IRS; that and I should have demanded that my CPA camp out in our offices until the witch hunt was over.Hubris on my part (but what a disgusting way to earn a paycheck)!

  45. Ed Mullen

    I think a flat tax can sound reasonable once you get above a certain income level where people are already paying at least that much. But it’s harder to justify when you are talking about the low, low end. You sort of skipped around that point by saying “everyone over a certain income”.But that’s the hard part. Strict flat tax advocates want those families of 4 making $28,000 who are paying very little if any tax to start paying the same rate too. That $4,400 is 5 or 6 months rent to those people. It’s the folks on the really low end who get hit most. It’s also those people who make up the difference in lost revenue from the people whose rates drop from 30% to 15%. After all, the idea of taxes is to raise the money we need to fund our government.I can understand the appeal of “flat”. It’s more easily to understand. It sounds fair. But the closer you look at the low end, the less fair it is. Not all people benefit equally from the government. Some folks can and should pull more weight than othersand not just proportionally more. The system is a mess. I agree a clean slate is probably needed. A clean slate with a graded system would clarify a bunch, including increasing capital gains.

    1. Mark Essel

      Where do you draw your line, and what’s the best way to ramp up to the flat tax.One alternative to a true flat tax rate: Zero tax for individual incomes less than $30k, ramp to 15% linearly from $30k to $60k. Only flat for folks individually earning $60k+.Let’s see how that table looks (no marriage penalty, household consideration, etc)Annual Income, Tax Rate$0-30k, 0%$30-60k, ( (Annual Income – $30k)/$30k) * 15%$60k+, 15%

      1. Ed Mullen

        Yeah. That’s what you’d have to do. Then that essentially is a progressive tax below 60k and flat above.It strikes me that that would raise a lot less than is currently raised. But I’m basing that on any figures.

  46. Lazaro Fuentes

    Fred, If you championed this and got others in our industry like Steve Case, Bill Gates, Larry Page, Mark Zuckerberg and even John Doerr to champion it, it could become a strong movement… and pass.@Laz

    1. fredwilson

      do you think that’s the right group to get behind this?

  47. Tedc

    Agree and more. Cut spending so flat tax and ZERO corporate tax rate power recovery and the re-employed American’s pour revenue into the USTresury and we reduce suicidal borrowings of both political parties.

  48. ShanaC

    I’m for progressive taxes in general.  I also think everyone should play both federal income and state income taxes in general, better to prevent the breakdown of civil society.That said, I think the whole AMT/deduction/tax system we have now has totally screwed up the laffer curve/made it too easy to shelter money/impacting revenue in ways it shouldn’t.  That needs to change. And it needs to change in such a way so that we incentivize saving, people earning money, etc, while paying our bills.We’re not doing either right now…

  49. panterosa,

    Fred, you address the money factor, but what about the time factor??The flat tax to me is so zen. The appeal to me is the recoup of time not spent tracking deductions and tax prep. I have spent so much wasted time on taxes in my first career that I could cry at the thought of it. It was hell to get out of that whole stupid mentality of tax driven living, spending and investing. I now know so much about taxes I scared my new accountant as the most tax aware client he’s ever had. And I have zero interest in taxes. It’s wasted space in my brain which I’d like back for another, better,  purpose.The current tax system is a waste of time upholding a broken system of effort to produce value. I could have done much more investing things with the time my taxes took me to prepare. I’m quite sure others could have converted their tax prep hours into more value for the economy. CPA’s could easily convert to financial positions with people like me who are looking  creating new businesses. I create content and need someone to work out the pricing metrics and other financial concerns so I can bring my value to the table.

    1. fredwilson

      yes, yes, yes

    2. Mark Essel

      I do pretty well dumping all knowledge of taxes each year. Unfortunately I have no idea if I’m getting screwed by my tax guy or not.One big government FU, getting married cost my wife and I $3-4k in tax returns last year.

    3. PhilipSugar

      Even more so for corporate taxes.

  50. Morgan Warstler

    “And it is also believed that a lower tax rate on risky investments vs safe investments (like bank deposits) provides an incentive to make those kinds of investments”There is no logical argument that investment income is different than any other.Pretend that in the first order, we treat them the same, and suddenly as the doomsayers suggest, investment in risky early stuff falls.Immediately, in the second order, the upside of risk INCREASES and a few big payoffs go even bigger, and suddenly we’re back to the same demand for risk.There should be no corporate taxes, so there can be no argument about previously paid taxes.As much as I like a flat tax, and boy do I like it, I’d be almost as happy to get a progressive consumption tax – something the left is more likely to accept.

  51. Stefanie

    @FredAnother reason a flat tax will never we implemented is the huge # of jobs that are currently tied to the existing system.If a flat tax was in place, over night, we’d no longer need:- personnel income accountants- income software (Turbo Tax, etc)- huge portion of the IRS staffThat might be 20M jobs lost immediately if a flat tax was implemented.

    1. fredwilson

      maybe they could shift to more productive industries??

      1. Ted

        Stefanie is right. For the US Gov, this is a show stopper. That much disruption and potential unemployment so quickly would never fly in Congress.This is also why Congress will never pass the bill to reduce the US Postal Service from 6 days per week to 5 days per week … since they would effectively be eliminating 1/6 of their staff.

    2. Jonathan Nation

      we can just pay them to dig holes & fill them back in.In reality there will always be reason for personal accountants & some enforcement staff (IRS), the job will just be different. Those who are really good at teaching and creative ideas for the use and accounting for money (not saying cheating the system, but really knowing the rate of return on options and evaluating options for an individual) will always be a good adviser to people as an accountant. They will get to do good work at a higher level, not stuff that they have to compete with turbo tax on, or can outsource to cheaper labor.On the IRS side, there will still be audits & enforcement, even if the Fair Tax was enacted. It’ll just be different.Stefanie, you are also ignoring the additional jobs side. If you make easier to start a business, there will be more jobs. If you make it better to invest in the USA, there will be more jobs.

  52. Jonathan Nation

    Fred, have you studied up on the FairTax?I would rather have a flat tax then the current system, but the biggest issue is our current system basically started off as a flat tax.Texas, Flordia, Tennessee and a couple other states basically have the FairTax in place (best a state can) with one small expection – the prebate, which really helps the lower income households.On the progressive taxes –  I wonder if the definition of “progressive tax” has changed over the years. Progressive could mean that the more income or wealth you have, the more tax you pay. By that definition a flat tax of 15% would be progressive because 15% of $1 is less then 15% of $1,000,000. I know Adam Smith mentions “Progressive tax system” I just wonder if he is saying – base it not on $500 per person, but a percentage per income, wealth, or consumption, because the wealthy typically have or do more of each & thus will pay more in taxes if you tax one of more of those items.

  53. Yoav Lurie

    Deductions, credits, and rebates are not the problem: how they have been corrupted and molded to suit the needs of a small subset of society is the problem.These are the only levers the government has of encouraging or discouraging a behavior.

  54. Roger Toennis

    I think the right income tax solution would follow the advice of Albert Einstein when he said..”It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” So in that light the “simple but no simpler” solution is a modifed tax structure that has… 1. Zero tax rate up to an inflation-adjusted income level I call the “Minimum viable ‘head of household’ wage” (MVHOHW). – This wage level would be calculated to be the average US wage-level required for a single wage earner to own a very basic home and feed/clothe/house a family of 4 at the medium cost of living for a family of 4 without having to have both adults in that family working. 2. Above this MVHOHW the tax rate would rise gradually from 0% to 18% such that when a wage earner is making twice the MVHOHW they are paying 18%.3. Everyone earning above “twice the MVHOHW” would pay a flat 18%.4. Charitable donations would be deductible at 50 cents on the dollar from the first dollar.5. Home mortgage interest would be 50% deductible for everyone making between MVHOHW and twice the MVHOHW.6. All capital gains would be taxed at the current 15% (less than the 18%).7. Corporate tax rates would also be based on a 18% rate but corporations would be given lower tax rates based on a sliding scale that would reduce their tax rate.  The tax rate reducing on how many US-based “MVHOHW” jobs they provide to US citizens, or to foreign workers working in the US on authorized visas, compared to the total number of workers they employ worldwide.So any Corporation operating in the US would as a baseline pay 18% corporate tax rate on net income. But then that rate would change and lower depending on how many “MVHOHW-level or above” jobs that they support that are based in the US for either US citizens or authorized foreign workers or for US citizens loving abroad.So for example if a corporation has1. 10, 100, 1000 or 100,000 jobs total and… 2. All of those jobs are based in the US and.. 3. All of those jobs are at or above the MVHOHW… …would pay a zero tax rate on their corporate net income. I would even be OK with allowing companies that have the most MVHOHW jobs in the US not only pay zero taxes but qualify for significant-sized government subsidies they could use to do advanced research on next gen products/services in their industry.The jobs that corporations outsource to offshore vendors of that they directly hire in foreign countries would be counted as part of the “total jobs” number.This “simple but no simpler” approach provides all the right incentives for what Benjamin Franklin called “responsible levels of industriousness and frugality” by the middle class while also providing not just a ladder to, but a “ramp to” the American dream of self-determination, successful pursuit of happiness, prosperity while also providing for the “general welfare” that is a requirement for all the other positive outcomes mentioned. It also provides VERY attractive corporate incentives to locate jobs in the US and have those jobs be at levels that allow for the middle class to feel secure that they can raise physically and emotionally healthy children who will get the publicly funded education they need to continue the cycle of middle class prosperity that sustains our economy and society for both those who are poor and allows for great rewards who aspire to achieve great things.Some say I’m a dreamer but this is not Rocket Science. 🙂

  55. Dan Cornish

    I want Fred to pay lower taxes and I feel it is quite fair. Here my reasoning. If Fred payed more of his income to the Federal Government, the money would not be available to do productive things. I prefer Fred redistribute his income than some idiot in Washington to redistribute it. 

    1. Dave Hopton

      yep, and i’m sure Fred has the time to properly research and allocate spending for every part of the US budget whilst also running his fund.I’m sorry, but the idea that everyone in Washington is an idiot and we as individuals all know better than the entire Federal government is supremely arrogant. Of course there are loads of problems with the system, but the answer isn’t to just hand it over to people with no experience who are trying to also live their lives.Where in any other part of life is that ever a good thing? “Hey Doc, you went through 10 years of medical school and have been practising medicine for 20 years but I’ve heard some pretty bad stories about surgery gone wrong so I’m just going to perform my own lobotomy.”

      1. Dan Cornish

        OK there are a few people who are not idiots, I was using hyperbole (just incase you did not understand)see…. The definition of arrogance is thinking the government knows better. There are only a few things government does well. You are blinded by your dogma. Perhaps your should look carefully at how government tries to absorb all available power, freedom and money. You understand the American experiment is one of the few times in human history that the natural state of government – tyranny – did not exsist. Citizens have to fight against the natural  steady state of government. More and more people are starting to wake up. 

        1. Dave Hopton

          No, the definition of arrogance is:ar·ro·gance [ar-uh-guhns]nounoffensive display of superiority or self-importance; overbearing pride.Accusing me of being blinded by dogma when you don’t know me or my political views seems to me to be more arrogant. What I’m actually “blinded by” is people making huge, sweeping statements about institutions comprised of hundreds of policy experts and assuming that they’re all “idiots” who don’t know the first thing about government. I don’t like everything government does, but I’m not willing to assume that I know all the facts and am necessarily capable of making better decisions.

          1. Dan Cornish

            Hundreds of policy experts are idiots compared to 300 million consumers. The free market is FAR smarter that any number of “policy experts.” I do know your politics, because I can see the pattern. You think that complex systems built by government are far better than what the people can do themselves.  Your example of a brain surgeon is just dumb and they tip of argument one hears from progressives. The dogma I see is that people in government are far smarter than “the people” who need to be guided. What happens when hundreds of policy experts become thousands of policy experts. You should read the “Mythical Man-Month”

          2. Dave Hopton

            I’m not sure I can continue this if you honestly believe that experts don’t exist? I wouldn’t dream of telling you how to run Cosential but apparently if 300 million of us did you’d follow every piece of advice, no matter how crazy?The only pattern possible to observe from my reply is that I’m not willing to assume that I, as a sole individual who has 0 years of experience working on economic policy, am more informed and better positioned to make decisions than those with PhDs and decades of understanding. I actually believe that simplicity should always be the priority, but I recognise that running the biggest economy in the world is going to make things just a little complicated. That’s why I’m 100% behind simplifying the tax code by removing loopholes – I just think that 15% for everyone is TOO simple and happily benefits the most wealthy. It’s my belief that the wealthy will always find ways to survive, and that government has a responsibility to help people who don’t have capital and live on the very edge, because I know that if I was ever in that situation that’s what I’d really appreciate. As for this idea that people in government think “the people” are stupid and incapable of making their own decisions, please find me a politician who has ever said that. I certainly don’t believe it. Instead, I recognise that as an individual I don’t have the capacity to make perfect decisions every time and am willing to admit that there are people who know more than me who I am subsequently willing to trust and let them run parts of the country. 

