As the year comes to an end, I reflect on how we can make our tax system more fair. By Bill Gates
Where will you be when the ball drops at midnight on New Year’s Eve?
I expect to spend midnight this year in the exact same place I spent midnight last year: asleep in bed. That doesn’t mean I’ll let the holiday go by without recognition, though. Melinda and I love to use this time of year to reflect. How did the last twelve months go? And what do we hope to accomplish in the years ahead?
I was fortunate to travel the world this year. I got to meet some amazing people and see incredible innovations that I’m hopeful will make life better for millions. As December comes to a close, I feel more optimistic than ever about the progress we are making. At the same time, I’m also aware that gross inequities continue to separate the lucky from the unlucky all over the world—and that I have immense privileges as a result of this inequality.
Instead of updating you on what I’m working on—as I did in last year’s end-of-year post—I want to use this year’s post to write about inequality. Specifically, I want to focus on one particular issue that came to the forefront in 2019 and will be top of mind for many in 2020: America’s tax system. This isn’t exactly the most festive topic to cover during the holidays, but it’s one of the most important debates happening in our country right now.
Although I mostly spend my time talking about the issues I’m really focused on—global health, education, and climate change—I get asked about taxes a lot. I understand why it comes up so often; I’m a natural focal point for this debate.
The truth is, I’ve been pushing for a fairer tax system for years. It was nearly two decades ago that my dad and I started calling for an increase in the federal estate tax and for an estate tax in our home state of Washington, which has the most regressive tax system in the country. In 2010, he and I also backed a voter initiative that—had it passed—would’ve created a state income tax. (My dad even wrote a book about why we need to tax accumulated fortunes.)
It isn’t always popular to stand up for higher taxes, so it’s great that many Americans are having this conversation. I want to be as clear as possible about my views.
I start with the understanding that the U.S. government simply does not bring in enough money to meet its obligations. This isn’t a value judgment; it’s just a fact. The government collects about 20 percent of GDP in taxes while spending about 24 percent. And the cost of commitments is going up.
Meanwhile, the wealth gap is growing. The distance between top and bottom incomes in the United States is much greater than it was 50 years ago. A few people end up with a great deal—I’ve been disproportionately rewarded for the work I’ve done—while many others who work just as hard struggle to get by.
“I think the rich should pay more than they currently do, and that includes Melinda and me.”
That’s why I’m for a tax system in which, if you have more money, you pay a higher percentage in taxes. And I think the rich should pay more than they currently do, and that includes Melinda and me.
Although I’m not an expert on the tax code, here are some steps I think America should take to make its tax system more fair.
We should shift more of the tax burden onto capital, including by raising the capital gains tax, probably to the same level as taxes on labor.
Today the U.S. government depends overwhelmingly on taxing labor—about three quarters of its revenue comes from taxes on wages and salaries. Most people get almost all of their income from salary and hourly work, which is taxed at a maximum of 37 percent. But the wealthiest generally get only a tiny percentage of their income from a salary; most of it comes from profits on investments, such as stock or real estate, taxed at 20 percent if they’re held for more than a year.
That’s the clearest evidence I’ve seen that the system isn’t fair. I don’t see any reason to favor wealth over work the way we do today.
I’m also in favor of raising the estate tax and closing the loopholes in it that many wealthy people take advantage of. A dynastic system where you can pass vast wealth along to your children is not good for anyone; the next generation doesn’t end up with the same incentive to work hard and contribute to the economy. It’s one of the many reasons that Melinda and I are giving almost all of our wealth back to society through our foundation, rather than passing all of it along to our children.
Other steps toward a fairer tax system include removing the cap on how much income is subject to Medicare taxes, closing the carried-interest loophole that allows investment-fund managers to pay the lower capital gains rate on their income, and taxing large fortunes that have been held for a long time (say, ten years or more). Very wealthy people often have large investments they’ve held for long periods, and if those investments aren’t sold or traded, the money is never taxed. That doesn’t make sense.
And fixing taxation at the federal level is only a part of the solution. We also need to make state and local taxes fairer, since they represent a large portion of Americans’ tax bills. For example, I still think we should adopt a state income tax in Washington.
When I say the government needs to raise more money, some people ask why Melinda and I don’t voluntarily pay more in taxes than the law requires. The answer is that simply leaving it up to people to give more than the government asks for is not a scalable solution. People pay taxes as an obligation of law and citizenship, not out of charity. Additional voluntary giving will never raise enough money for everything the government needs to do. If Melinda and I signed over our foundation’s entire endowment to the state of California, it wouldn’t be enough to fund their public schools for even one year. A vibrant economic system depends on setting expectations for who pays how much.
But in addition to fair taxes, Melinda and I think there’s value to society in allowing the wealthy to put some money into private foundations, because foundations play an irreplaceable role that’s distinct from what governments do well. In particular, philanthropy is good at managing high-risk projects that governments can’t take on and corporations won’t—for example, trying out new approaches to eradicating malaria, which is something our foundation is working on. If a government tries an idea for improving global health that fails, someone wasn’t doing their job. Whereas if we don’t try some ideas that fail, we’re not doing our jobs.
“In the 1970s, when Paul Allen and I were starting Microsoft, marginal tax rates were almost twice the top rate today. It didn’t hurt our incentive to build a great company.”
The country does need to be thoughtful about how high taxes should be raised. One of the reasons that innovators flock to the United States is that this country makes it easy to start a business, invest capital, and earn a profit. We shouldn’t destroy those incentives, but we’re a long way from that point now. Americans in the top 1 percent can afford to pay a lot more before they stop going to work or creating jobs. In the 1970s, when Paul Allen and I were starting Microsoft, marginal tax rates were almost twice the top rate today. It didn’t hurt our incentive to build a great company.
It’s great that Americans are debating who should pay more in taxes and how. I’ll continue to focus on the issues our foundation works on as well as climate change, so I will not take a position on the proposals that are being debated during this campaign season. But I believe we can make our system fairer without sacrificing the incentive to innovate. We’ve updated our tax system before to keep up with changing times, and we need to do it again, starting with raising taxes on people like me.
At the beginning of this post, I mentioned two questions Melinda and I like to reflect on this time of year: How did the last twelve months go? And what do we hope to accomplish in the years ahead? As we end this decade and look forward to what the 2020s will bring, I hope to see progress not only in how taxes are collected but how they’re spent to build a healthier, more equitable world for all.
Melinda and I believe that driving progress is wealth’s highest purpose. Even before we were married, we decided that we would use the resources from Microsoft to make people’s lives better. Our wealth comes with an obligation to give back to society, and in 2020, we’re committed to continue living up to that obligation: through our taxes, through our foundation, and through our personal giving.
Melinda and I are currently writing a lot more about that commitment in our Annual Letter, which will come out at the beginning of February.
I wish you and your loved ones a wonderful year ahead.