2025: Trump made $1.4 billion in crypto earnings: https://www.politico.com/news/2026/06/30/trump-crypto-windfall-disclosures-00983207

2025: Coinbase net income was $1.26 billion: https://www.sec.gov/ix?doc=/Archives/edgar/data/0001679788/000167978826000015/coin-20251231.htm#iae11e908344a4bcc80d453663d7e2997_196

The SEC following Yass’ lead in investigating the trades they don’t want to pay out: https://www.bloomberg.com/news/articles/2026-07-02/sec-probes-alleged-insider-trades-that-cost-susquehanna-millions?srnd=homepage-americas&embedded-checkout=true

As it turns out, pretty much everything. Persistent lobbying campaigns and aggressive legal work have made it functionally optional. Around four thousand1 estates pay it each year, a time period in which almost three million Americans die. Of the $1.2 trillion transferred between generations each year, only around $32 billion is captured by it.2 It doesn’t work. In the early stages of the largest3 wealth transfer in human history, with the national debt a problem that is just getting worse4, now seems as good a time as any to work on solutions.

Cerulli estimates5 that there will be $124 trillion in inheritances and gifts passed on to younger generations by 2048. It was published in December 2024, and nothing in the last year has led me to believe that the current concentration of wealth will diminish by the time the youngest baby boomers reach their mid 80s. Half of that will be passed to the top 2 percent of households.

Still, a statutory tax rate of 40 percent on $124 trillion over two and a half decades is nothing to sneeze at from a revenue perspective. That’s in the ballpark of trillions of dollars a year. Even at the CRS’6 observed effective rate of 9.2 percent, that would be hundreds of billions more than the roughly $30 billion we currently take in. Unfortunately, however, the edifice of exemptions and avoidance mechanisms that have been put together over the last few decades have ripped the teeth out of the estate tax and cemented the conditions for an unproductive American aristocracy.

For starters, it kicks in way too late. After Trump’s latest round of tax cuts for the rich (the OBBBA) permanently raised the threshold for it to kick in to an astronomical $15 million (and twice as much for married couples). Even at the comparatively progressive threshold of $5.5 million ($11 million for married couples) before Trump’s first round of tax cuts for the rich, only 507 farms and small businesses were subject to it. At current levels, for a married couple to have a bill of $1 million in estate taxes owed, they would need to leave behind a fortune of $32.5 million (an effective rate of barely more than 3%), without having taken advantage of any of the many well worn work around that are described below.

Starting with the mechanism Sheldon Adelson used to avoid8 around $2.8 billion in taxes: Grantor Retained Annuity Trusts (GRATs). The way a GRAT works is that you (the grantor) create an irrevocable trust and transfer an asset into that trust. That trust has to make annuity payments to you based on a rate set by the treasury (120% of the average yield of treasury bonds with maturities between three and nine years), and any appreciation of the asset in the trust above the amount necessary to make the payments can be passed onto an heir tax free. If the asset, for some reason, fails to appreciate faster than the treasury hurdle rate, it just goes back and you can try again. It is a heads I win, tails I break even bet on whether whatever asset you have can outgrow the hurdle rate. Even worse, the trust can be structured in such a way as to “zero out,” and leave the inheritor with no liabilities whatsoever. While data on tax avoidance is hard to tell, but a conservative estimate is that $15 billion in tax avoidance per year is not unreasonable.

A similar concept is the Intentionally Defective Grantor Trust (IDGT). Here, you structure a trust so that it is owned by you for capital gains tax purposes (so that you can sell assets to it without incorporating capital gains), but separate for estate tax purposes (so that any appreciation falls outside of the estate). Somehow, this is legal. Not only is it legal, it costs us at least $8 billion a year.

For families with nonpublic assets, the law allows staggering discounts when making transfers. Minority and lack of marketability discounts can have considerable consequences. Consider a car dealership worth $100 million owned by a married couple with two children. They could set up a family limited partnership where the parents own 1 percent, but act as general partner, while the children each own 49.5 percent as limited partners without management participation rights, or the right to sell without the permission of a general partner. Each of those $49.5 million dollar shares could be discounted by up to 35 percent due to “lack of control,” and then up to another 35 percent due to “lack of marketability”, bringing the value of the $99 million gift to $41.82 million, from which $30 million can be deducted, leading to a tax bill of around $4.73 million. And that is conservative, given how these techniques can be layered. Around $5 billion a year is kept from the taxpayers through these discounts.

