Ramifications of Biden's proposed capital gains tax hike, federal budget, India's COVID surge, founder psychology & more

Episode 30 begins with a disjointed burst of banter and crosstalk, the hosts shouting over each other and joking about shout-outs and a company acquisition. It is pure noise rather than content, running into the show's usual intro.

Jason formally opens the podcast, introducing the group calling in from various places and teasing that the energy feels low before diving into the news.

The first topic is breaking news from a few hours before recording: Biden announced a proposal to nearly double the top capital gains rate for wealthy individuals, from 20% to 39.6%, to help pay for social spending and address inequality. A host notes that for those earning $1 million or more, the federal rate could reach 43.4%, and the increase would raise about $300 billion over a decade.

He adds that combined state and federal capital gains rates could reach about 52.22% for New Yorkers and 56.7% for Californians, and recalls Biden's prior warning that those earning over $400,000 can expect to pay more. He says the stock market was down on the news. These figures are as read on the show.

The hosts rib Jason for having ranted about this beforehand, joking that he should have seen it coming given how he voted, before settling into the substance.

A host offers a quick primer: capital gains taxes apply to the profit when an investment is sold, with a distinction between short-term holdings of under a year and long-term holdings of over a year. He explains the long-standing economic rationale that a lower capital gains rate, relative to income tax, incentivizes long-term investment, keeps money moving, and supports growth, so raising the long-term rate from 20% toward 40% is a striking policy shift justified as funding social spending.

He walks through the history as the group recalls it: the top long-term capital gains rate reached about 40% briefly in the late 1970s, roughly 1976 to 1978, then sat largely in the 15% to 20% range for the last couple of decades, and earlier in the 20th century was fairly consistently around 25%. Jumping to 40% would therefore be a large change with heavily debated economic implications.

Chamath steps back, arguing Biden likely does not see this as a fully credible plan. He reads it as performative, since the headline 39.6% came in well above the low-30s figure people had been whispering, which he interprets as giving a pound of flesh to the party's activist left, a group he says does not understand or participate in venture-style wealth creation. His reaction is that it will be tough to pass and may end up as a watered-down version, so he is not very worried about this specific version.

He returns to a recurring theme: the fewer people who get to participate in the upside, the more there are who just want to tear it all down. He treats the proposal as another signal of structural problems to fix, saying it is not reasonable for a few to get very rich while everyone else is left on the sidelines.

Asked whether it will pass, Sacks thinks it could, because the tax increase is planned as part of a second infrastructure bill the party is calling human infrastructure, which he describes as rebranding social programs since infrastructure is one of the last popular categories of federal spending. He expects the bill to pass with a big capital gains increase, though not necessarily at exactly 39.6%.

He recalls that the 20% rate came from Bill Clinton lowering it from 28% to 20% in a mid-1990s package of tax reforms, which he credits with some of the best years of US GDP growth, productivity growth, and deficit reduction. He warns the country is experimenting with breaking something that worked since the Reagan-Clinton years, namely reasonably low taxes on capital formation.

Sacks argues it is a category error to treat capital gains simply as income, because the money has already been taxed once when earned; saving and investing it, then being taxed again, is a form of double taxation that was an original reason for a separate rate. He warns the change risks disrupting an economic recovery already underway.

A host points out that organizations, not just individuals, pay capital gains, so doubling the effective rate puts many under pressure. He uses the example of a pension fund with large investments in private equity or hedge funds, which are pass-through vehicles: if you are structured so you do not bear the tax you may be indifferent, but any organization or person that does bear it suddenly sees returns roughly cut in half.

On the question of ordinary savers and 401(k)s, the hosts clarify that 401(k) gains are not taxed as they grow, so the main hit falls on retirees with taxable stock-market gains or people trading things like cryptocurrency, who would effectively pay income-tax rates rather than a lower rate.

Chamath argues the change would diminish investment at the margin: some people would consume rather than invest, which could push inflation up, because the reward no longer justifies the risk they already bear. He says the riskiest assets, early-stage venture and company formation, carry an implicit expectation of return for the risk and time involved, a rate investors have been trained to feel.

Doubling the rate from 20% to 40%, he suspects, changes many investors' risk tolerance as they feel their after-tax gains differently and ask whether it is worth it, which would drag on entrepreneurship. He argues part of why America is such a sink for capital from around the world is incentives that excite people with the prospect of reward, so removing those rewards has implications larger than the rate itself, with knock-on effects as capital pools outside the US also change behavior. This is his own analysis.

He contrasts eras: the effect was more muted under Clinton, less so in 1978, and barely existed in the 1940s and 1950s, but is a huge force today. As an indebted nation that owes money to countries including China and is supposed to generate growth to pay it back, he asks where growth will come from if limited partners stop backing venture funds and investors decide to check out.