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[JULES VAN BINSBERGEN] Welcome to the Lauder Institute at the University of Pennsylvania. I'm Jules van Binsbergen, director of the Institute and a finance professor at the Wharton School. [JONATHAN BERK] And I'm Jonathan Berk, a finance professor at the Graduate School of Business at Stanford University. This is the All Else Equal podcast. Welcome back, everybody. Today we're going to talk about something uniquely Californian. We're going to talk about the billionaire tax.
Basically, what the voters of California will vote on in November is a 5% wealth tax, a one-time 5% wealth tax on billionaires. [JULES VAN BINSBERGEN] Now, Jonathan, you say something uniquely Californian, but let's be clear. The principles that we're going to be discussing today, and potentially the motivation where this tax comes from, I think is of all states, all countries, and all ages. But yes, indeed, this particular proposal of a wealth tax that is currently being considered is indeed taking place in California and not yet in other states. Although, you know, given the current
mayor of New York, I'm actually worried that it may come to the East Coast as well. [JONATHAN BERK] Yeah, it probably will. Jules, I mean, I'm gonna play devil's advocate, Jules. Billionaires have more money than they could spend in their lifetime. What's wrong with taxing them? [JULES VAN BINSBERGEN] Yeah, that's a very good question, Jonathan. And this show is called All Else Equal, and I think that is exactly what we're going to be talking about today,
which is the question of what are the other side effects of taxing billionaires? And in the end, are we even achieving the goal that we have stated? Because there are obviously many different goals that we can discuss. The first goal could be we just want to increase government revenue But obviously, a much bigger goal would be we would like to have a fairer society or some other social objective that we have in mind. But let's discuss first the basic principles behind the first goal, which is suppose that, and we are in no way saying that this is the right goal, but suppose that you wanted to increase government revenue and the state of California just wanted to have more income so
that they could spend more. Is this measure, this billionaire tax, a good idea? And I think that a good place to start for us the discussion is a concept that is well known to economists, but maybe not to all of our listeners, which is something that's called the Laffer curve. And so Laffer was an economist who introduced this idea and said, "Listen, are you sure that when you increase the tax rate, that your tax revenues are going up? Aren't you making an all-else-equal mistake?" [JONATHAN BERK] And the insight was that it was a fundamentally all-else-equal mistake, that there's a limit to how much money you can extract from taxpayers, that the higher you make the tax, the more incentive
they have to avoid the tax. So with low tax rates, accountants cost a certain amount of money, and you're just better off paying the tax. But when the tax rates are high- The cost of the accountant, relative to the tax is lower, and you might be better off paying the accountant to lower your taxes. And then eventually it gets to the point where you can't raise any more money. [JULES VAN BINSBERGEN] And Jonathan, hiring an accountant to try to avoid the tax is only one reason why the tax might be going down.
We are going to be discussing later examples where the marginal tax rate is so high. Suppose that I asked you, "Jonathan, the marginal tax rate is ninety-eight percent on the next dollar that you can make." Can you please work a little harder so that we can take ninety-eight cents of the one dollar that you're producing? You're going to say, "Ah, for that extra work, you know what? I'm just going to choose leisure over labor." And therefore, it's not just the accountant that we're hiring, but there are other behavioral responses that people will have to high tax rates. The incentive to work more goes down a lot if you make the marginal tax rate too high.
[JONATHAN BERK] And in particular, in the United States, you can change states, right? Labor is free to move within the country. If you impose a high tax rate in one state and the neighboring state, or not even the neighboring state, has a low tax rate, you can move to this low tax rate state Jules, let me put this in perspective. Let's just understand the cost of the billionaires exercising their constitutional right to live in any state they want to live in. As our guest today will tell us, if you take into account the billionaires that we know about that really left the state, then the total revenue in taxes that this tax will raise is sixty-seven billion dollars Now you can do the following
back-of-the-envelope calculation. Total billionaire wealth in this state is estimated to be two trillion dollars, and the highest tax rate in California is approximately 14%. Now, even though it is an income tax, capital gains are taxed as an income tax. Eventually, in order to consume this money, it eventually has to be realized So that means 14% of this wealth will eventually be collected by the state of California in income tax. So that number is $270 billion. So if you think about it, you're talking about just 20% of billionaires would have to leave the state. If just 20% of billionaires left the state, the state would actually lose money on this tax.