          3. Michael Kogan

            I think you are confusing multiple things into one.The issue that advocates of smaller government point out ( I am not saying they are right or wrong) is that the government is unlikely to know better than you do what is good for you. So less government and more investment money empowers people to take care of their own affairs.  Of course you don’t know all the facts about the world at large, but you probably do know a lot of facts about your own personal circumstances.  Now in the case of Fred, clearly he knows a lot of productive ways to invest the money, so it is good to let him keep more of it.Having said all that, the reality is that we somehow need to finance our military, Medicare, Medicaid, Social Security, education, basic research, etc.  So at the end of the day we have to find practical ways to make things paid for beyond partisan slogans.  And I am not claiming to know the answer, but just pointing out that to the extent that we can, we should empower people to take care of themselves and let them have the capital to do it.

          4. Dave Hopton

            Michael,Good points on both sides. Empowering people is a great thing to do, but it comes with flaws. People were empowered by mortgage companies in 2006 to take out loans they had no hope of repaying, leading to a financial crisis. That wasn’t rational behaviour, but they did it because the temptation of the massive house you’ve always wanted is hard to resist when it’s offered to you on a plate. My personal view is that I’m willing to put trust in groups of experts (who happen to be in government) to try and use collective wisdom to avoid mistakes like that by installing a regulation framework that protects citizens. If that means that government becomes a big bigger, it’s something I’m willing to tolerate in order for it to actually do the job. I’m with Clay Johnson on this one: “What I want is for government to be competent and good at serving its citizens and be as big or as small as it needs to be in order to do that.”…

      2. Chris65203

        Definitely agree with this…Yes government can be wasteful but here is what government tends to spend capital on:  SchoolsRoadsHealthcare And here is what individuals tend to spend money onPlasma televisionsExcessively large homesNew tricked out carsA new apple product every 6 monthsTo say that individuals spend there money better then the government, well have you looked at how we’ve spent our money over the last 20+ years 

        1. Dave Hopton

          totally agree. Government is there to invest for the long-term, using as much evidence and expert opinion to introduce policy that will hopefully improve public services, ensure protection is there for those that need it and make lives better. They aren’t perfect at it and we have a responsibility to lobby them and help where we can, but it’s not exactly an easy job when everyone wants what’s best for them and doesn’t care about others. 

          1. Les Stroud

            Ok, i think i am following you around this thread. 🙂  You are onto the problem.  What is government’s responsibility?Traditionally (and constitutionally), the federal government is limited to lower levels of Maslow’s hierarchy (well, conceptually).  They cover security and interstate commerce.  However, there are a number of issues that really walk the line as to whether they need centralized management (almost always less efficient).  I believe that all problems are easily generalized.  As such, without study, they make great fodder for 30 second video clips. However, most problems are impacted by their context. As a result, they need more individualized assessment. To me, this is better done in lower levels of government (local, state) such that it creates competition between those local governments to find the best solutions (and if I don’t like it I can leave).  Simply, the fewer people involved, the easier it is to solve the problem.  In the end, I think everyone wants to end up in a place where the solution providers are more responsive to their customers problems and make the best and most efficient utilization of their resources.  The question is which approach, in general, leads to the highest percentage of correctness.  

        2. Michael Kogan

          Somehow, you managed to omit two useless wars in the last 10 years.Healthcare – exactly.  Our government spends a lot of money on healthcare, yet we lag behind most industrialized countries in lots of healthcare related metrics.   The reality is, if you tax investment more you get less of it and if you get less investment you get fewer jobs in this country

          1. Dave Hopton

            funny that many of countries the US lags behind operate government-run healthcare systems…Oh, and completely agree about the wars. But the people who advocate continued aggression (Rick Perry, Rick Santorum, Romney if he thinks it will get votes) are also the ones who want to reduce tax revenue! How does that make any economic sense?!

          2. Les Stroud

            Please define lag behind in the context of the entire global medical system.  While there are problems with the current model, I haven’t seen a credible statistic that is able to differentiate the gains that some centralized systems have made from the underlying gain from the existence of US funded pharmaceutical companies and their research have provided.  

      3. Les Stroud

        Actually, you are both right.  Not everyone in Washington is incompetent, but there are folks that are (like everywhere else).  The problem is that there is no system that removes the incompetent folks from that system.  In the private market there is (called bankruptcy).  Over time, Washington is building up more and more incompetence because employment regulations make it very difficult to get rid of them (talking about perm positions in agencies, not elected officials).  So, Dave, you general argument about division of labor is valid.  However,the system does not provide a means of building the best possible decision makers to handle that monetary distribution.  The system also does a horrific job of measuring the success of the folks that make the decisions (outcomes are too far out).  So, it’s kinda a pick your poison situation.  In my case, I would rather take my chance with a private company managing those services because it provides me the ability to switch to another provider if I find them inadequate.  While, this puts me at risk of a company’s conflict of interest, it seems to be a better compromise.

    2. Elia Freedman

      This statement really gets at the underlying job of government. Is the government’s job to make sure everyone has the same (wealth, benefits, etc.) or is the federal government’s job to make sure that everyone has the same opportunity to succeed? Redistribution of wealth may or may not have anything to do with that job but instead the government’s role is to provide a baseline of safety and security that ensures each of us can work toward our own advancement.

    3. kidmercury

      the idea that govt can effectively and morally redistribute wealth is dead on arrival to anyone who does even the most cursory of analyses. the size of govt has grown greatly over the past 40 years. so too as income inequality/wealth concentration. clearly, govt is not skilled at adequately redistributing wealth. 

  56. Avi Deitcher

    Isn’t disqus one of your portfolios? Tell them commenting sucks on an iPad. Does not play nicely with mobile Safari.

    1. Cynthia Schames

      Same with iPhone.

  57. Lee Blaylock

    People who tend towards being socially conservative, business oriented will always argue for lower taxes and complain about the 52% of Americans that pay no tax.  (to the folks who think they don’t, their payroll tax is rebated to $0 with the deductions) and they complain that individuals pay something like 85% (figure is not 100% accurate but it is close) of all taxes in the USA.Then there are the other types who generally are socially less conservative (i can’t call them “progressive” b/c that is oxymoronic to me), more pro big government and they talk about things like “fairness” and argue that the wealthy should pay even more.I’m not going to debate that b/c I don’t see that is where the core problem is.  It is not perfect, but the PARAMOUNT problem we have is a culture of spend, borrow and kick the can down the road in Washington that is eating at the core competitiveness of our society now and for future generations.The problems are on the spending side, not as much the taxing side.  And until Washington performs bariatric surgery on its spending habit, they need to stay out of my pocket for anything else.  They need to prove they will not waste tax payers money with wreckless 200+ years, we accumulated a $5t deficit.  Bush took to to $9,000,000,000,000,000 and Obama will take it to $16,000,000,000,000,000 by the end of the term.Soak that in folks.  The consequences are horrifying, especially considering that now our annual debt is equal to our ANNUAL GDP! 

  58. Brian Broadbent

    Bravo Fred! Bravo! Here is what I would specifically propose in regards to the Capital Gains Tax:1) Tax all capital gains above $50,000 as ordinary income. HOWEVER, the first 8-10% of annualized returns are tax free. So if you are a hedge fund manager and/or Mark Zuckerburg and you have a near infinite return because of a zero cost basis, your gains would largely be treated as ordinary income. But if you are a true investor with a cash cost basis, you would receive very preferential tax treatment.2) Have a simple alternative capital gains tax for gains below $50,000. Say 15-20%

  59. gail

    omg you and Illan agree on something (politically) ….he has been saying this for years

  60. Packmania

    Tax rates should be lower, not higher. The tax code should be simpler.Capital gains taxes should be lower than OI rates – its incentive for inestment using after tax monies that have already been taxed.This is different than carried interest tax rates, which should be higher, closer to OI rates. There is a Huge diff. Between capital gains and carried interest income, which are basically fees – ordinary earned income.The goverment is a terrible allocator of the peoples money, it is beyond belief that some want to take more money from people to give it to the govetnment. Spending is far too high and must be reined in.For those who feel taxes are too low or they dont pay enough, feel free to pay more voluntarily. That you dont only proves the point that you dont believe that YOU should pay more, only that other people shoul. I for one dont care to be an ATM for state, local and federal politicians and their special interest friends and causes.There is far too much waste, inefficiency, fraud and corruption in government and government spending, andcthe right answer is Not to throw more money awayb … Where else in your own lives are you enamored with throwing good money after bad.Thanks Fred for good topics and discussions here.i pay quite enough thank you

  61. Dan Cornish

    Why does it have to revenue neutral?  It is time to have an intervention before we hit rock bottom. Too much money is being taken out of the economy for non-productive uses(government).

  62. kidmercury

    15.2 trillion in debt and rising. debt drives everything. that amount, which is growing, can never be repaid. raise federal taxes to 100% and you still come up short. the solution is simple — a reset — but people aren’t ready to choose it yet, as it looks like 2012 will be romney vs soetoro, and people are not willing to think outside the two party box. ron paul’s growing popularity shows we are getting closer, though. and as the situation gets more painful, people will mature to the point where they are ready to face the truth. which is what will set us free. 9/11 was an inside job,kid mercury

  63. csuwildcat

    IMO, the best model is the “fair tax” (a poverty adjusted consumpion tax) where true basic goods and serives are not taxed (with caps), but all other transactions are taxed at a flat rate. Under this model there is no income tax at all, things like groceries, gas, utilities, and housing are tax-free to a limit. This accounts for poorer individuals and would increase our deplorable savings rate in the US. It would massively reduce the administration cost of taxation, because the register is a far more efficient and accurate collection mechanism.

  64. Dhiraj Kacker

    So pleasantly surprised to see this topic! Agree with everything here. Fairness, ease, no social engineering – it just makes so much sense. Let me add something that applies to entrepreneurship and people willing to take risks. With the tax incentive to buy houses people very quickly try to buy one as soon as they get their first job. And I can name so many cases where just that early decision (based primarily on tax savings) locked people up mentally that they could never take the chance of joining a startup or starting on their own because they had a mortgage to pay! It also decreases mobility – today the world is becoming smaller, the need for people to move around and reassemble to create value is much more. The housing incentive actually decreases this kind of mobility. Of course that is my judgment, but as you correctly say, let the market decide if it is better to rent or own. Why do the social engineering.It would be a great day if this were to come to pass, but politically, with all the vested interests, it seems a long way off.

  65. Jeff Walker

    Fred, i so agree with you on this.  Why don’t we get others who are private equity and VC who feel the same way to at least be more vocal about it.  Shouldn’t Mitt and the other candidates renounce capital gains rates on carried interest since no capital is put up to get that rate on carried interest.  A flat tax would be great but the first step is probably just taxing carried interest at the same rate as other Americans pay on their income.  Very unfair…Jeff

  66. jer979

    I am with you. just watched a good documentary on netflix called ‘s an inconvenient tax.’s it will give you some mute data on how bad the current system really is

  67. timshel17

    There seems to be a persistent fallacy here. We cannot pool services provided by government and divide by the number of citizens in order to ascertain some “equally derived benefit.”Progressive taxation is not founded merely in “fairness” or in “redistribution ethics.” The economic benefits of a safe and stable social climate are inordinately reaped by the very top of the economic ladder.In the US and EU, this means that the wealthy and high income earners have the most to gain from a strong global military presence abroad and a strong police presence at home. Almost 50% of Federal expenditures in the US are on military. The benefits accrued from these expenditures pool at the very top of the ladder in far higher proportions than they do at the bottom.

    1. Dave Hopton

      totally agree

    2. Les Stroud

      Ok, there is an assumption in your logic that I am missing.You said: “We cannot pool services provided by government and divide by the number of citizens in order to ascertain some “equally derived benefit.”and then”The economic benefits of a safe and stable social climate are inordinately reaped by the very top of the economic ladder.”First, do you believe that all benefits are economic or directly tied to economics?Second, how do arrive at the conclusion that wealthy folks reap additional benefit that is not offset by additional burden?  Do you have any facts or studies that back that up?