The Obama administration tried to place some minor limits on these discounts, but, predictably, the Trump administration withdrew9 those limits in his first year as president.

And the well-funded estate planning industry has kept pushing. South Dakota led the way in the reemergence of “Dynasty Trusts,” which allow families to pass assets across unlimited generations without further taxation, ever, as this helpful graphic from Schwab makes clear. These trusts hold at least half a trillion dollars10 in assets, and probably a good deal more given the rise in asset prices since that number was reported. This scale of assets makes it reasonable to assume that at least $10 billion a year in estate taxes are avoided through these structures.

Given the problems I have identified with capital gains tax avoidance, the work that has been done by the estate planning industry has helped to build a world in which productive assets are transformed into the touchstones of a modern aristocracy.

A Three Part Approach

The failures of the estate tax should not come as a revelation. Every meaningful attempt at reform has failed. The Clinton administration’s 1997 proposal to eliminate non-business valuation discounts died in committee. The Obama administration’s eight proposals (on in every Greenbook) on GRAT restrictions were never taken up by Congress. Every estate tax provision in the Build Back Better Act was stripped out before it became the IRA.

Part 1: Close the Loophole

Still, it is necessary to keep working on those changes. While closing the avoidance channels is—in my view—insufficient to fixing the estate tax, it is absolutely necessary. Much of this work has already been proposed, and it is necessary to keep the fight going.

GRATs should, in line with the Obama administration’s proposals, be reformed to have a minimum term of 10 years, a minimum remainder value that cannot be zeroed out, and a mandatory inclusion in an estate if the grantor dies during the term. They would still involve some tax shifting, but at least they would not be risk free to the grantors.

IDGTs should be fundamentally broken down to remove the false distinction between ownership and tax ownership. Meanwhile, valuation discounts should be reanchored in reality. This step may be costly from an administrative perspective, but as I go over later, the expected ROI on this policy mix is such that the cost of robust enforcement is not prohibitive.

A federal law against perpetuities preempting state laws should be enacted. There is no reason for a republic to allow for the creation of trusts that last more than three generations. Furthermore, when the beneficiaries of trusts change, that should count as a taxable event.

Combining these with my proposal for capital gains taxation would eliminate the issue of stepped up basis at death, and make buy, borrow, die moot.

Part 2: Tax Receipts, Not Estates

Currently, the estate tax is levied on the total estate before distribution. That makes some sense. The assets and liabilities are all there, and can be assessed in one go. Still, I think that we can do better. We can tax recipients separately, with each heir facing their own rate based on what they receive.

If the concentration of wealth among a small group of inheritors is something we want to avoid, then our tax system should say that leaving two children $25 million each is worse than leaving two children and eight grandchildren $5 million each. While the current system is indifferent, a receipts-based system wouldn’t have to be. Especially under a system of progressive rates (more on that in the next section).

Wealthy families would face a tradeoff: concentrating control, or reducing taxes. In other words, they could disperse their money, or the government would do it for them. This creates many opportunities for gaming, but so long as it could aggregate lifetime receipts—gifts plus inheritances from all sources—it would result in a substantial improvement.

Part 3: Replace the Cliff with a Curve

In theory, the current estate tax is a flat 40 percent. This discontinuity is sharp, and provides incentives for avoidance (just like any tax cliff system). While discrete tax brackets make sense in a world where everyone is doing their taxes by following along with a worksheet, a simple formula proves much harder to game. What I propose is, following a $1 million lifetime deduction, all gifts and inheritances should be taxed according to:

where ϕ is the golden ratio: around 1.618. If you look at the plot below, you can see that the rate is increasing as the inheritance goes up smoothly and continually, although at a decreasing rate.

All Together

Going back to the car dealership worth $100 million owned by two parents with two children. By closing the loopholes used would leave $70 million of the estate taxable, which at current rates means that $72 million would be passed on, $36 million to each child. With the smooth rate structure and tax on receipts, however, things get more interesting. If the parents wanted to leave the estate equally to the children, each one would have $49 million in taxable liability, at a rate of around 36.79 percent, each child would get about $31.96 million. If, however, the parents decided to leave $17 million to each of their children, and $16.5 million to each of their four grandchildren, things get more interesting. After taxes, each of the children would receive ~$11.49 million, and each of the grandchildren would receive ~$11.17 million. By splitting up the inheritance, the parents were able to reduce their tax bill by almost 6 percent.