[JULES VAN BINSBERGEN] So Jonathan, what do you think is the main motivation for why people want to introduce this billionaire tax? Where does this come from, you think? [JONATHAN BERK] Well, I think the motivation is that people believe that billionaires aren't paying their fair share, whatever that means. And you know, we often have spoken about this, Jules, and I know you have strong feelings. There's another related concept that rich people don't pay taxes. I mean, what does the data show about that? [JULES VAN BINSBERGEN] Yeah, I have heard this story now so many times in the United States, or maybe even people
say this in certain European countries, rich people don't pay taxes. But if we look at some data, Jonathan, and we ask the question, which percentage of the total income taxes in the United States is paid for by, say, the top 0.1%, the top 1%, the top 10%, and the top 50%? And I think that when our listeners hear these numbers, I think they will be quite shocked. So for example, the top 0.1% Already pays double digits of the total tax revenue, something like 20% of the total tax revenue. So one way to think about that is that if you're in the top 0.1%, you pay taxes for 200 other people because you pay 20% of the total tax revenue even though you belong to the top 0.1%.
If we go to the top 1% of the country, they in total pay 38.4% of the total taxes in the country. The top 10% pays 71% of the total taxes, and the top 50% pays 97% of the taxes in the country [JONATHAN BERK] So the truth is, half the people in the country don't pay taxes. It's the people in the bottom 50%, not the top 50%, who don't pay taxes in this country. [JULES VAN BINSBERGEN] That would be the accurate statement. But of course, I mean, different people will look at the data differently. If you look at the data this way, I think it's very clear that the top pays a lot of taxes.
But I think that people wanna make this statement like the rich people should pay their fair share But you know, as researchers, right, we always want to ask the key question with every research question, which says, what is the counterfactual? Tell me for how many people the top 0.1% should pay their taxes before you're willing to say that they're paying their fair share. Is paying taxes for 200 other people, is that your fair share? Or how high should that number be before we are willing to say that they're paying their fair share?
[JONATHAN BERK] You know, I, like you, am frustrated by this because- Lucky for us, I mean, lucky it wasn't our country that ran this experiment, we've run the experiment when we said the fair share is that all the billionaire money should be paid in taxes. That was the Soviet Union. There were no billionaires, and there was no growth. The reason billionaires have become wealthy is because they've provided an enormous service to society. People are not forced to buy the products that made the billionaires rich. They chose to buy that product. That difference, what we call consumer surplus, added immense value to the country
[JULES VAN BINSBERGEN] But just to be clear, Jonathan, and just to also make sure that the other side is properly represented, there are definitely countries in the world where because property rights are not properly protected and the country is very corrupt, where there are billionaires that didn't make their money in the way that you just said it. But I think that many of the billionaires in California that are currently going to be taxed Are exactly the type of people that you are describing, which are not the ones that got rich by stealing taxpayers' money or in some other way stealing.
They're people that developed really good products. For example, if you ask the question, "In Steve Jobs, does he deserve to be a billionaire?" And if you think about the consumer surplus that he delivered to many people and how many people in the world are using the products that, by the way, before he returned to Apple, Apple wasn't making. After he returned to Apple, those products were being made. Then you need to ask the question, doesn't he deserve to be a billionaire, and why should you be taxing that? And particularly, that's the type of talent that we should protect and try to keep in the country and in the state. [JONATHAN BERK] And I would even not even use the word deserve.
I would say the implicit contract. The reason these billionaires worked as hard as they did to create whatever they did was because we have an implicit contract in this country that you get to keep the benefits of what you do And by taking billionaires' money, you're essentially violating that implicit contract, and that implicit contract is the reason they worked hard in the first place. So economic growth depends on these billionaires. So if future billionaires feel as if that contract will be violated, it will affect their incentive to create. Now, you may say, "Oh, come on, Jonathan, they're self-motivated." Well, first, I'm not sure of that, but let's say I give you that.