  68. Tom Labus

    Most US taxpayers want a system that is screwed up so that if and when they make a lot of money, they will be able to use the screwed system for their advantage.  

  69. Chris65203

    Agree with previous that says progressive system is not hard to understand.  What is hard for the feds to get a hold of is actual income earned/deductions/rightoffs etc.  To make companies stronger, invest in their product, get the economy going again and hire workers what we need is a deduction in corporate tax rates (40 percent to 27 percent) and the implementation of a progressive capital gains/dividends tax.  <400,000 a year is 15% or lower and go from there.  This will prevent execs from using corporations as personal piggy banks as well as slow down the flight of corporations overseas.  As for the individual income tax, it really doesn’t need to be overhauled but just tweaked to what we had in the Bill Clinton years (37% for top income earners, slight increase for 75% +, and static for rest), oh and close the loopholes.  *Chartible deductions, I think, are still a good thing, just need to be monitored for quasi-tax evasion type stuff.  

  70. Gopi

    Fred, I have commented many times in your blog regarding taxing capital and income at the same but at a overall low rate. Even one time you dismissed my idea. But its great you changed your mind now!.BTB, its pathetic that the democrats want to jack up the federal tax of doctors, small businessmen and other upper middle class to 40% but want to rise the tax rate of their super rich buddies like soros or Buffett to only 20%.In my opinion we got to reduce the tax rate to a flat 20% for all income with the first 50k income excluded. Also we should maintain the home interest deduction only for the first home (loan value capped at $500k). Eliminate all other deductions including the state/local taxes paid. Interestingly eliminating state tax deduction will also result in states lowering their tax rate as the difference in the effective tax rates between states will become so large it will change the incentives of people and business.

  71. Chris

    whether is simple, progressive tax system with no deductions is best or a flat tax, the discussion is important and the need to revamp the current system is undeniable.   Either of these alternative approaches gets us to a fairer system.   Unlike the harsh rhetoric on the campaign trail, I don’t believe we have a culture of envy.   Ours is a country that idolizes wealth with TV shows like Cribs and Pimp my Ride.   Americans of all income levels love the idea that vast wealth can be generated here.   I believe this falsehood of “class warfare” is really about fairness.   Most people know there are others who are smarter than they are, with better ideas, better connections and the skills and confidence to generate more wealth than they could.  As long as the system is fairly setup, no one would begrudge the wealth of others. Tax reform is a great (and necessary) first step.   ps – a simple tax code could also help to eliminate or drastically reduce the bloated and unnecessary IRS, cutting government waste a bureaucracy.   Bravo to you Fred for taking a public stand on this somewhat controversial issue, especially since it would mean you (and I – and many people reading your blog) would pay more!

  72. bob

    he may not know what it means, but anyone who knows fred wilson knows the guy is a mensch.  this is yet another of many proof points. there should be more such enlightened one percenters

  73. Matt Toth

    I think the talk about people not wanting to own a home or give to charity is an excuse. I prefer owning my home, not because of the deductions but because I can do whatever I want to it. I think more people feel that way than care about deductions. I think the same is true of charity. People give because they want to, the deductions are just a side benefit. Humans are much more willing to help than we give them credit for. I appreciate you discussing this and opening the debate of a flat tax with this audience.

    1. laurie kalmanson

      Yeah, it would just make the pricing different. And it is arguable that the advantage of the taxbreak is built into the price, and the price would be lower if the break goes away — which would be better for people trying to buy one and worse for people trying to sell one

  74. Bob Walters

    You, sir, are a great American.You are in touch with the country and her people, and willing to sacrifice for what (you believe) is right.And isn’t that the definition of love?Bravo and semper fidelis.Bob

  75. Richard

    Let’s start off with something easy, “student loan interest forgiveness” and a cap on the tuition rates that universities can charge, subject to some incentive metric, and still be eligible to participate with the student loan program.

  76. Tarik Ansari

    While a flat tax is certainly a good idea, it’s only a part of the issue, there is also a more covert and less debated inflation tax imposed by the Federal Reserve. When they were able to do what was undisclosed serie of bail outs essentially larger than the nation’s GDP we can’t leave it out of a discussion on taxes.The best tax is zero tax, and up until 1913, this was the Federal tax rate, which could still be gradually attained if the Federal government only focus on it’s essential constitutional functions (which it is currently not even doing so well). A leader determined to tackle the budget and economic issues would try to gradually reduce the federal budget as well as taxes, eg. with the budget decreasing twice as fast as tax revenues.Like one of the candidates said, if some lower income people are not paying any taxes — and higher income are paying 15% or so —, then we’re half way there! Obviously, it’s most important that taxes be reduced for the middle class, but leveling it for the rich won’t get us there faster or change much.If we want to transition through a flat tax to get there, then I 100% support that. I am just saying let’s look at the bigger picture, and set a goal, it might not be achievable immediately politically, but at least to get on the right path and philosophy.Some Democrats may disagree with me because they’d like to put or maintain certain programs in place, but nothing stop those programs from being external to the Federal government and voluntarily funded, they would probably be managed in a much better way, while those choosing to contribute to those would be able to enjoy more happiness, fulfillment and connection through self-engagement. This is a long subject, but look at what Chile did with Social Security.

  77. garydpdx

    Over many happy hour discussions on this topic, our drinking circle has come to a consensus on a) 15% flat tax (really flat, no deductions), b) 5% VAT that is partially replace the Medicare tax in FICA (funds go to FICA), c) entire FICA income tax goes to Social Security, cap removed and d) 7-10 year phase-in from current broken system (e.g., some people have factored mortgage interest deduction on their financial plans, so this allows them and the market to adapt from this heroin drip).

  78. laurie kalmanson

    sales tax on food is about the most regressive tax there is.that said, tax the hell out of soda, and stop subsidizing corn syruptax policy is used to shape many other policies — from tax on gasoline to pay for highways to subsidies to support industries.the starting point is defining where govt action can best be used; the policies follow from thereso much now is solely to the benefit of the subsidized industry and not anyone elsethe government built the internet and the government built the highways.what else could the government build that would benefit the country? public goods / social goods would include schools that prepare children for the future, a transportation system that gets people places without requiring them to own cars and be dependent on imported oil produced by people who don’t like us, healthcare … it’s a long listalso, bring the military home and keep the services as employers of choice for the many people who choose service, but have them build things instead

  79. laurie kalmanson

    completely off topic: promo for a friend’s #beatles tribute band, which has a grammy nomination for their album of beatles reminiscences, “fab fan memories”……the album is grammy nominated this year. they are launching a viral youtube campaign to get attention and sway votes and sell records “We’re all Beatles fans,” says frontman Dennis Scott, who’s previously won two Grammys … http://blogs.tennessean.com

  80. inthewoods

    All the studies I’ve seen on the Fair Tax indicate that it wouldn’t come close to covering the costs of our federal government.  In order for it to work, then, we’d need to have a radical revamping of our overall government spend.I’m also concerned about the effect at VAT tax would have on overall consumption, which is 2/3 or so of our GDP.Bottom line, for me:- Flat tax likely doesn’t work to fund the government.- Flat tax would require radical restructuring of the government.- The assumption is that the new system wouldn’t be complicated by special interests – I see no way it would not be.  From simple stuff like “$50k or below pay no tax” to “let’s get rid of all deductions except (insert your own favorite).Radical makeovers are really unlikely in our system of government, especially since money has so much power in the equation.  So, I would hope for smaller changes that can make a big difference, like, say, raising the cap on the payroll tax.

  81. Ronnie Rendel

    B”H Having sat in on many Occupy Wall Street sessions at 60 Wall, I have had this discussion many times.  Here’s my humble opinion:it’s not about taxes.  If anything, it’s about the efficiency (or lack thereof) the government on all levels spends the money.The truly just thing to do for the 99% is education and charity.  It’s not about taxing the rich more, this doesn’t help the 99% it only gives the government more money to blow.It’s about creating a culture and mechanism for the rich to make charitable investments – kind of like VCs do, but with the bottom line being helping people build new businesses and new communities creating wealth – but on a bigger scale.  The key ingredient to this of course is education – creating a community that supports skill building and insight that develop new wealth building communities.Yes, of course, this has everything to do with Moshiach…  This is how the world will look very soon.

  82. gorbachev

    The biggest problem I personally have to the lower taxation on capital gains (or rich people in general) that there is absolutely no actual evidence whatsoever that it leads to the benefits used to justify it.In fact, if you look at the various economic data over the years, the only evidence regarding lower taxation on high income individuals is that they get disproportionally richer and that it has no actual impact on employment and a negative impact on the income of folks, who are taxed at higher rates. The lower taxation seems to do exactly the opposite of what it’s supposed to do.Most people seem to advocate lower taxation on capital gains and high income people as a matter of some sort of blind belief (religion?) rather than anything else.



      1. kidmercury

        not quite. if you don’t reward savings, you fuel reckless spending, which leads to overinvestment/bubbles, which contribute to chronic unemployment, excessive volatility, and difficulty in long-term planning for all people and poor people both need to be able to save and invest at their discretion when they see opportunity they are comfortable with, not because the tax authorities bullied them into it. rich people aren’t investing as much because prices are too high and because customers are non-existent (customers don’t have sufficient savings because prices are too high). prices are too high because government stops them from falling with all forms of stupid intervention, bailouts, etc.    

  83. jason wright

    Wealth creation.Wealth concentration.What’s the difference?

  84. Ronnie Rendel

    B”H  An example to explain my point above:  I know a company that sells very big services to very large banks.  Last year 2 of the banks they sell to (representing 50% of its client base) laid off a combined workforce of 40,000 and passed on any technology investments in their space.This company has $400K in invoices outstanding to their clients, but these take 3-6 months to pay invoices (one thing about big banks is they hate to put out $).  So this company is facing bankruptcy in the time it takes to collect the invoice that will fund it to the next sale, etc.  And there is a relatively healthy pipeline, etc.This is a perfect case of where a charitable investment – i.e. an investment that while financially sound (though less then the typical quality grade for a bridge loan) – would save the company and its employees.  That’s what we need more of.Gosh, I would just love to create a fund that furthers everything we talk about in the AVC community (new education channels, hackathons, and community building), coupled with a mechanism to assess “opportunities” like the one I just mentioned.This would really help the public good.  And by the way, in G-d’s Torah  this is the highest form of Mitzva (commandment) a person can fulfill in their life.  Don’t want to get into religion (single worst thing that ever happened to us), but charity and charitable investments are the ultimate fulfillment of the human potential.  Enough said.

  85. Dave W Baldwin

    Interesting batch of comments.  IMHO, @panterosa:disqus is the one who has it right. If you simply determine a ‘no taxable’ amount that is multiplied by how many in family unit and apply tax on amount above that, then you basically have simplified.  What a person makes in his/her check is his/her’s.  The whole tax filing scenario is wasted time.  On the labor income side, you can do the ‘no tax’ amount of annual wage and do two tiers if you want.  That may come down to the first level being as low as 5% moving up to 15% so that jumping tier thing is less than going 15% to 30% (at least in the mind).Point to this is, we are in a time of tech where we shouldn’t have a bunch of folks scared out of their minds during the first quarter and/or over tax themselves giving a 0% interest loan to the government.Technically, the consumption tax matched with a check going out monthly to those who fall under the threshold of livable wage works also. On the investment side, to make things fair between those who invest their own money vs. those who invest other’s probably would require a seperate return.  If we were to change this and it is set in stone for 10 years, then we’d accomplish more simply due to the time wasted allegedly debating, though it always gets back to blame and envy.Last but not least, @ShanaC:disqus , regarding the ‘no tax’ level of annual income per geographical location issue, it is not my fault that the COLA in NY is so much higher than in Southeast MO.  Fort the most part, employers realize what the COLA is coming in and know what their wage levels will have to be.  Differences in ‘no tax’ levels could be different per state on state tax issues. 

  86. Mark Cancellieri

    Fred,While there are clearly exceptions, your situation and Mitt Romney’s situation are extremely rare. The federal tax system is extremely progressive.…I seriously doubt that your brothers pay 40-50% in taxes. I think you are confusing marginal tax rates with effective tax rates.