The family benefits, and society benefits. The “Carnegie conjecture,” that inherited wealth reduces heirs’ productivity is well founded in the economic literature. Furthermore, inheritance can, in some ways, be seen as the ultimate economic rent. This can be seen in the rent-seeking behavior of the Mellon family, who made their money in the early days of the Grant administration, and have done nothing of value to the country (save Andrew Mellon’s exemplary job as a caricature of what FDR was campaigning against), and yet until Elon Musk’s late spending, Thomas Mellon was11 on track to be the top donor in the 2024 cycle.

No one in the Mellon family earned that fortune, nor did anyone in Jack Schlossberg’s generation earn12 the following necessary to mount a congressional campaign. They did it as the result of a policy failure that has stunted social and economic mobility, and brought about an American aristocracy. The time to do something about it is now. Or in 100 years, our descendants will despair at the continued domination of dynasties founded before the advent of Trumpism, just as we despair at the continued power of dynasties founded before the Great Depression.

When you open a position with $100, and it goes up to $200, you have $100 more than you did when you opened the position. But you don’t owe any taxes on that additional $100 until you close the position. To anyone with a brokerage account that seems normal, but the longer you think about it the weirder it is. You’ve gotten $100 richer, and have effectively deployed that $100 to invest. You can, if you want, borrow against that $100, and there is a strong literature suggesting that people make decisions on the basis of having that additional $100.

Meanwhile, the government has services to provide and those services have costs. So it would like to tax you on that additional $100, like it would with any income realized by any other American. If the tax rate on capital gains is 25%, you owe the government $25 on your gain. But you get to choose when you pay, and because you haven’t closed the position and “realized” the gain yet, it doesn’t collect the taxes you owe on it. You will owe them when you close the position (unless you die beforehand, more on that later), but until then, you can use the money, either by keeping it invested, or by borrowing against the asset it represents. The government is essentially giving you an interest free loan that you get to pay back when you choose.

To continue with this example, let’s say that the next year, the asset grows by 10 percent, so you now have $220. Your capital gains are now $120, and you owe $30. But, because you didn’t pay $25 when you had $100 in gains, it stayed invested and you got an extra $2.50. That’s weird, and with the real capital gains taxation system, things get even weirder.

In theory, it depends on the overall level of income realized by an individual, but capital gains are so concentrated at the top, it is safe to work from the assumption of top earners. Assuming they do not engage in the kind of chicanery all too common to that class, capital gains from assets held for less than a year are assessed as ordinary income, up to a rate of 37 percent, with a potential net investment income tax (NIIT) of 3.8 percent, for a total of 40.8 percent on marginal dollars. For assets held for longer than a year, the top marginal dollars of gains are taxed at around rate of 20 percent, although, the NIIT still applies, so it is actually 23.8.

This discontinuity is a major source of tax avoidance. Because there is little economically different between holding a position for 364 or 366 days, it is fairly trivial (as detailed in this ProPublica story) to move gains from short term to long term.

Visualizing the discontinuity between short and long term rates, along with the fact of the unrealized loan gives a system that looks something like this:

But for the very rich, like Ohanian, the good part hasn’t even come yet. That happens when you die. Under current law, when you die, any capital gains are wiped out and the position is transferred to your heirs as if they opened it that day. This is called “stepped-up basis.”

Going back to the earlier scenario, if you die after your position doubles, your heir(s) get it as if it was always worth $200. That isn’t an interest free loan. Those gains were never taxed. They never will be taxed. We have always been at war with Eastasia.

It is even better if you borrow against your assets while you live. For very high net worth individuals, this is a great bet for banks. A small (20-30%) percentage of a large portfolio is very good collateral as stocks rarely decline by enough fast enough for a margin call to not be effective. Then you have plenty of cash, and interest expenses to mop up any pesky net investment income you can’t help but realizing. Then your heirs can sell some of the stepped-up assets to pay off the loans.

I don’t think this is good. It is a major reason the ultrarich pay lower effective tax rates than the upper middle class, it feeds an industry that degrades our moral character, and—arguably most importantly—it misallocates capital.

