receipt_long A Low Rate on 'Economic Income' Is Not a Gift
report_off The claim
"Billionaires are rich thanks to tax giveaways: the 378 wealthiest households pay only 2% of their economic income in tax."
This argument is interesting to take apart, because it hides its trick inside a single technical phrase: “economic income.” The 378 wealthiest households supposedly pay only 2% of it in tax.
The trick is an equivocation, at least in the popularized, viral form of the claim. “Economic income” in the underlying study typically includes the unrealized appreciation of assets. A share that rises from 100 to 110 increases its owner’s paper wealth by 10, but that owner has not received 10 in cash; nothing has been sold, nothing has been paid out, there is no income in the everyday sense of the word. The version of the claim that circulates online drops that context and lets “income” as in “money you actually got” get silently substituted for “income” as in “the change in the market value of what you already own.”
The strongest form of the counter-argument deserves a direct answer, not a dodge: proponents point to “buy, borrow, die.” A billionaire can pledge appreciated stock as collateral for a loan, fund their spending with the borrowed cash, and never trigger the sale that would realize the gain and create a tax bill, deferring taxation indefinitely and then erasing the gain entirely at death through a stepped-up cost basis. That pattern is real and worth taking seriously, as a policy question about basis step-up and collateralized lending. But it does not rescue the “economic income” framing. A loan is not income either: it has to be repaid eventually, it carries real interest cost, and it exposes the borrower to a margin call if the collateral falls in value, a risk the lender prices in precisely because the loan is not a realized gain. The genuine complaint here is about one identifiable loophole, the basis step-up at death, not about a general failure to tax unrealized gains as they accrue every year, which is the much broader thing the “2% of economic income” statistic actually measures.
And more modestly than a causal story requires: paying little tax on unrealized gains does not by itself show that the fortune was easier to build because of the tax code. It shows only that those gains are not taxed as they accrue, a narrower and more defensible point that a low effective rate on paper gains does establish, even if it does not establish the stronger “tax giveaway” story built on top of it.
There is a real phenomenon behind part of this asset inflation, though, and it is worth granting it rather than denying it: a significant share of the appreciation in financial and real assets over long stretches of the past two decades, especially 2009–2015 and 2020–2022, has come from monetary policy itself, quantitative easing and near-zero interest rates, not from any tax rule. This is the Cantillon effect: newly created money reaches asset holders and financial institutions first, inflating the prices of what they already own, well before it reaches wage earners through higher pay. Conceding that a chunk of these gains is a monetary artifact rather than tax policy does not by itself settle whether such gains should be taxed differently; it only relocates the argument to monetary interventionism by the state, not to a permissive tax code and certainly not to the free market’s ordinary reward for identifying value.
Set the “economic income” dispute aside for a moment: there is a separate, openly normative argument the Austrian tradition makes about taxing capital heavily in the first place, unrealized gains or not. Mises treats what gets called progressive taxation of income and inheritance as, in substance, a disguised mode of expropriating successful capitalists and entrepreneurs rather than an ordinary tax, on the view that taxing capital heavily reduces what is available for accumulation and entrepreneurship, which is what tends to raise productivity and wages over time. That claim stands or falls on its own; it does not depend on, and should not be mistaken for, the narrower point above that the 2% figure does not mean what its promoters say it means.
“2% tax on ‘economic income’” does not mean “2% tax on money earned.” A rise in a company’s paper value is not a wage cashed in hand, and a loan against that paper value is not a wage either. But observing a low tax bill on unrealized gains does show those gains go untaxed as they accrue, whatever one concludes from that.
Quotes
View full quote"Taxes are necessary. But the system of discriminatory taxation universally accepted under the misleading name of progressive taxation of income and inheritance is not a mode of taxation. It is rather a mode of disguised expropriation of the successful capitalists..."
Books
Human Action: A Treatise on Economics
Ludwig von Mises' magnum opus and the most comprehensive systematic treatment of economics from the Austrian School perspective. Mises develops pra...
Read More