  87. bramcohen

    Funny how people worry about distortions which might be created if a deduction is phased out too quickly, but don’t worry about distortions for phasing them in quickly. In the very narrow case of mortgages I agree that that shouldn’t be phased out quickly, because people have extant mortgages. But it is important that the mortgage tax deduction be phased out – it doesn’t even really promote home ownership, just makes mortgages cheaper which makes houses more expensive and winds up with everyone back where they started but more highly leveraged. It does make a lot of money for real estate agents and mortgage brokers though.

  88. ctbtj

    Although this post is about capital gains, the main question is “whether it is good policy for someone of Mitt Romney’s or my wealth to pay a lower tax rate than the average hard working american citizen.”My concern with saying that people who earn more have to pay more, is that it tends to reward people with consistent earnings and penalize those who accept low incomes initially while training to earn more later.  Three personal examples come to mind: 1. I spent several years bootstrapping a small software company.  I made very little, and took significant risk, during that period.  Eventually it paid off, to a point where I am in the bracket that politicians believe ‘should pay more.’   But if you spread my income across all the years, it would be much lower.  If you risk adjust it, lower still.2. My father owns a mid-size construction company.  He worked incredibly hard for little money for at least 20 years before it really started to pay off.  He took big risks the entire time, his entire net worth was on the line if the construction jobs went bad, and he came close to losing everything on several jobs.  He has earned in the millions for many years now, but if you spread it across his entire career, it is much less.3. My wife is a doctor.  She worked incredibly hard through residency, for a pittance.  Then she did a chief year (also a pittance).  She may eventually go on to a fellowship (still a pittance for long hours).  If she eventually earns more, it will only be through a long period of sacrifice.So, my concern with the basic premise of this post is that we should be very careful with incentives.  Its one thing for people in the sexy/rich industries (internet startups/investment management) to say “high income people should pay more”, but most startups and small businesses aren’t Facebook or SAC capital.  They take years of risk and low income to develop, and we should be careful that we don’t undermine the incentive to sacrifice and invest.

  89. Drew Vogel

    You are forgetting one of the other advantages of a progressive tax structure. It removes less money from the economy when incomes are generally down and can least withstand taxation while it takes more money when incomes are generally up and can thus withstand more taxation. A more economic phrasing is that it serves as an automatic subsidy when the economy is slowing and it serves as an automatic inflation dampener when the economy heats up. Had our taxation and spending policies been properly aligned in this century, we would have been taking in large surpluses 2002-2007, which would have offset most of the deficits resulting from our current recession.

  90. DonRyan

    It seems simplistic but a flat tax is a fair tax. Everyone pays the same rate. Why can’t Congress understand this?

  91. Scott Watermasysk

    I would certainly welcome anything that makes the system easier to understand. Everyone should know if I make $X I get to keep $Y. Anything else simply makes things more complicated than they need to be. So a flat or known/clear scale would be great. I would also like to see this carried over to business taxes as well. It is very disheartening to hear that I my start up, KickoffLabs, will pay more in taxes than someone like GE (even worse that GE brags about working the system to not pay taxes). 

  92. Les Stroud

    Can someone explain to me their perspective on what makes progressive taxes right (morally, ethically)?  After all, we are talking about percentages and folks benefit from things other than economics.  I’m just curious because anything other than a flat tax has never seemed fair.  To me, the progressive tax system has always felt like bad construction.  It feels like an accumulation of decisions to fund pet projects by slapping additional taxes on the groups of folks that are the least likely to complain at the time.  Over time, this evolves to a structure that can’t support it’s own weight.   At some point, shouldn’t you step back look at the overall spend and redesign the system to support it in the simplest, friction-free, way possible?  Shouldn’t you require the government to live within the budget provided by that model (instead of leveraging the bottom-less pits of debt issuance and inflation) and require them to move heaven and earth to start working around the model again?

    1. Drew Vogel

      It’s easy to say “Just take the same percentage of everyone’s income” but that ignores how much of that income was derived from or enabled by the services paid for by taxes. For example, you and everyone at your work benefits from the roads by being able to drive to work and by using the roads to ship the goods you make to the market. It’s only fair that those roads be paid for by each of us in proportion to how much income we derive from them. In other words, the guy who owns the factory and gets 25% of the income should pay for 25% of the road. To do otherwise would be to make the laborers pay more tax than their employer, relative to their income. How is that fair or moral?

      1. JLM

        Should the factory owner who built the factory to build a product he identified and perhaps created and hired the workers and paid the workers to work not get some “credit” for the jobs created and the taxes paid by those workers:If Michael Dell creates 40K jobs and those jobs paid millions in taxes, does Michael Dell not deserve a smidgen of credit on his taxes?  Why have him pay taxes at all?

      2. Les Stroud

        You are assuming that the only benefit to society is economic.  One could argue that the protection of baseline human needs, opportunity, freedom from persecution, freedom of rights, etc are far more valuable than any economic benefits that anyone receives.  Those benefits are equally distributed by nature.However, with that said, if I take your argument as face value then the tax should be directly correlated to usage. Someone who drives more should pay more in road tax.  Someone that purchases more should pay more sales tax.  Someone that breathes more should…well, not sure on that tax.  Anyway, the point is that to achieve the fairness that you are arguing for, tax revenues have to be non-fungible.  As such, they should not be an income tax at all. What you pay would be based on what you consume.Following your logic, taxes should be individual use taxes.  To me, that sounds a lot like a federal sales/use tax system. Frankly, technology may be at a point where that might be feasible. —Completely different point, stop here if I am rambling :)Now, I would argue that the majority of those maintenance functions are paid for by the federal gov, but executed by the states (with their allocation of federal tax revenue – less overhead of collection and distribution). To me, it is far more efficient for that money to go straight to the state and just have the state operate under agreed quality standards (as empowered by the interstate commerce clause). So, that could be administered at the state and local levels with use taxes (i pay property taxes and road taxes for that purpose already, just expand that program and shrink the federal one).So, that covers maintenance and use. The federal government also provides investment in science and technology. I think this is a valuable role that someone should fill. It’s called long term venture capital. If folks would like to use the federal government as a venture capital investment group. Then I think that system should promote success. I would do this by moving that portion of government to an externalized agency (like freddy, fannie, post office). Except…they should be allowed to fail (if it fails it should go through a bankruptcy process and recreated with new leadership and personnel). They should have to live to the standards of any other high risk venture firm. They should provide a return on your investment (might just be a metric showing how you are changing the world or might be a dividend). Most importantly, they should be able to loose your business if they make bad choices.There is a strategic desire that long term investment occur and that everyone not opt out (insert good of the community stuff here). I get that. So, I have no problem with a system that requires you to invest a percentage of your income with a qualified venture firm (think of it as combining with social security). However, the individual should be able to choose whether they will use the government as that firm or another private enterprise. The creation of competition, and the potential for everyone at the gov firm to loose their jobs if they underperform (see above), will help ensure that you have the best possible people making long term investment decisions on your behalf. It would also give folks a choice in how those dollars are allocated. The gov may choose to invest in long term military technology, solar technology, and large scale physics (LHAC) technology. A competing private firm may have a portfolio that is environmentally centric. It may invest in smart agriculture, the development of biodegradable materials, and electric cars. Another might have a portfolio that spans nuclear, natural gas, communications, and wind power. The bottom line is this would allow people to vote with their dollars for the things that they feel are important strategically and tie those dollars directly to those initiatives.There is also the safety net that the federal government provides. Most people argue about the extent of this safety net, it’s abuse, and the system’s capacity converting people that need help into people that provide help. However, everyone believes that there has to be some mechanism that provide some level of service. In the past, charities and religious organizations bore a lot of this burden. Now, it is largely federal with centralized oversight and regulation. Since I default to believing that people closer to problems make better decisions, I tend to think that this should be pushed down to the state or local governments. However, I also understand the potential for corruption. So pushing the function down to the state would have to be accompanied by an appropriate regulatory framework which is managed by a collaboration of the state agencies and approved by the federal oversight.Generally, I would support moving as much as possible into situations that reward the best administrators of the funds and require those that are not so good to find a new profession. Outside of that, with the addition of constitutional amendment outlawing income tax and investment tax, I would be perfectly happy with a VAT/Sales model.  I think it would vastly simplify the tax code, be proportional and fair, and encourage saving and investment.

  93. Jake Howerton

    Glad to see you supporting an idea like this Fred.  It is a much clearer position than previous arguments made by yourself and Chris Dixon.  The “wealthy investors shouldn’t pay less than firefighters” argument works much better when you are advocating that the firefighters pay less, instead of arguing for the wealthy to pay more.Instead of having multiple rates like some have suggested in this thread, I would prefer having a cliff where all income under the cliff is tax free.  That could be somewhere in the 15-50k range, and everyone will get their first $x of income tax free.

  94. Byron Gibson

    Nice writeup.  I wish you’d also take a serious look at the Fair Tax proposal.  Very different from a flat tax, but very interesting structure and economic incentives.  Summary:…Would love to hear your thoughts on it.

    1. fredwilson

      i will read up on this

  95. Joe Wallin

    Fred, I agree with you. I think there ought to be a constitutional amendment which says that every individual is entitled to pay the lowest tax rate available to any other individual. So, if Congress wants to pass a law allowing a zero percent tax rate on tax exempt bond income, for example, we can all constitutionally be entitled to pay zero percent. Such a constitutional amendment would be fair and just.

  96. JLM

    Taxes, at the end of the day, are just food for the BEAST and the BEAST is the government.  You cannot intelligently decide how much to feed the Beast until you decide what size Beast you intend to support.Before you decide how big a Beast to support — the Constitution suggests the Federal gov’t should be a Beastette — you have to decide how “smart” a Beastie you want to create.Problem today is that the Beast is huge, not very smart and no longer serves the interests of its owners.I want a skinny little Beast just big enough to provide the services that individuals cannot provide for themselves (like defense), just a notch short of starvation and smart as a whip.I want that Beast to look first to tariffs, fees and non-income related or derived revenue — the exact basis upon which the country was founded.  The Founding Fathers never having contemplated an income tax, a capital gains tax or an estate tax to say nothing of the myriad of other taxes which exist.First slim down the Beast and then discuss taxes.

    1. LE

      “I want a skinny little Beast just big enough to provide the services that individuals cannot provide for themselves (like defense)”I think the days of the skinny beast are long gone. Every year new nanny state ways come about to protect all of us or some of us. Some I agree with and some I don’t.  Each year new laws and requirements get added. Nothing gets taken away that I could easily point out as an example. There is no cleaning phase re examining what we don’t need anymore (and I’m not sure to what extent that would help). Because it makes sense that as time goes on you are going to find new ways to protect people. (My wife is on that hospital committee that analyses medical mistakes and comes up with new procedures to prevent those particular medical mistakes. It’s an ongoing process. There are always new errors and screw ups in medical care.)Some of what is done is in reaction to some black swan event which causes a knee jerk reaction of laws and regulation to protect us. Some a good idea some not. Some good for me personally some not. I remember very distinctly seeing the second plane hit the tower in real time on 9/11 (at least I think what I watched was real time). The first thing I thought was “oh shit everything is going to change now. We are going to spend untold dollars to make sure this particular thing never happens again. This one event is going to cost plenty of money. Not only the security but the building design which apparently wasn’t able to stand a jetliner hitting it fully loaded with fuel.

    2. fredwilson

      we are going broke with that approach. revenues and expenses make up a P&L

  97. JLM

    Payroll taxes are really not taxes but insurance premiums.They are bread on the water.

  98. JLM

    It is time for successful and productive Americans to stand up for themselves and stop playing into the hands of those who would envy, seize, redistribute and attempt to feed their guilt about being successful.Stop making war on success.

  99. Mark Essel

    Flat taxes would be groovy, but then I regularly favor simplicity and free market forces over perceived fairness and regulation.What’s the major argument against flat tax rates? Checking comments quickly.”Wealthy folks can pay more?” – they would”But the rich won’t pay enough?” – 15% flat tax is enough”Poor folks don’t make enough to pay 15%?” – drop off the tax rate under X dollars per year”What about incentives?” – the major incentive to growing wealth is growing wealth, that’s incentive enough”What about IRS jobs?” – seriously? They’re smart, no doubt they can find other accounting jobs.