If you invested $100,000 into one company a decade ago and your position is worth $1 million today, you have $900,000 in unrealized capital gains. If you think another company will do better going forward, you would have to realize those gains and pay around $214,200 in taxes before you could invest in that other one. That means you would be turning a $1 million holding in a company with potentially mediocre prospects to $785,800 in a company with better ones. So that second company would have to dramatically outperform the first one in order for the switch to be worth it.

This means that privately rational investors are not allocating to the best companies anymore. That seems to undermine the point of our modern financial markets.

So here’s what I’d do. I’d stop making the loan interest free. Just pay the taxpayers back for the privilege of holding our money.

For example, if the rate on capital gains was 25 percent, and you had $1 million in unrealized capital gains during a quarter where the average federal funds rate was 3 percent. You would have to pay the taxpayers 0.75 percent (the 3 percent, divided by a quarter) times the $250,000 you would owe on your gain: $1,875.

When you close the position, you will owe the full amount, but until you do, you should have to pay for the privilege of the deferral.

This proposal is, unfortunately a bit too simple, so after some consultation with several LLMs about potential pitfalls and complications, this is what I have come up with to enhance it.

There should be a progressive system on capital gains (like there is today), but with no distinction between short and long term capital gains. A discontinuity that massive is too attractive a target for tax avoidance.

The stepped up basis should be eliminated. Your heirs should have a choice. They can close the position and pay the taxes on the capital gains, or they could continue to pay interest. But they shouldn’t receive a clean slate.

For illiquid or hard to value assets, you should have to make up interest payments at realization on the assumption that the asset grew at a continuous rate during the time you held it, but those payments should be summed without the assumption that they compound. I know this is essentially another interest free loan, but hopefully it would be much less consequential.

Unrealized losses should create a nonrefundable tax credit against other income earned in that current quarter. Honestly, I don’t love this idea, and I would be interested in other ideas, but while the government shouldn’t send you checks because your portfolio is down, there should be some symmetry.

Finally, there should be a floor below which no payments are owed. Assuming the floor is something like $1000 per quarter, that would mean you would need between $400,000 and $800,000 in unrealized gains (depending on the federal funds rate) to have this effect you.

My choice of the federal funds rate was no coincidence. I think it could shorten the “long and variable lags” associated with monetary policymaking.

Rate hikes would bite more as people would see higher carrying costs for their investments. Admittedly, there would be a bit of an asymmetry where the tax relief provided by rate cuts would be smaller than the hit from rate hikes, but given the fact that the relief would be a regressive tax cut, I am ok with it.

I also think it would make markets more efficient. While there would still be some lock in (you still have to pay capital gains on your first position before moving to your second), but I think it would be dramatically improved.

Revisiting the scenario I used to illustrate the problem, with a 3 percent federal funds rate and the same 23.8 percent capital gains rate I used. Now, you’re paying $1,606.5 per quarter to maintain your $900,000 in capital gains. If you sell, you will still owe the $214,200 in capital gains you owe, which would mean you would only have $785,800 to invest in the company you think has better prospects. But, now, making that trade cuts your quarterly bill dramatically as, even with better performance, I would imagine it would take a while to accumulate another $900,000 in capital gains, and the savings from those quarterly payments combined with the improved performance of that second company would, provide some upside to staying locked in.

My proposal wouldn’t fix everything that is wrong with the current system. Real estate would still be a mess (but that would be less of an issue if it were combined with a land value tax). But it would directly address the core problems I have identified. Capital would be better allocated and revenue would be higher.

The way we tax capital gains is currently unfair and inefficient. It rewards behavior that isn’t societally beneficial and creates a network of holes for tax avoidance. If you’re going to defer your obligations to us, the least we can do is charge you interest.

A trend that he has noticed over the past few years is that—in most cases—investment managers are finding it harder and harder to charge high fees for their specific investment decisions. Alpha (above market risk-adjusted returns) is fleeting, and their clients have begun to rightfully ask what they are paying for, as the disclaimer at the end of every ad for an investment product notes, “past performance is no guarantee of future results.”

But, investment managers are a tenacious lot and they have plenty of resources at their disposal. And they understood the nebulous nature of their alpha long before their clients did. So, some of the smartest minds in finance, noting the chasm that exists between tax law and economics realities, realized it is a lot easier to generate market-matching returns with a reduced tax liability. And then they could charge fees based on the tax savings. After all, tax savings are structural. Luck should play no part. alpha generated by investment skill, such as it exists, which investors would be more willing to pay for.