Well, they get to create wherever they want. They don't have to create in California. So we don't really have to talk about how motivating it is. We can just talk about the fact that people have a freedom of where they want to live. [JULES VAN BINSBERGEN] And Jonathan, here again, I think that what I don't understand about this discussion time after time is that if we just change the context of the problem a tiny little bit Everybody understands that this is never going to work. If you say that in the basketball team, Michael Jordan's millions need to be taxed so that every single
player in the team would make exactly the same because it's unfair that he's making a lot, even though if he would move to another team, then he gets to keep his millions. Nobody is in any doubt that it would be an extraordinarily bad idea to take all of Michael Jordan's money in this team. So if we think of our country as a team, don't you wanna keep your star athletes and make sure that they keep playing for your team so that you keep winning? And so for some reason, it's very difficult It's difficult for people to view the problem this way rather than the way of, "Oh, we should just take these billions because then we
can do something better with it than what these billionaires would do with it." But I'm not even sure there's any evidence that anything better with that money is being done because these billionaires are creating companies. I think there's also a very important cultural thing here, Jonathan, that we have to take into account, and that is a healthy culture is able to admire its stars It is not so envious of its stars that it wants to take them down. And so again, in the sports analogy, nobody has a problem with admiring the stars. They're motivating to other people. Why can we not view these people as stars that should be admired and should be mimicked and should be aspired to?
Isn't that a much better model? [JONATHAN BERK] Yeah. That's the model of America, I think. Okay, so Jules, with that introduction in mind, why don't we introduce our guest today? Here at Stanford, we're very lucky to have Josh Rauh on the faculty. He is the Ormond Family Professor of Finance at the Stanford Graduate School of Business, and a senior fellow at the Hoover Institution. He's also, I think, one of the world experts on taxation, and particularly taxation in California, where he's done a lot of work emphasizing the fact that the state has the highest income taxes in the country. And as these income taxes are introduced,
the amount of money that the state raises Isn't equal to what it would be were there no response of the billionaires. And I think Josh has done a lot to communicate this in his writings. So Josh, thank you for coming, and welcome to the show. [JOSHUA RAUH] Thank you very much for having me, guys. [JONATHAN BERK] Okay, Josh, what's wrong with the fact billionaires are very wealthy, they don't need 5% of their wealth. What's wrong with taking it? [JOSHUA RAUH] Oh, boy. Well- The fact of the matter is that the wealth is money that they've earned, and so you shouldn't just jump to saying, "Let's just take it."
One of the reasons for having taxation in the first place, taxation is of course to fund public services. Taxation at the same time is an imposition on the property rights of individuals. And so, the question is, how far do you wanna reach in there? And I think with the Billionaire Tax Act, which is gonna be on the ballot in November in California, and voters are gonna be asked, "Should we take a 5%," it's pitched as a one-time tax bite out of billionaires' wealth in order to contribute further to funding the California government. And I think what's wrong with it is a few things.
I mean, number one, this tax actually isn't gonna generate The kind of revenues that the proponents of the tax say it's going to generate. Number two, it's going to cause a lot of economic damage that is not even going to improve inequalities. It's likely going to make inequality worse. You know, maybe if you chop off the billionaires because a bunch of them leave and go to another state, it's going to hurt the economy. And thirdly, the state of California has got a spending problem, not a revenue problem.
Our Programs have increased in cost dramatically for public health and for education without commensurate increases in quality. So there's no reason to be violating the property rights of individuals in order to try to bring in more funds. It's going to be self-destructive. And finally, I'll also mention that there's some countermeasures on the ballot that encourage people to think about whether they would be interested in having the same treatment as the billionaires of California would be treated under this measure. Countermeasures that would stop the state from potentially taxing retirement savings of individuals and asset taxation in general.
[JONATHAN BERK] So Josh, I agree with you that taking 5% of somebody's wealth, let's be honest, everybody, no matter how rich you are, 5% of your wealth is a painful take. But leaving that aside, I know that your research focuses on the question of whether or not there will be a net revenue gain For California. Can you talk about some of that? [JOSHUA RAUH] So the proponents, the economists who advised on this wealth tax are University of Berkeley Professor Emmanuel Saez and Gabriel Zucman, who is now at the Paris School of Economics, who used to be at Berkeley.