  100. sigmaalgebra

    There may be fewer than 100 venture partners in the US with significant income this year from ‘carried interest’. We’re not talking a biggie for the US Federal budget.There are related but much bigger issues: We’ve been shooting our economy and our country in the gut for far too long, and now the shooting is starting to hurt. We’ve been dumb, uninformed, misinformed, just plain wrong, often deliberately dumb, and it hurts and is UGLY and I’m SICK of it. Our tax laws are part of the problem but, really, can’t be addressed well in isolation.As a country, we have some serious problems, and for solutions we have some coordinated decisions to make on tax policy, foreign policy, monetary policy, research, education, training, our ‘social safety net’, the role of technology, globalization, and our military. Here I want good data, information, and decisions and am not a party line voter, a ‘true conservative’, or even very ‘conservative’ and am not at all for Ron Paul and whatever funny stuff he’s been smoking (No, Virginia, there were still financial bubbles and panics with the gold standard, and the US and the world economies are no longer like that of an isolated village 5000 years ago as essentially assumed by the Austrian School as described by Henry Hazlitt).For these decisions, and prerequisite information and thinking, we have an astoundingly powerful recent tool. May I have the envelope, please? Yes, here it is: The Internet. “I suggest that we use it” (‘Star Wars’, episode IV).That US voters are willing to throw whole elections based just on religion, marriage, Roe v. Wade, promoting ‘diversity’, etc. is REALLY discouraging. We’ve got people dying for no good reason, and before we get a solution many more will die. We’ve got to get real or put up with some serious sewage.For taxes, the broad idea has been (1) if someone makes $50,000 in some one year, then they owe a fraction to support the gumment and (2) if they make $50 million in one year, then, with progressive taxation, they owe a larger fraction to support the gumment.If add up all the taxes, fees, etc. that go to support the gumment, then the proposal of this thread would still have Buffett’s secretary paying a larger fraction of her income than Warren pays which doesn’t look very progressive.For the mortgage interest deduction, as long as a business can deduct interest expense, eliminating the mortgage interest deduction for homes would still let landlords deduct mortgage interest, make renting cheaper than owning, turn nearly all of the US into renters, and bring a lot of negative consequences. Also, eliminating the home mortgage interest deduction would lower house prices, and another shot in the gut of house values is one of the last things the US economy needs now.One of the problems doing something about strange tax and other economic situations is our ‘globalized’ economy. I don’t want global gumment, and until we have a good global gumment, not likely soon, a globalized economy will have a lot of strange situations for taxes and much more along with cascading financial, economic, and military instability, etc. Bummer. Most of globalization I don’t like.One of the strange situations from ‘globalization’ is the US being an unpaid policeman of the world.If the US is to police the world, then we should do it as an effort for US empire instead of US charity, i.e., we should be PAID, and paid WELL. With our various deficits, unemployed workers committing suicide, etc., I’m not thrilled about US save the world first, world-wide charity. Melinda Gates may be, but I’m not. Charity is for people with Champaign budgets, and nearly all the US is now down to less than a six pack of off-brand beer and has no business with save the world first, world-wide charity. If Melinda wants to help, I suggest she start in Detroit, Cleveland, etc.If we are going to be part of ‘globalization’ and associated policing, then likely we need to accept what the British did 150 years ago: It’s a nasty world out there; it can’t be cleaned up soon; but there are some economic opportunities. The British Empire ran India with what, only 10,000 English in India? Using ‘traditional methods’, the US should be able to run Akrapistan, should we still want to, for less than 5,000 US citizens. Actually, I’d prefer not to run Akrapistan and, instead, if Akrapistan messes with us again, then we should mess with them, get it all over with in less than a month, and then leave again. They’d have some ‘collateral damage’ but better them than us: Seen our ‘collateral damage’ from globalization? Detroit? Cleveland?Apparently 100 years ago, before income taxes, the US was a protectionist country with high tariffs, and the tariff income paid a major fraction of the cost of gumment. I conclude that one of the big advantages of the US is that it is large enough with enough resources of various kinds to do much better being much more protectionist and isolationist and believe that, thus, we should go that way. Then, with the US economy less ‘globalized’, we would have less cost from policing the world and fewer problems with strange tax and other situations.If we back away from a globalized economy, then we don’t import as much, have little reason to export, and can keep the fruits of our labors instead of exporting them.There is the idea of making all the Diesel fuel, jet fuel, home heating oil, and gasoline we need, say, 25 million barrels a day, for $0.75 cents a gallon from less than 7% of our SW deserts: We bubble CO2 from burning coal, making cement, etc. through tubes with bugs, let sun shine on the tubes, and filter out the Diesel oil:…The 7% is just simple arithmetic from what’s in the article. Then, the world oil situation is not directly our situation. Uh, no doubt the same tubes, given a supply of CO2, would work even better in the Negev desert. US, Mexico, Australia, Africa, even Akrapistan, there’s a LOT of desert in the world. Desert is not necessary; no doubt tropical Brazil would also work well or better.Yes, 75 cents a gallon sounds much better than the current $4 or so, but considering our foreign policy and global military policy to have ‘stable’ supplies of oil, we are paying much more than the $4. Looks like we should rush to be ‘energy independent’ at least for oil at 75 cents a gallon quickly.Yes, yes, yes, I know, I know: One of the ‘themes’ that came from WWII and the Cold War was that military threats to the US came from bad conditions in foreign countries so that the US might get its national security from helping other countries be more prosperous, free, and democratic. What funny ttuff were they smoking then? I never heard about a national referendum on that. Such a proposal sounds to me much less solid than anything a VC would ever invest in or anything I would try to pursue.But since WWII that ‘theme’ has been our excuse to police the world, fight in Korea, Viet Nam, Iraq, Akrapistan, etc., throw some trillions of dollars of our national treasure and a lot of the health and lives of our youth at “foreign adventures”, and to give away various US industries such as consumer electronics, autos, kitchen gadgets, hand tools, machine tools, boots, shoes, and textiles to make the world more ‘global’. In particular, we decided to offer China the opportunity to rip off our patents and to sell the results into our market. Dumb. “A fool and his money are soon parted”. And now we’re broke.Yes, if we don’t police the world, then there will be some ‘thugs’ filling the vacuum. So, we should be careful. Maybe we can police the world at low enough cost with GPS, drones, wide band sensors, signals intelligence, etc., but I doubt it. Again, we need good information and thinking. We don’t need dedicated, devoted Hillary running around, “going and going and going” like someone replaced her 1.5 volt battery with one with 20 volts, to Malaysia saying all this and that if they that and this about their policies on freedom of speech, etc. Hillary: You are NOT authorized to pursue some international coffee klatch, gossip, save the planet sisterhood. F’get about Malaysia. You would do MUCH better for the US if you would just retire, stay home, cook for Bill, bake cookies for your grandchildren, and definitely f’get about everything you dreamed about saving the world when you were in college — EVERYTHING. The less you do outside your home, the better for the US. Stay home. Now “how hard was that?”.No way do I believe that the US would have made so many dumb decisions in tax policy, the housing bubble, and foreign policy if the US voters had had anything like reasonable information from our news media. I regard our news media as deliberately deceptive and brain-dead ‘drama’ to grab’m by the heart, gut, and below the belt to get their eyeballs with just a phobia about anything like important information. The content is deliberately junk and nothing like what is important in technology, science, engineering, finance, medicine, or law. Net, I regard our news media as the worst problem facing the future of the US. In one word the solution is the Internet.

    1. LE

      “One of the strange situations from ‘globalization’ is the US being an unpaid policeman of the world.”Assuming we don’t receive any money from any country (and I don’t know if that’s the case or not,  but let’s go with it for now) this is about control.If you get money from someone else then you have something to loose.And then they can control you because they can tie that money to something that they want. Federal government does this with states with highway funding. And that was a way to get, if I remember correctly, the 55 mile per hour speed limit. Don’t implement the speed limit you will loose highway funds. And there are other examples of this.Don’t ever think for a second that the strategy is not well thought out. I’m not saying stupid things aren’t done. But it’s not a simple as it appears on the surface.This is also one of the reasons that we give money to foreign governments. That way they are are dependent on us and we can get behavior we want with veiled threats to remove or reduce funding.

      1. sigmaalgebra

        You have some good points, especially in general if not in enough specific cases.”Don’t ever think for a second that the strategy is not well thought out.”  I don’t think for a second that very often the strategy has been well thought out.  E.g., apparently we gave Pukistan a lot of our textile industry as a carrot to make them behave. Then supposedly in the last 10 years or so we gave them $20 billion or so, yes, much of which they used to buy US military equipment. So, they have been ‘behaving’? So, Clinton goes to launch some cruise missiles at UBL’s camp in Akrapistan, and Halfbright phones up her buddies in Pukistan to warn them, and they warn their buddy UBL. Later UBL is right there well protected in the Pukistan town like West Point. And much of the Taliban leadership for Akrapistan is actually in the Wackozerostan part of Pukistan (yes, my spelling of some of these names is non-standard) where the Pukistan military claims it’s impossible to attack them. So, we attack them with drones, and Pukistan raises a big stink.If we want to play real politik games in South Asia, then we might help India pressure their semi-good friends in Pukistan.Meanwhile China gets mining concessions in Akrapistan.Our foreign policy boils down to one word: Dumb. And it’s costing us blood, treasure, jobs, and national strength.

      2. jason wright

        So why DOESN’T the US pay its UN fees?

        1. LE

          a) What’s the stick and what do they loose if they don’t? Voting rights? It’s going to move to another country? The stick determine much behavior. (By the way NYC had and may still have a problem with foreign diplomats who park illegally).b) The reasons here:

      3. sigmaalgebra

        I wasn’t very clear:Yes, tax policy is important, but we can’t address it well in isolation from other policies about our economy, foreign relations, military, etc.Our country is in deep trouble.  We’ve done an historic job of pulling deep defeat from the jaws of historic victory.  Our defeat is from our stupid policies, really stupid, so stupid it’s lucky we are not in worse shape than we are.I hate the defeat and the stupid policies.Foreign policy is a big part how we’ve been so stupid.  Hillary, Powell, Halfbright, Kissinger, Rusk, Dulles, all the way back to Keenan and his “long telegram”, we’ve been really stupid.I’m not partisan in this and hate stupid policies going back at least to WWII, from both Democrats and Republicans, left, right, whatever.  Being stupid covers a lot.We’re never going to have a “shining city on a hill” if we keep dumping in the streets, our buildings, etc.I heavily blame the news media — NYT, Wapo, Time-Warner, LAT, ABC, CBS, NBC, CNN, Fox, PBS, etc. for giving us brain-dead drama instead of crucial information, and broadly I like the promise of the Internet as a solution.  To me John King, Wolf Blitzer, Katy Couric, Chris Wallace, and Diane Sawyer and more are all instant channel clicks to something else.Still, I just hate our being stupid and especially the consequences. 

        1. LE

          “I heavily blame the news media”Agree. “for giving us brain-dead drama”They are businesses and their purpose is to make money. They will do things that achieve that goal in the end. And if it’s infotainment that’s fine. Besides, people don’t have the attention span or intelligence to digest real information anymore than they want to eat healthy foods.”and broadly I like the promise of the Internet as a solution”A step in the right direction. But as this situation with SOPA has shown how many people who signed on to support really made an independent decision on the true facts rather than simply agreeing with something that the thought leaders told them to think about the issue? I mean you couldn’t even make any statements that were circumspect about SOPA without drawing an incredible amount of wrath. It would be like talking about (well know WW2 leader who killed 6 million) childhood or something as a reason for his behavior. 

          1. sigmaalgebra

            I have a lot of respect for the need of media to make money.  And the ancient Greeks understood that ‘drama’, at least what we now call ‘formula fiction’, was a sure-fire way to get and hold the attention of an audience.  So, media news draws heavily from the techniques of formula fiction.  Or, more simply they want to grab people by the heart, gut, and below the belt.  Emotionalism over rationalism.But as we know, much of old print and broadcast media have been doing poorly financially.  So, of course their message is nonsense, but, we have to understand, they are rapidly going broke!Curious:  Google has been a huge success via keyword searches of Internet text and with no direct role for drama or formula fiction at all.  Curious!I actually have a lot of faith in the ability of enough of the right people to pay good attention to good information.  Or, our civilization has a lot of respect for solid information in math, science, engineering, technology, medicine, finance, and law.  The news media is nearly alone in their devotion to junk nonsense content, mostly to an audience that in their day jobs puts up with no such nonsense.For the Internet, it used to be that “never get into a public argument with people who buy ink by the barrel”.  Well now, don’t get into a public argument with a community that communicates at several trillion bits per second.Also, for over 100 years of the news media, “the medium is the message” held and meant that, since TV, with just a few TV news channels mostly with HQs in Manhattan and with just one really powerful Manhattan newspaper, the medium was a small echo chamber feeding a small ‘bandwidth’.  Now the “medium” is over 100 million Web sites and over 1 trillion Web pages, along with cheap video production and YouTube and Vimeo, with huge ‘bandwidth’ in every sense.So, with this new ‘medium’, we stand to get many new ‘messages’.  ABC, CBS, NBC, NYT, etc. haven’t yet caught on to this or are staying with their sickly birds in their hands instead of the healthy, young flock in the bushes.  Max Planck, as he was trying to get quantum mechanics accepted, said “The old guard never ‘gets it’, and the change comes only when the young people ‘get it’ and the old guard dies off” or some such.  So, the ABC message will change when finally both Diane Sawyer and her audience die off.E.g., in the last Republican debate, as the first question John King gave the “message” of his “medium”, and Newt cut him down to knee high to a cockroach; the audience fully ‘got it’; and Newt went on to win South Carolina by a wide margin.  In South Carolina, John King was one of a tiny minority that failed to ‘get it’. 