Over the last year alone, strategies like this have surged with AQR capital management—a pioneer of the approach despite their posturing of academic rigor—seeing its AUM in the strategy going from $10 billion to $45 billion, and everyone from WorldQuant to the House of Morgan jumping into it.

Here’s how the basic version works. You own Stock A, it’s down 10%, you sell it, book the tax loss, immediately buy Stock B which is basically identical. The wash sale rule says you can’t buy the same stock for 31 days, but a different ETF tracking the same index? Totally fine. You maintain your market exposure, but now you have a tax loss to offset gains elsewhere. Repeat this across hundreds of positions and you can generate meaningful savings year after year.

There are more sophisticated versions. One that fills me with rage was launched in July 2025, by Roundhill Investments. The S&P 500 No Dividend Target ETF. The fund tracks the S&P 500 by investing in other ETFs tracking the S&P, but whenever one is about to pay a dividend, XDIV transfers its position into a different one that isn’t. Economically, you own the S&P 500. For tax purposes: you haven’t received any dividends. The product exists purely to create a gap between reality and what you report to the IRS.

This type of work has been immensely profitable, both for the finance industry and for the investors who have avoided many billions of dollars in taxes as a result. But it is not victimless. Firstly, that revenue loss has to be made up in borrowing, which has to be paid back with interest. Secondly, it involves operating in a grey area, both for investors and managers. Now broken window theory isn’t exactly my favorite theory of criminal justice, but I am too much a connoisseur of financial shenanigans not to have noted how thin the line between aggressive interpretations of statutes and outright criminality can be. And as much more favorable towards innovation in the financial sector I am than the average Democrat, even I struggle to intuit benefits in terms of capital allocation or market efficiency from what are functionally wash trades.

The fact that society accepts this behavior has been deeply damaging. My 18th birthday occurred a few days before Donald Trump took his fateful journey down his gold plated elevator to announce his presidential campaign. And while there were problems with American society before then, I do not imagine I am alone in noting that a moral rot has taken hold within a certain portion of the American character. And I see aggressive tax avoidance, of which Trump is a gleeful participant, as integral to that rot.

To support this opinion, it seems like now is the right time to turn to Trump’s former close personal friend Jeffrey Epstein. Specifically, it deals with a 2013 scheme by a Texas Billionaire and his family to avoid around a billion dollars in estate taxes by flooding the market with shares of a thinly traded company to cut the estate valuation. Because, once again, I am a connoisseur of financial shenanigans, I have included a brief summary of the scheme in the below diagram, with a link to a proper write up in the caption.

In January 2014, Levine wrote a Bloomberg opinion piece about the scheme, which came to the attention of a trusts and estates lawyer at the white-shoe firm Paul, Weiss, Rifkind, Wharton & Garrison LLP. Yes, it is the same Paul Weiss that folded immediately to the Trump administration’s lawless intimidation of law firms earlier this year. Seeing the scheme, the lawyer emailed Epstein saying, “I thought of you when I read this. Was this your idea?”

I think Levine sums up the situation better than I could:

In the early days of the Epstein scandal, one mystery that bothered me and a lot of other people was: Where did his money come from? A small collection of billionaires seemed happy to pay him hundreds of millions of dollars, but for what? Given the context, there were various wild theories, but as far as I can tell the answer was just that he was really good at saving them taxes. I once wrote, somewhat jokingly, that Epstein would find tax schemes and then “the fancy lawyers in the Paul Weiss tax department would say ‘wow ... this is amazing, why didn’t we think of this, this guy is a Michelangelo of tax minimization?’” Apparently that really happened!

If, as seems likely, this is at least part of the truth, it fits with my thesis. Leon Black was willing to associate with a post-conviction Epstein because he saw the potential billion dollars in tax savings as worth funneling tens of millions of dollars to a convicted child sex offender. That is moral rot if I have ever seen it.

The difference between aggressive tax planning and enabling crime isn’t hard and fast. And with the incentives that exists, Wall Street will continue to aggressively pursue tax alpha. With Charlie Munger’s wisdom, “show me the incentives and I’ll show you the outcome,” it is clear that the incentives have to be changed. And while this post is already too long for that, I would start by trying to reconcile the tax code to economic reality.