They put out an estimate that this tax would raise $100 billion for the state of California. And just to put that in some perspective, California's annual budget is spending around $325 billion per year So in our research, we looked at that and we said, well, we have to actually look at what kind of behavioral responses should be expected here, and whether that number reflects the behavioral responses that we would expect based on existing research. And those behavioral responses that we focus on in this paper primarily are billionaires leaving the state of California, although I'll also note that in a lot of my other work, I've focused on the other margin, which is the intensive margin or
the extent to which individuals who already have businesses here would grow them here or would grow them elsewhere. But we focus on billionaires leaving California, and we ask, okay, what's the impact of that going to be on that hundred billion dollar number? And also, those people pay income taxes Year after year. They don't pay as much income tax as the proponents would like. That's part of the reason why they proposed this wealth tax. But they do pay income tax. You kind of have to take into account the loss of income taxes that you'll have if billionaires leave the state in response to that. And that's not something that the proponents did when they came up with this $100 billion number. So bottom line, first of all,
we found that six billionaires had already left. Now, I think the proponents are still claiming that somehow those departures are going to be deemed invalid by the California tax authorities. I think these people have very, very good attorneys who know how to make sure that you cut all ties before the end of the year. Plus, these people already had one foot out the door before. This isn't exactly the first time that they felt mistreated by, uh, the government of California on, uh, business and tax matters.
[JULES VAN BINSBERGEN] So Josh, the whole measure also in the way that it's announced seems to be very politically formulated. In other words, if you said as people get richer, we would like to impose a wealth tax on them, and we can think of some progressive tax, or we can think of many different ways in which if you wanted to raise $100 billion. To do this specific thing of this 5% wealth tax on the billionaires, it almost also feels to me like they're going after individuals because it's such a small number of people. So it seems a very weirdly targeted strategy. Are there any legal constraints on this, or how should I interpret this? In other words, if I have $500 million, you could still tax me 3%, but that's not on the table.
There's something about this billionaire cutoff, and of course, a billion dollars seems to be like a relatively arbitrary number to me. So how should I understand this? [JOSHUA RAUH] There's a history of having arbitrary cutoff numbers in other parts of the tax code. [JULES VAN BINSBERGEN] Yeah. [JOSHUA RAUH] California and other states have a millionaire income tax, so if you earn more than $1 million per year, there's an additional 1% surcharge on that. So there is a history of that. But you're right to point out that this does target a very
small number of people, and I think it has to do with the political salability of saying, billionaires have Wealth beyond the imagination of most individuals. It is sort of easier to demonize these folks, which I think is quite unfair. If you think about the job creation that the firms of these individuals have had in California, It has been substantial. It has been massive. These individuals have really driven the economy of California, and I think even the proponents of the wealth tax have respect for the fact that the firms of Silicon Valley employ a lot of people I think where there's a disagreement is they
believe that somehow this agglomeration of technology firms and tech employment will somehow persist even if the billionaires leave, and I don't think that's the case. [JONATHAN BERK] Let's just put this in context, Josh. What fraction of California state taxes is paid by the billionaires? Income taxes. Do you know that number? [JOSHUA RAUH] That's a difficult number to measure. We don't know that number exactly.