          2. LE

            “Now the “medium” is over 100 million Web sites and over 1 trillion Web pages, along with cheap video production and YouTube and Vimeo, with huge ‘bandwidth’ in every sense. So, with this new ‘medium’, we stand to get many new ‘messages’.  ABC, CBS, NBC, NYT, etc. haven’t yet caught on to this or are staying with their sickly birds in their hands instead of the healthy”But the funny thing is that the new medium is still looking for approval and recognition from daddy (old media). That hasn’t changed. People still want to be on the Nightly news and they still want to be written up in the NYT, 60 Minutes.  Just like colleges want to be ranked by US News and people think it’s important to win a Nobel or other prize, be a Rhodes Scholar whatever. Those institutions have power and they include new members every year to keep that power.One mistake that old media is making is not putting themselves in a better position to be the anointer and ranker of the new media and players so they can retain some power going forward (think NY Times bestsellers rankings).  That way it becomes a continuous reaffirming feedback system.  Successful institution include and get ahead of important people before those people or things get important and don’t need them anymore. (Examples Oprah with Obama, SNL and Rolling Stone with musicians, Johnny Carson with Comedians).Add: Fred and Paul Graham also do this to a certain extent as well.

          3. sigmaalgebra

            You have some insight into how old media might be helped.  While I don’t believe that old news media can be saved with their ‘traditional norms’ and, further, don’t believe that they will change their norms, if I’m wrong then maybe your ideas would save them.The future I expect for the Internet is an explosion of content with a wide range on subjects, details, and quality with a lot of specialization. is an example.  Fred’s a bright guy, a good ‘bartender’, with a lot of bright ‘customers’.  If old media had to hire Fred, they’d have a tough time fitting him into their budget, but on the Internet some billion people interested in this ‘community’ can get Fred for free.  There stands to be a lot of that.  Heck, earlier today I downloaded some software bibliographies from Joel Spolsky; some of that was new to me, looked good at Amazon, and I hope to use.Wikipedia is an example:  A lot of the stuff there is good.  E.g., the treatment there of ‘sufficient statistics’ is better than any I saw in school and better than anything on my not small applied math bookshelves.  E.g., some place on the Internet, I believe Wikipedia, understands that often in principle the Neyman-Pearson result in statistics needs to solve an NP-complete knapsack problem — NICE of them to notice that.  And Wikipedia is just out there, edited by the public with the cute wiki rules.  NICE.Eventually on the Internet, if not already, we should be able to find a lot of quite good information to let us be well informed as citizens on globalization, foreign policy, the US economy, the US Federal finances, the world economy, etc.  E.g., for the SOPA-PIPA debate, I downloaded and read more than one version of each of the bills and, thus, was relatively well informed when I wrote Representative Dr.  Gibson in NY20 and Senators Schumer and Gillibrand.  The SOPA-PIPA sponsors backed into “an Internet buzz saw” with no significant role for old media.Heck, maybe some day on the Internet we’ll be able to get a Leontief input/output model for the world economy!  Maybe we’ll get a global macro economic simulation game that lets us estimate the first-order effects of blocking the Strait of Hormuz, a war between North and South Korea, breakup of the Euro, Diesel oil for 75 cents a gallon, etc.Maybe we can get the bozos and stupid decisions OUT of US Federal politics and get this country back to winning again. 

    2. Jeff Walker

      actually there are a huge number of people benefiting from the carried interest tax rate not only the 3000 venture capitalists, the 10,000 private equity professionals, the hundreds of thousands of real estate partnership general partners.  Just look at how much Steve Schwartzman of Blackstone and David Rubenstein of Carlyle make each year on payouts of carried interest.  you will make billions if you change the tax rate on carried interests to an ordinary rate from a capital gains rate.

      1. sigmaalgebra

        Yes. In part I was pouring sugar syrup on Fred’s guilt feelings as a venture partner.   But there is a point: Venture capital is risky business with, drawing from Mark Suster’s data, loss of something over 1/3 of the venture partners over the past 10 years or so (without looking up Mark’s data). There is evidence that Fred has been really successful, but in VC that’s nothing like automatic. So, a theme is, gains from risky business deserve lower tax rates.Maybe private equity, merchant banking, etc. are less risky.Even with the gains from a change in carried interest wherever it applies, I’d still want more information and thinking before deciding. We’re talking about the economy here.

  101. Mark Gannon

    My problem with a flat tax is it won’t stay flat for long.  They overhauled the tax code in 1986 and eliminated a lot of write offs, but then spent the next 10 years putting them (or similar things) back into the tax code.   Once a flat tax was in effect, plenty of people would then go to work to get back their write offs.  The end effect would be much lower tax revenue to the government.  I want the government to pay Social Security, Medicare, invest in basic research,  provide for the defense etc. You seem to assume that a flat tax sans write offs would actually provide enough money to fund government activities at the current run rate.  Do you have any evidence that says what revenue would be like under such a tax?

  102. Jeff Walker

    actually there are a huge number of people benefiting from the carried interest tax rate not only the 3000 venture capitalists, the 10,000 private equity professionals, the hundreds of thousands of real estate partnership general partners.  Just look at how much Steve Schwartzman of Blackstone and David Rubenstein of Carlyle make each year on payouts of carried interest.  you will make billions if you change the tax rate on carried interests to an ordinary rate from a capital gains rate.

    1. fredwilson

      i totally agree Jeff

  103. Tereza

    I’ve talked before about this taxation fault line between friends from business school who today earn many times what I do while paying a fraction of my effective tax rate. These are people who were very very close friends for a very long time. And it is very upsetting to see where it’s gotten to. Because we just can’t spend time with them anymore without being very angry and sad. Here’s the rant. My family is at about 50% all-in. This includes minimal deduction for childcare. We pay our nanny on the books and give her health insurance. For playing by the rules, we are apparently suckers. I am thankful for what we have. I lovely little house in a nice town, great public schools. It comes at the price of a very long commute. We live paycheck to paycheck in my entrepreneur mode.Some of these friends live at what I’d call the private jet level. On the second glass of wine the platitudes start flowing freely. Disdain at the “food stamp president” and anyone who needs any kind of help. At this point we politely avoid such dinner invitations. We’re tired of being the token “fun” and “normal” people. Like an exotic animal at the zoo.The part that hurts is that these were bootstrapped people themselves, but don’t acknowledge the advantages they were given, at exactly the right moment in time. Like steroid-injected East German swimmers at the 1980 Moscow Olympics. One has even paid six figures to establish alternate citizenship — he’s just too good for the system that created him. Being a child of parents who risked their lives to escape totalitarianism, the notion of changing citizenship on the fly to optimize your tax rate makes me, frankly, nauseous. Generally what we’re talking income is from hedge funds. And I really don’t see this money flowing back into the economy so it meaningfully ‘trickles down’. Almost none do angel investing to give back and spur innovation or create good jobs (“too risky!”). They can’t get past the math of early-stage investing to see that you do it in part because it’s the right thing to do. Our country needs innovation and to create new industries.Meanwhile, I’m doing my bit to contribute to innovation and new jobs. So — that offer to pay for us to come along on a vacation we can’t afford — and be subject to their very specific whims and desires — while not supporting new businesses like mine. I’m seriously not in the mood. And furthermore, I really don’t want my kids mixing with their kids.Getting to this has been a heartwrenchingly sad realization. These were some of the most important people in my life. But they are just not my kind of people anymore.Fred, I applaud you and Joanne for calling it out for what it is.

    1. LE

      Tereza, you spoke about these friends before so I’m glad you have finally made the decision to cut the cord by saying “But they are just not my kind of people anymore” and you are doing the right thing by the way this is effecting you. I was asked to do some alumni interviews for Wharton applicants (which I believe you also attended) and I was surprised that 2 out of the three students I reached out to didn’t even reply to my email. I asked the person who sent me the students names how it was possible that someone applying to Penn wouldn’t reply to an email (that they did receive). To me it’s automatic disqualification right there. She said it was actually a common occurrence, and this in particular which I will share:From my experience, some students apply to Penn because their parents want them to. I have had students that are children of Alum tell me ‘my Dad went there and he didn’t have an interview and he says there is no reason I need to.’ 

      1. Tereza

        That’s really interesting.It’s not in my DNA to apply to something that I didn’t want. I’m a terrible faker. I didn’t realize that was unusual. Yeah, when I wrote that up a while back, it was cathartic and I turned to my husband and said, I think we’re done (with these various individuals). He said, Thank God. It does leave a gap for us and we’re looking for different ways to fill it. (We don’t have much family). But we are confident it’s the right thing. If nothing else, we have to be true to outselves. Incidentally, I do want to underscore that I’m a total supporter of people making disgusting gobs of money. I would never ever begrudge someone for working hard and getting rich, as log as they did it honestly. What I cannot tolerate is to not sense a responsibility to give back, and tone-deafness to the fact they started on 1st, 2nd or 3rd base. A sense of entitlement pisses me off. I do have great friends from Wharton and Penn. But it does attract some odd birds with pretty lacking social skills. I am active in the school and a proud alumna and still have many friends. People from all schools go weird. That’s their loss. Anyway, thanks for the kind words. Enjoy the game!

        1. JamesHRH

          There is a saying in banking that goes:’Money does not change people; it magnifies them.’Good call – come to Calgary for a ski weekend when you crack the nut and get a vacation budget!

          1. Tereza

            We’d love to!!!

    2. Carl J. Mistlebauer

      Tereza,I applaud you and your husband!  Its hard to acknowledge that your values and those around you do not match.I basically found myself in the same position you are in back in 1995:  I actually got called a socialist for establishing our own daycare and going self funded with our health insurance.  So I resigned from the local Chamber and a whole slew of boards I sat on.  I just dropped out of the local and state “communities” that I found myself part of and limited myself to my employees, my family, and some very close friends.I have never had an employee or a poor person EVER begrudge me and or my success,  but those who have been successful themselves are the most jealous and vindictive people you could ever meet.From my perspective, and remember I hire from the poor and poorly educated, the people with the greatest sense of entitlement are the wealthy.Always stay true to yourself…..

  104. george

    From my POV, the tax debate is an interrelated resource (or limitation). Although I agree, that our federal revenue model needs some altering, I don’t believe you’ll find the “incentivizing benefit” under a flat tax system and ultimately, that’s the one economic driver that has been the source of building personal and federal wealth in our nation. I would like to see our government first operate fiscally responsive with our money (balanced budget), before we consider discussing collecting more from fewer in new ways.What we’re really talking about here, is pulling money away (capital) from those individuals who know how to invest, create engines of growth and reallocate into the hands of those who generate a negative ROI.I’m not down with this model until the return is at least at break-even…

  105. Otto

    If you need tax deductions as incentive to be charitable then you’re missing the point of charity. If the IRS is what you think of first before deciding to own a home or rent, you’re already in trouble.

    1. LE

      “then you’re missing the point of charity”Why does it matter why someone gives to charity as long as they give to charity and the charity benefits?Do you think people give to the Metropolitan Opera solely for altruistic purposes?  Only because they want to support the arts? That it has nothing to do with being able to meet and to be able to socialize with prominent people?  Or giving money to build a hospital wing or endow a school or scholarship? That it has nothing to do with the recognition that goes with an act like that?  A local hospital sold the naming rights to a parking garage to a local businessman. His name is on the outside of a multi story garage, in large letters.”If the IRS is what you think of first before deciding to own a home or rent, you’re already in trouble”Why? You’re equating someone who may be living beyond their means with someone who is considering the tax aspect of something in order to help make a smart financial decision.

