Should the tax burden shift away from labor income toward capital gains and negative externalities?

Brendan Foody · published Jun 1, 2026

Income tax should be eliminated for the bottom half of Americans and replaced with taxes on capital gains, especially short-term capital gains

Jobs are the largest positive externality in the economy, yet income and payroll taxes structurally disincentivize them, which becomes acutely problematic under AI-driven job displacement; capital gains taxes distort incentives less because investors will invest regardless

53:12 Eliminate income tax on the bottom half and tax capital gains

Brendan Foody · published Jun 1, 2026

Taxing capital gains does not meaningfully deter risk-taking because investors take risk in aggregate through portfolios and would be taxed on overall portfolio gains

High-risk investing happens in an aggregated portfolio, so the tax applies to net portfolio outcomes rather than individual risky bets

55:09 Capital gains taxes do not deter risk taking

Harry Stebbings · published Jun 1, 2026

Raising capital gains tax is self-defeating because investors will simply relocate to jurisdictions without capital gains tax, so the government loses the tax revenue entirely.

People move; he cites UK idealist politics like the Green Party where higher taxes just push capital out of the country

55:25 Higher capital gains taxes just drive capital offshore

Brendan Foody · published Jun 1, 2026

The US should tax carbon and other negative-externality consumption rather than tax the income of the bottom half of Americans

Carbon is a clear negative externality that goes untaxed in the US, and such taxes don't damage incentives or trigger emigration the way income taxes damage the incentive to work

56:07 Tax negative externalities like carbon instead of labor income

Paul Graham · published May 2006 · hedged

Income tax rates start to go badly wrong around 50%, above which people get serious about tax avoidance, because the payoff from avoiding tax grows hyperexponentially.

At 10% moving to Monaco gains 11% more income, at 90% ten times as much, at 98% fifty times; the payoff follows x/(1-x).

source Income tax avoidance payoff grows hyperexponentially above a 50 percent threshold