What we do know is that the top 1% of taxpayers are paying well over 40% of the income tax in California. What people have focused on more and have done sort of a better job of estimating is people are very concerned about what share of their wealth they're paying in taxes each year, and that's really where I think it's worth talking about because that's really where the proponents are going with this. So the proponents pretty much want to say these billionaires have got a lot of- Unrealized capital gains. You know, they want to think about that as income that the state should be able to tax, but, you know, because the state doesn't tax unrealized capital gains, I think they view this as being kind of a backstop of now,
you know, we're going to take this 5% bite out of their wealth as a way of taxing these unrealized gains. I mean, taxing unrealized capital gains has tremendously negative impacts on the incentive to invest And to take risk. And the reason you can see that is that, if you invest in a new business, you invest in a startup, the valuation of that startup can be pretty volatile from year to year. And these proposals for taxing unrealized capital gains, they often have some types of offsets or clawback provisions in them. But let's face it, right? If you've already had to pay tax on the fact that your company got a $500 million or $1 billion valuation, you really think you're going to be able to claw some of that back
or any of it back if the company ultimately then fails? Knowing that in advance is just a major disincentive to risk-taking. [JULES VAN BINSBERGEN] So let's go back one more time to the research that you mentioned from Saez and Zucman, right? When they did their estimate, what was their assumption about the mobility of people? Because obviously most billionaires in the country already have residences in many different states is my prediction. And so it's really that the only thing they have to do is just spend more time away from California and just eliminate whatever real estate they had in California.
Was the assumption in that research that nobody would move? Or if you want to get to an accurate estimate of, say, $100 billion in extra revenue, there are a lot of strong assumptions that need to go into that [JOSHUA RAUH] Right. So they started with one hundred and ten billion dollars, which is five percent of the Forbes 400 California billionaire wealth of two point two trillion dollars. And then they took a ten percent behavioral parameter on top of that, where I reduced it to a hundred billion. But then on top of that, right, so then you have to ask, all right, you know, what would be an appropriate response parameter? And what's challenging about this is that the settings in
which response parameters to wealth tax have been estimated, you know, they're things like Swiss cantons that have moved around the wealth tax rates. You're looking at to what extent, you know, wealthy individuals are sensitive to, you know, Swiss cantons Cantonal wealth taxes, which is a well-identified way of doing. But as we know in this kind of research, you really can only identify it off of the population that is treated and the population that's going to respond to the treatment. And so, Switzerland's already a tax haven, so the extent to which people are going to be moving
around these cantons may not be the best measure. We also look at that literature, but what we did first was we just said, 'Look, what about the response that we've just already seen?" I mean, you don't need to have any behavioral response parameters from economic reasons. Just look at the six people who announced, who we know left because it was announced and reported in the news. When you do that and you take their wealth off the table, you're down to 67 billion So, you know, the proponents of this wealth tax assumed that was gonna be zero, and they're actually still assuming it's gonna be zero.
They're still saying that the founders of Google, Brin and Page, they're saying that those guys did not escape our dragnet. We're gonna find a way to get those guys. They're not giving in on the idea that those people have left. I think the tax lawyers of those individuals are gonna have something else to say. So that gets you down to $67 billion. And then the question is, all right, not all of the-- There are 212 billionaires in California. Many of them have, already have properties in other states.
They didn't make a big announcement When they left California, many of these people are not household names. There was not a big announcement in the press when they left California. And so the question is, how much additional do we think we lost there? And based on some of the literature-calibrated estimates, we get down to $40 billion. I think the proponents don't like the way that we did that. Okay, fine. So are we at $50 billion at that point? And many more additional people clearly left, and it's really just a matter, okay, how much below $67 billion are you?
Are you only down to four? You're a little more. And then, okay, that doesn't even consider the lost income taxes from these people. So again, they're not paying as much income tax as the proponents would like. But they are paying several billion dollars per year to the state in income tax. We estimate around four or five billion dollars per year in personal income tax. And so when you consider the fact that the state loses those individuals and that stream of income tax, you've got to take a present value of that thing and ask, "Okay," what's the lost present value?"