    2. Luke Chamberlin

      No one gives because of the deduction, but the deduction allows people to give more.

  106. gleslie

    It’s sounds like the “starve the beast” trumpet has already been sounded so I’ll just say this… Regardless of what rate we choose and and how progressive we think those rates should be, we should all agree that simplicity is important. Right now, the ROI on efforts to limit tax exposure are far too high for both companies and individuals. Resources used to limit our tax exposure are wasted as far as the real economy is concerned. And there are a lot sharp quantitative minds in the tax profession that could be valuable elsewhere. When you think about a young start-up with a couple co-founders that does a few hundred grand in revenue, hiring an accountant or spending the time yourself can be a major drain on your already limited resources. Take the incentives out of mastering the complicated tax code so we can focus on building product and acquiring customers.

  107. js

    I see these comments about a drop in government revenues and how that might impact “things”. Folks, federal income taxes do not go towards providing any governments services. Federal income taxes merely pay to service the national debt… paying interest on such. Income taxes merely go to pay interest payments to the private for profit banking cartel a.k.a. the Federal Reserve and it’s members… we pay interest for what? For what!? The government ought to be able to determine and print its own money without paying for interest to a private third party. 

  108. Paul Dimoh

    Fred, I wanted to raise a narrow question regarding your initial post. I’m a first-time commentator as well and my apologies if my question has already been addressed. This is a broad topic, perhaps more easily dealt with in piecemeal. My views are undeveloped but shaped somewhat by my work as a corporate attorney. working with VC/PE clients  Whenever I turn on the television, the buzz phrase II keep hearing is “jobs, jobs, and more jobs”. On the issue of incentives, one can make the argument that in the current economic environment, the incentives for investors (i.e. lower taxes on capital gains) are almost necessary because without them, investors will be less inclined to provide access to private capital. We all can agree that capital allows portfolio companies to create jobs and ultimately grow the economy. So I think it’s important to have a tax policy that encourages the kind of investment that is critical, particularly in this economic environment. Although the fairness of the policy is debatable, the incremental benefit to all of society seems undeniable. I almost wonder whether my investment funds and portfolio company clients could carry on operations if the investors were not incentivized to provide capital.  My point is that at this current period, we may need the incentives to drive growth if the concern of everyone is truly jobs, jobs, and more jobs.   So as an investor, do you think it would be difficult maintaining the same level of investor commitment if we removed the low capital gains tax or other incentives and implemented a flat tax? And how do we reconcile the need for fairness with the need to create jobs, jobs, and more jobs? A flat tax is attractive. I just wonder whether it would be more prohibitive of market forces working independently. The idea of a consumption tax is interesting as well.

    1. fredwilson

      a good question Paul and i don’t know the answer.but one thing to think about is that a large part of our LP base (and the same is true of many VC and PE funds) is tax exempt

  109. Coen Hyde

    This is something I’ve thought about a lot, though I am Australian. Our system has so many tax deductions and incentives that anyone with money can easily game the system, provided you pay the accountant. After my first business and witnessing what is possible I have become an advocate for a flat tax above a minimal amount. Now that I am back again to starting a startup on the side, my biggest bills are legal and accounting. In Australia I believe our very complicated tax system is a barrier to starting innovative companies. If you look closely at a lot of our companies, most have either a Lawyer or Accountant as a founder.Re removing deductions will cause massive disruptions in the market: Well it’s obvious then that those deductions were just causing massive market manipulation in the first place.

  110. Dglasco

    I tip my hat to you for have the courage to even touch this subject and be concerned about “fairness.” Along with integrity, fairness is a subject that is usually not considered in the startup and investment world.I also wish the media would distinguish between the Private Equity investing that Mitt does (usually based on investing in mature companies with revenue and using leverage) and Venture Capital firms that are focused on investing/support for startups for many of the innovative companies that is so important to our economy.

  111. Chris Motes

    A flat tax?! Think of impact on the accounting industry!!

  112. matthughes

    Word.I love the light and fast nature of the flat tax.Having all Americans equally invested in government spending would incentivize citizen engagement and as such, government transparency.Just a terrific post –

  113. paramendra

    I don’t think we are anywhere close to a flat tax. I don’t see the political support for it. I have never gotten around to crunching the numbers or read up on someone having done so, but I have suspected a flat tax at a reasonable rate – might be more than 15% – might actually bring in more money for the government by simplifying the IRS bureaucracy. But regardless of the flat tax idea, I think there might be a broader agreement on the thought that the tax code does need simplification. 

  114. JLM

    There is a lot of pious nonsense that gets mixed into any dialogue about taxes in America today because there is a bit of guilt about being successful and transforming that success into wealth.Celebrate success.  Celebrate the creation of wealth.  Celebrate the accumulation of wealth.  Celebrate hard work.  Celebrate taking risks.  Celebrate luck.Teach the poor how to get wealthy, don’t keep them on the dole and pick the pockets of the wealthy to fund that system.  That is worse than slavery.  Let everybody who wants to get up early, stay late and work hard get filthy fucking rich.Wealthy people are generous in their philanthropy — no great revelation there as you have to have a bit of money to have some to invest in good causes.The government does not have an entitlement to your income.  They should come hat in hand with a damn good plan to use your money to fund the minimum essential services that we cannot buy for ourselves.This is a country who wants your income but has not discharged its simple duty to present, discuss, debate and approve a budget in almost 3 years.  They want your money but they will not even give you a budget.If anybody really feels they are not paying enough in taxes, then write a damn check and STFU about your faux piety and just act on it.If Warren Buffet is concerned that his tax rate is lower than his secretary — cut the old girl in on a couple of deals to lower her effective tax rate, pay some of her taxes and write whatever check makes you feel good but STFU already. Right now the entire country is paying way too much in taxes and needs to grow a set and say to the Congress — until you knuckleheads can create a budget, reduce the deficit, get your own house in order — you deserve nothing from me.Or, maybe not.

    1. fredwilson

      i am not going to STFU about it as much as you might like me to JLM.

      1. JLM

        Rhetorical flourish really.  Not intended to be personal.  As the keeper of the salon, it is your right to introduce any topic in any manner that you so desire.

        1. fredwilson

          i figured but i just wanted to be clear

          1. JLM

            Crystal!Tom Cruise, Jack Nickolson — A Few Good Men

    2. LE

      See attached. Took a second to create on zazzle.

  115. Ashwin

    “One is that a flat tax is regressive meaning that it penalizes lower income earners by taxing them at the same rate as higher earners. But I think we are all coming to realize that the current system may be even more regressive since most wealthy people find ways to pay lower tax rates.”Fred, there is a behavioral economics angle to this.When the wealthy people pay less tax, it often means less money put into a poor man’s pocket (via social infrastructure that the government funds). But when poor get taxed more, its more money getting out of their pocket, which is a direct dent on their disposable income. The hurt is immediate in the latter.

  116. Georgi Kodinov

    Living in a country that has the lowest *flat* tax rate in EU I must say that it works remarkably well. I don’t have to attain an expensive accountant and do tax gymnastics to pay reasonable taxes.So IMHO you’re up to something 🙂

  117. stephanwehner123

    The thing about the flat tax is you quickly get into the case of exceptions. What if someone can’t pay to start with. So it can’t be done. Then the question becomes just what is a good rate of increase?

  118. Ian Smith

    Why so much emphasis on income tax? Why not increase the proportion on land tax and make people pay for their local services proportionally? I was very interested in Fred Harrison’s “Boom Bust: House Prices, Banking and the Depression of2010”.

  119. Volker Hirsch

    It might have been mentioned (forgive me for not being able to read through the hundreds of comments) but a country where this was done very successfully (and – at least initially – controversially) is Slovakia: in 2004 or so, they introduced a flat 19% tax on everything: personal income, capital gains (above €500 p.a.), corporate, VAT (or sales tax as I think it is known in the US). A personal allowance per person to cover the absolute, absolute minimum (running to below $5,000 per person p.a.) and that’s it; no further allowances, rates, nothing.The finance minister who championed this was, incidentally, Harvard-educated. People were initially very upset as they felt a lot of legacy privileges slipping away. The initiative has led, however, to an immense inflow of foreign direct investment and has helped the country’s economy onto its feet much faster and much cheaper than most others.

    1. fredwilson

      ooh thanksi will read that

  120. melissa

    I am in favor of the flat tax and have been for many years,  The notion that this affects the poor is not a true statement, in the sense of paycheck to paycheck.  The poor or lower income spectrum relies on the tax return to re-coup their tax dollars…..and in many cases a tax return higher than what was actually paid in, but they still pay the 25% on each check.  A flat tax would net a lower income person more money check to check.  The upper income would see the biggest jump in taxation by eliminating all the loopholes while the average middle class would pay less from check to check.  I am considered middle class earning $50k and by doing the math I would gain approx. $300 per check.  A flat tax would eliminate the requirement to file taxes by 04/15, it would result in a smaller IRS (loss of jobs yes, but smaller payroll). In my eyes the current system puts most of the burden on single persons.  Single persons have zero deductions, they usually don’t own a home and have no dependents.  

  121. Brownsville Bulletin

    Republicans also purport a slew of other economic nonsense that has been shown to be absurd.  The flat tax is part of that nonsense and would further destroy the poor and middle class.Fred, your post really demonstrates a complete lack of understanding of macro 101.  To think that a 15% flat tax would raise revenue is in the realm of the absurd fantasy of Reagan purported trickle down economics working.This is nonsense, but unfortunately I have a day job so I don’t have the time to lecture on the details of why it is nonsense… I suggest you read a textbook or two, or Keynes’ “General Theory of Employment Interest and Money.”  You are not helping the world with these half-understood missives.

    1. fredwilson

      you are doing a good job of lecturing with the tone of your commentthis community is more about discussing than lecturing fortunately

  122. NVS

    This country has the worst Tax system in the world like few of the other corrupted countries.

  123. pbierre

    I think consumption-based taxation makes the most sense, but also think we are going to need tax policy to maintain a flexible balance between Americans investing in foreign workforce development vs. domestic investment.  The big lesson of the past 3 years is, to have a healthy, growing consumer-led economy, the average household has to feel confident about future income and income growth.   Job insecurity is a growth-killer, and laissez-faire economic global HR policy cannot help but to undermine consumer confidence everywhere it displaces workers.So I would consider taxing ex-US investments (at the time of the investment), but flexibly, with the tax rate proportion to US unemployment.   That way, in times of a “jobs crisis”, investment will preferentially flow domestically to bring down unemployment and boost consumer confidence.  But, once any American who wants to work can get a decent job (remember the 70s?), the foreign investment tax would shrink to 0.   Other countries (e.g. China) are effectively using policy tools to keep their people employed, and the U.S. now must become good at this game if we are serious about U.S. economic growth.      

  124. Matthew DeBord

    You’re right about the carried-interest travesty. But why do we need a flat tax? Why not just tax cap gains at historic levels?…AND why not a far more complex tax code — one that can be calibrated according to the abilities of a world that has massive computing power People with nothing more than pencils and stiff drinks dealt with a code that had many more brackets:

  125. jason wright…I’m sure this article offers nothing new that hasn’t already been covered elsewhere. Just a thought.

  126. pointsnfigures

    Matt’s idea changes incentives.  As you make more money, the marginal cost of making the extra dollar escalates with each dollar made.  At least with the current system I have a range I can run through before marginal costs escalate.  Tax flat, no deductions.  It takes all the power away from lobbyists, and makes every thing simple.  Plus it allows resources spent on figuring out taxes, both how much to pay, how to allocate to minimize tax and how to avoid and will transform those dollars into spend on productive resources.  Opportunity costs matter.

  127. Druce

    A column today from Bruce Bartlett on the history of tax policyhttp://economix.blogs.nytim…Any coherent policy would be better than the crazy special interest patchwork we have.And of course, on Mitt Romney’s 13.9% effective tax rate…

  128. farragut209

    What would be your thoughts on the loss carry forward?  It seems like it could be construed as a deduction, thereby making it a candidate for elimination.  Although, framed another way, you could say it’s a temporal shift of negative income.

    1. fredwilson

      if you are going to tax capital gains then you need to offset with capital lossesif you don’t do that, risk capital will dry up

  129. Meet The Matts

    In a country split in two, there is no perfect solution. But this is something we can both live with – and we’re of differing opinions on many things political. It’s like our sports affiliations; we agree on some and crucify each other for others. Run for office!