It's hard to come up with scenarios where California comes out of this net positive. [JONATHAN BERK] So Josh, one more thing on that. What already surprises me is you said that the budget is $325 billion. Did I hear that correctly, per year? [JOSHUA RAUH] Yeah. So if I would take the present value of that to turn it into a one-time sort of wealth representation, and I compare that present value with even if it's the 100 billion, full 100 billion, it still seems that it's only making barely a dent into what the future expenditures of California will look like. So then even if, regardless of the
discounts that you're applying, which means that the number is actually way below 50, maybe even below 30, even if it was the full 100, it seems like a very small amount compared to the present value of obligations in terms of the budgetary spending that California's taken on [SPEAKER 4] Well, that, that's correct. And even you can do something much more mild than that, which is just look at the Legislative Analyst's Office. It's like the California CBO. Just look at the LAO's projection in the next, just the next four years. In the next four years, there's a $93 billion hole, a deficit in the budget. So you're going to confiscate this wealth,
you're going to lose a lot of the people and the option value of confiscating more wealth in the future if they wanted to do that, and you're going to maybe fill a gap for the next four years in a state that spends 325 billion. It just doesn't add up. I mean, there have been proposals to have national wealth taxes, national versions of this. If you confiscate all of the billionaire wealth in the country You're gonna get around somewhere in the neighborhood of $7 to $8 trillion, okay? That is one year of federal government spending in the United States. What are you gonna do then, now that you've confiscated the wealth of all these people? Where are you gonna go next?
[JONATHAN BERK] Yeah. But I think the important point is when you confiscate this wealth, you have effects on the rest of the economy. The fact that these people have accumulated this wealth is the reason why we're so wealthy. If you go to countries that don't have billionaires, they're not as wealthy as we are. This is not a coincidence. [JOSHUA RAUH] It's not a coincidence. You're actually hitting on something really important, which is actually a big criticism I have of the entire field of public economics really, is that there's just this laser focus now on
can we raise revenue by doing something, right? If we can impose this tax, can we raise a little bit of revenue? And this game sort of began with Art Laffer, actually, in the Laffer Curve, because the Laffer Curve is this idea that there's a point- Beyond which if you raise the marginal tax rate, you don't bring in any more income. And, you know, Art Laffer claimed the national level, that rate was pretty low. But what's interesting is that the field of public economics, which I think is dominated by people who come from a somewhat different political persuasion than Art Laffer, they actually said, "We're very happy to play along with this game.
Okay? We estimate." And well, you know, one of the proponents of the wealth tax in California, Emmanuel Saez, part of this literature, "We estimate a revenue maximizing marginal tax rate of 82%. That's our number." So the whole focus then became on what maximizes revenues. But maximizing government revenue- Should not be the objective function of a government, right? You're not simply trying to maximize government revenue. You're trying to optimize over some you know, some kind of welfare, right?
Some social welfare function. And so, but the result of this type of thinking, of this kind of revenue-generated thinking is that the proponents of this kind of wealth tax, they would be happy if the state brings in an extra one billion dollars Even if it destroys 100,000 jobs in the state. I mean, that's not a good trade-off, right? You have to ask, what are the economic distortions? So that's where the late and great Martin Feldstein, and some of his papers in the 1990s, these were very ambitious papers that tried to add up, like, what are the aggregate distortions to having income taxes at the rates that they are? And oftentimes these distortions are costs in the economy, deadweight loss - there are multiples
of the amounts of revenue that are brought in. So that's where I've really been disappointed in the field of public economics. And actually, the proponents of this wealth tax had this on display at the debate at SIEPR, where Emmanuel Saez stated that even if 80% of the billionaires left California The state budget would still be better off because he believes that you're gonna lose a little bit from their income taxes, but you're gonna gain some from the wealth taxes on the 20% of the people who left. He found that to be a wash. I think it'd be a little worse than a wash, but just taking his point at face value, I just said to him, "Look, I mean, so you would liquidate Silicon Valley for an extra billion or $2 billion per year in a
state with a $300 billion debt. You would liquidate all that. You think that's not gonna have any implications for jobs and for prosperity in the state?" This misplaced focus on how do we maximize revenues I think it's been a real problem in the entire tenor of the discussion. [JONATHAN BERK] Josh, I think it's an example of something more fundamental, which is that when people can't see something, they just often think it's not there. So nobody sees how a billionaire creates wealth
So they just assume the wealth was created anyway, that if we remove the billionaires, we would still get all the growth in California, and I think that's a fundamental mistake. But let me change the subject a little bit. Is there a good way to tax overall, Josh? [JULES VAN BINSBERGEN] Yeah, to add to that question, right? Suppose that you could redesign the entire tax system from the bottom up, and suppose that we had already cut the budget in half and we're spending it correctly. There's still the question, what is the optimal way of raising that amount of money through which type of taxation, right?
Agreed? [JOSHUA RAUH] Yes. Well, okay, so the kind of field of public economics is actually pretty clear on this, and it all just derives from the idea that you wanna tax in ways that are gonna generate the fewest distortions. Yeah. And so the worst types of taxes that you can have are actually taxes like income taxes or wealth taxes, because these generate massive distortions in behavior that have tremendous economic costs For society. So those are the worst ones. The ones that are generally better are consumption taxes. And if you put in, you know, an idealized version of a value-added tax, actually looks really good on paper. And so I don't dispute any of those models.
And you know, I think you want to move more towards consumption taxation, value-added taxation. I think just from a more practical perspective, what I want to see is Much lower tax rates on the income tax and a broader base. I think the corporate tax is a double tax. I would say eliminate the corporate tax, and if you want to have offsets to that, then have the shareholder-level taxes, you know, dividends and realized capital gains be the rate offsets. Simplify the system directly. Get rid of a lot of the deductions and the loopholes, and those include the favorite ones of people who will just never give them up, including the deduction for employer-provided health insurance, you know, deductions for
mortgage interest and so on. I will say that we have made a bunch of progress in the federal tax code Mortgage interest deductions are capped now, you know, thanks to the Tax Cut and Jobs Act of 2017. You know, just keep going in that direction, lower rates, broader base. I think that's the more realistic type of tax code that we could get in the United States. [JONATHAN BERK] Well, Josh, you know, as you know, the title of this podcast is All Else Equal And if there's an example, I think, of an all else equal mistake, it's taxation, where people assume they can raise revenue and not
take into account how people will react to the tax change [JULES VAN BINSBERGEN] The Laffer Curve, [JOSHUA RAUH] Mm. Well, exactly. Then there needs to be a basic social safety net. There has got to be a floor. But where we are right now in terms of the scale and the size of government is just far, far. Beyond that. And it becomes difficult as you want to raise more and more revenue from the economy, bigger and bigger piece of the economy that you're going to raise through taxation.
You're just going to end up with more and more distortions, and you're making everybody poorer. It's the famous Margaret Thatcher quote, right? This is Margaret Thatcher's final appearance before Parliament, and she said, "You would rather that the poor were poorer so long as the rich are less rich." That is your policy. And I think that a lot of our policies that we have now implicitly are doing that because the level of everyone is so much lower We're actually not even really assisting on poverty in a lot of cases, right?
Maybe in the bottom decile we're doing things where people's economic outcomes could, you know, perhaps better given the redistribution that we have. But once you go above that, so much redistribution occurring also with massive disincentives for individuals to work. I mean, if you look. Now we're not talking about billionaires, but recently I was reviewing, looking back at what the marginal tax rate is of someone who is at the 25th percentile of earnings in different states in the US, and they suppose they got a pay increase to go to the median. So that's on average, it's going to go from like a $36,000 a year annual salary to a $72,000 per year annual salary
The marginal tax rate there in all of the states that did the Medicaid expansion with the Affordable Care Act is over 100% because people are on Medicaid at $36,000 and they lose Medicaid if they're at $72,000. So basically, you have zero incentive to double your income. That's a problem. People respond to incentives and people know it. And so I think when we're doing all this redistribution, we have to be seriously asking these questions, are we getting more prosperity for everybody out of it or not? [JULES VAN BINSBERGEN] Thank you so much, Josh. This was wonderful.
[JONATHAN BERK] Josh, thank you so much. [JOSHUA RAUH] Thanks to both of you. Pleasure to be on this show. [JULES VAN BINSBERGEN] Thanks for listening to the All Else Equal podcast. Please leave us a review at Apple Podcasts. We love to hear from our listeners. Also, be sure to catch our next episode by subscribing or following our show wherever you listen to your podcasts. For more information and episodes, visit allelseequalpodcast.com or follow us on LinkedIn. The All Else Equal Podcast is a joint production of Stanford University's Graduate School of Business and the Lauder Institute at the University of Pennsylvania.
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