  130. Kronn

    How about grandfather the existing tax code and offer the 15% flat tax. I would love to know my tax burden and file a simple one-page form instead of 600 pages. It would help adoption.

  131. dnelon

    What stops you (and others who feel that their tax burden is too low) from just donating the difference to the Feds?  

    1. fredwilson

      i hear this all the time when i write stuff like thisit is such a bullshit argument

      1. dnelon

        I wasn’t being an ass, why is it BS?  I would like to understand why the Feds need so much money.  If folks believe that the Feds are the best stewards of their money then they should donate to them.  I do not believe that to be the case so I contribute to the charitable orgs that I believe in.

        1. fredwilson

          it is bullshit because nobody is going to pay more in taxes than they owe. i give a ton of money to charity toobut we have to balance the federal budget. if we don’t we will be bankrupt like greece soon.

          1. dnelon

            From my perspective we have a spending problem not a revenue problem.  I think I understand your point but I disagree that many of us should be forced to give more to an organization that wastes our money.  We need to find some way (and in today’s political environment I don’t see an obvious answer) to stop the runaway spending (by both parties).  Notwithstanding any of this, I appreciate much of your musing and say “Peace” on this topic and hope that we, as a nation, can find a way out of the mess that we are in.

          2. fredwilson

            everyone organization wastes moneyif i told every company that we invest in that they shouldn’t get more investment from us because they waste money, none of them would pass that testwe have a revenue and spending problempeople who are ideological about stuff like this hold us back from making the moves we need to make and getting to a balanced budget and preventing us from going bustwe need to cut spending and raise taxes

  132. Josh Benson

    Great post. It’s interesting but confusing as to why this rationale is so difficult for people to understand. The income was taxed already and the investments are generally risky. As far as a flat tax – that will be debated as per below, but thats for spelling out the 15% coherently! I’ll visit often.

  133. Steven Heath

    I agree , we need a Flat Tax in US & UK . But If it was just 10% on all income , everyone would know where they stand . No Accountants , No Black Economy because it wouldn’t be worth not paying . Say with 200% penalty if you do try and cheat . Simplifying Business must happen if we are ever going to compete with the Chinese . @cubasteve57:twitter 

  134. Johnballenger1

    I agree with your flat tax argument.  Of course, one tax that is being left out of the argument, is how much tax the corporation that you and Warren Buffett own shares in pays?  I would argue that one would have to include that number in the percentage of total taxes payed, since you are the owner of shares in those corporations.    

  135. GUEST

    Question Fred: if you lose money on these investments, don’t you get tax deductions? 

    1. fredwilson

      yes, at the cap gains rate

  136. Ryan Lackey

    Independent of the issue of flat tax vs. current system, how would you handle the transition?

    1. fredwilson


  137. Chad_Micheal

    It becomes regressive when you add ALL taxes, not just income taxes. If everyone paid SS/FICA on ALL income and everyone paid a “flat tax”, it ceases to be regressive. But, if you continue the payroll tax with a cap on SS contributions and don’t include other income for FICA, the effective rate of salary/wage employees at the bottom skyrockets while cap gains and high payrolled employees reduces greatly, especially without the standard EIC and mortgage deductions. That’s why it is “regressive’.

  138. Vicdoc55

    Best way to fix tax problem and make the 48% of people who don’t pay taxes pay them is a flat 18-22% usage/sales tax on everything bought / consumed. No state or federal income taxes anymore.nobody can hide from a mandatory usage/consumption tax. The more money you make the more you spend so, the more taxes you will pay.

  139. Emersonmj

    An easy way to mitigate the problem if a regressive tax is to not tax income below a certain level- say the poverty line – at all and only tax the income above that level at 15% this makes the tax proressive.  A family earning at or near the poverty line faces no or almost no tax while a family with significant income pays very near 15% of it in taxes.

    1. fredwilson

      yeah, i sort of mentioned that in my post but did not get into any detail on it

  140. The Butler

    It took a while but you came around to your main point. You pay too much in taxes and a flat tax is best for you. Scum bag!

    1. fredwilson

      i pay too little taxes. i think i was clear about that scumbag

  141. Aaron Klein

    Fred, if you would stop writing these common sense posts on weekends when I’m busy and traveling, I’d be here for the comments. :)Pragmatically speaking, I think it would be tough to do a real flat tax. There’s no way you could make the percentage low enough to keep taxes in the same range for middle class folks who do pay taxes now (admittedly, a very small number of people).But imagine if you had a two-tiered flat tax system. The first $100K of your income is taxed at 15%. Everything above that is taxed at 20% or 25%. And do the same thing with corporate rates.That would make tax planning SO incredibly simple for individuals and businesses. And it would unleash a lot of productivity in the economy.Thanks for a simple and common sense take on taxes. We do need government. Government does need revenue. But we need government to be a lot simpler, smarter, leaner and easier for the average person to interact with.

  142. Merovex

    I don’t think it’s unfair at all for somebody who earns income via risky investments to pay less tax, provided its their capital its risking. I don’t invest due to life circumstances, but I don’t begrudge those who do.We as a society encourage risky financial behavior because we recognize that this is the best way to help everybody benefit. You take risks and succeed, the economy improves, I benefit. To remove that incentive is naive at best, and at worst undermines our economic growth model.If you feel guilty that you don’t pay enough in taxes, then have your accountant determine how much you would pay under the “normal” rate… and donate that to a worthy charity that benefits the less fortunate. There are many that operate at below 20% their funding level, which I submit is likely more efficient than government.

    1. fredwilson

      exactly what i do, but i don’t need an accountant to do that math for me

  143. Mjnettleton

    ” I hope that the law is changed on carried interest. It will cost our family a lot of money in increased taxes but it is the right thing to do.”Hey it’s a voluntary tax system, if it is truly the right thing to do pay the extra tax without them forcing you by law. 15% seems a little high as a target tax rate but if it seems low to you lets make it voluntary and see who pays extra……

  144. Michael Elling

    Late response, but a quick search finds that no one has suggested Fred run for President.  So I am nominating him.  Seriously!

    1. fredwilson

      i could be the first candidate to get zero votes!

  145. Not_Joe

    Fred – Good post but slightly incomplete. The purpose of any tax system should be that it doesn’t allow the govt. to become a runaway train. There has to be some mechanism where total tax receipts CANNOT exceed a certain percentage of GDP whatever we as a society agree that number to be. That will at least stop the feast and NO famine (who needs to starve when there is good old debt!) mentality of all govt.’s.The biggest danger to a society is when govt. becomes the economy (Greece anyone?) and a good tax system must take that into consideration.

  146. 99%

    The share of annual real GDP that most Americans receive every year has gone down for more than 30 years.  Instead of choosing an arbitrary flat tax number, we should tax consumption progressively at rates that will allow the majority of Americans to have the share of real GDP they did when the divergence began.  The best way to do that is to tax the upper earners sufficiently to allow for an income subsidy toward this goal.  Then, I’d even pass a constitutional amendment to keep that income distribution constant over time.There’s no excuse for the country having gotten progressively wealthier over the last 30 years, while the share of that wealth for most Americans has fallen.  To make it worse, tax breaks have disproprtoinately favored the wealthy over the same peroid.The only way to talk about income distribution is in GDP terms. 

  147. xian

    The idea that this capital gains income (don’t get me started on the carried interest loophole) has already been taxed once, when it was earned, is a red herring for at least two reasons.The first is that taxes enter into exchanges and transactions up and down the economy. There is no particular reason to privilege this particular transformation and exempt it or shield it even partially from taxation.More to the point, the tax is on “gains,” above and beyond the original earned income. This latter point is glossed over so quickly it can be easy to miss, but it really belies the whole complaint about multiple taxation of the same dollar.

  148. dwinkle

    I think you’re ignoring the flip side of the argument. 47% of workers pay no taxes at all, and in many cases have thousands of dollars lushed on them by the government. You will never get these people to pay a 1% tax much less 15%. You will also never convince people a married couple with three kids should pay the same taxes as a single guy making the same amount of money.

  149. fredwilson

    a tax on consumption may be a better approach. i would be interested in learning more about that.

  150. Dave Hopton

    taxing consumption makes sense, but what about those at the lower end of the spectrum who consume lots of inexpensive items needed to live? Would there be a flat consumption tax or progressive? interesting idea

  151. ShanaC

    How do you decide what gets to be under “expensive consumption” Clothing over a certain price?  Certain cars?  What if said same car is an electric car?

  152. LE

    “there is wide belief by economists on both sides that the deduction does not help homeowners but instead the deduction gets priced into homes over time”I’ve seen this in practice in other ways. The area I live in now has very high property taxes. But the purchase price of the homes reflects this relative to another (similar area right across the river) where the real estate is valued much higher (for equivalent property) and the taxes are much much lower. I’ve also seen this with (comparable) neighboring townships where one has an earned income tax (1%) and the other doesn’t.   If you run the numbers, they come out very similar given certain income levels. And if you have high income it pays to go to the township with no earned income tax but higher property taxes (after a certain income level you start to pay less total taxes). So, yes, the market price can in fact reflect the total costs that are baked in.

  153. fredwilson

    so far, this thread has been pretty civil.

  154. Cory Giles

    Would it even be possible to audit that?

  155. Carl J. Mistlebauer

    Boy, I would be an outlier on this one…I live in the same house I have for the past 22 years, I drive my cars for at least 10 years and the reality is my “savings” are much greater than my “expenditures.”

  156. LE

    “a tax on consumption may be a better approach”Maybe it wouldn’t change your spending but it would change aggregate spending because it would raise the price of goods.  So then the demand would go down and the price of the goods would go up higher which then further reduces demand and leads to increased costs by reducing economies of scale.You can’t change an input and expect money to not be redistributed. @proales:disqus said: “Trust fund kids who have money, or the Walton family would pay massive taxes each year on the amount they consume instead of what they make on interest”So then they are less likely to spend money on either a ski home (reducing the value of your ski home) and things for the ski home (because the high end oven costs more). So the local merchant selling those things loses as well.  As does the carpenter and others who make a living off of what rich people buy.This is an entire ecosystem at work. You can’t change an input and expect it to work to everyone’s benefit. A particular individuals behavior doesn’t matter. The group behavior is what matters.

  157. laurie kalmanson

    the european VAT is essentially that; exempt food and other basics and scale it higher on higher priced goods

  158. Harry DeMott

    The only issue with a VAT tax is that there are so many loopholes in that system that it makes ours look sane. If you do a straight VAT tax with no further variances – it makes sense. Of course the argument will be that the poor need to eat therefore food and other basic service should be removed from the tax system – and then the preferences begin.

  159. William Mougayar

    I think the Anti-SOPA internet-based grass roots movement is a great example showing that this can happen in other fields as well. For each segment, there will be thought-leaders, movers/shakers, doers and supporters. – posted via

  160. Les Stroud

    If fairness is the primary concern, then a flat tax is exactly correct (maybe even a VAT tax).  The argument of certain folks benefitting more than others is a red herring.However, fairness has never been and will never be the concern.  Fundamentally, it is about differences of opinion about government’s role in society. I mean, if it was about being truly fair, there would not be taxes at all.  Everything would be an individualized usage fee (air usage, water usage, military usage, etc) all metered based on an individual’s consumption. Instead, the government prefers a system where government income fungible.  It makes it easier to reallocate money based on changes in opinion and politics. 

  161. laurie kalmanson

    school funding based on property taxes is a whole other long discussionas is, it guarantees that well off districts will have excellent, well funded schools, and poor districts will have schools with crumbling buildings and no textbooksit is the exact opposite of providing equality of opportunity

  162. LE

    Agree. I think many of the things that people say are idealistic “what I say in public” vs. “what I really think”. Or maybe “what I think I should think”.  For fear of being criticized.  It’s actually not that bad here though. Try commenting on Hacker News and not being politically correct or being to general or any number of other things that that particular community values and uses to keep members in lock step.

  163. LE

    “school funding based on property taxes is a whole other long discussion as is, it guarantees that well off districts will have excellent, well funded schools, and poor districts will have schools with crumbling buildings and no textbooks”Well educated, wealth-ier, motivated people will always have an advantage over people who are not. And be able to demand and get more. I think that something that’s just going to happen and not going to change. There are apparently teachers that desire to work in the “less excellent” schools because the parents are less demanding. It’s an easier job for many. 

  164. laurie kalmanson

    Underfunded districts are the most difficult places a teacher can serve