In the popular imagination of that system, it provided automatic discipline in line with Hume’s1 price-specie flow mechanism. If a country exported more than it imported, gold would flow in, expanding the money supply, raising domestic prices, and eventually making exports less competitive until trade balanced. If you imported too much, gold would flow out, contracting your money supply, lowering prices, and restoring competitiveness. No discretionary policy needed.

In practice, this is not how things worked. That gave rise to what Whale2 described as the “banking school” in which central banks followed what Keynes’3 called the “rules of the game.” Rather than a passive acceptance of gold flows, central bankers actively managed interest rates to maintain the system. Gold flowing in? Lower your interest rates to discourage more inflows and maintain equilibrium. Gold flowing out? Raise rates to attract it back. It was a supposedly self-regulating system. And as the economic landscape remained the same and the old boys network running global banking prioritized maintaining the system over anything else it worked. No wonder the court of the Bank of England loved it.4

Unfortunately for them, the economic landscape did not remain the same, and a more autonomous monetary system demonstrated just how flawed the underlying logic was.

Between 1897 and 1914, global gold production increased at about 3.5 percent annually56. That’s decent, but it was nowhere near fast enough to accommodate the country that had recently7 taken the belt as the world’s largest economy: the United States of America. Unlike the staid old world, we didn’t have a central bank run by aristocrats. In fact, since the second bank of the United States was dissolved in a Jacksonian hissy fit, we hadn’t had a central bank at all. Friedman and Schwartz documented that over this 17 year period, American gold holdings jumped from 14 percent of the world’s total to around a quarter. That means that the American gold supply growth was more than seven percent per year, while the rest of the world’s supply grew at less than three percent a year.

Without a central bank, no one was cutting rates enough to repel these inflows. But what about the price-specie flow mechanism? Didn’t it provide a backstop? Friedman and Schwartz show that over that period, American priced did in fact rise faster than those in the rest of the world (Britain, a reasonable enough proxy at the time). But only by between 60 and 100 basis points per year. This was because the American boom was structural. In a story that should not be unfamiliar to observers of the period from 2021-4, the American economy was growing faster than the rest of the industrialized world. And then—as now (or at least before these idiotic tariffs)—the United States was an agricultural and technological powerhouse. And it had grown too large for the gold standard.

The problem with agriculture for a world on the classical gold standard is that it adds a strong element of seasonality, which means that around the last turn of the century, global gold flows temporarily reversed8 during the crop moving season. This destabilized the global economy, forcing then Treasury Secretary Leslie Shaw to spend most of his exceptionally long term attempting9 to manage it. One tool he created to manage this struggle was “finance bills” which, with their high interest rates, attracted gold to the country during the low money demand season so that during the crop moving season it was already here and did not need to be imported. The Bank of England didn’t love these, as they made gold scarcer for the rest of the world year round.

The picture of the end of the classical gold standard is almost complete. Only three more pieces need to be placed. The first is the technological growth of that period. In ’s excellent 2022 book, Slouching Towards Utopia: An Economic History of the 20th Century, he creates an index of human technology and shows that from 1500 to 1870, it grew on average 0.2 percent per year. For the 140 years after that, it grew at 2.1 percent a year, more than a tenfold increase. In the early years of that period, much of the technological growth was driven by faster communications and electrical power, both of which were reliant on one key technology: copper.

From the 1890s to the start of the First World War, global per-capita copper consumption increased by a factor of ten10. With rapid global population growth, these numbers are truly astounding. Copper was, in many ways, analogous to the matrix multiplication accelerators that have become key to the current AI boom. And much like those chips, copper production is capital intensive and has long lead times, meaning that its production was sensitive to credit conditions.

While the City of London was very much the center of the financial universe at the time, the American financial system was still potent. It had volved specifically to work around the constraints of limited gold-backed money. Trust companies—lightly regulated11 institutions that faced no reserve requirements until 1906—had grown explosively because they could lend more aggressively than traditional banks. They could do this precisely because they held less gold relative to deposits. This was “innovation” in two senses: it created a larger effective money supply to serve a growing economy, and systemic fragility.

By August 1907, state banks and trust companies held deposits in New York (the center of national finance since the days of Alexander Hamilton12) banks nearly equal to those of national banks. The system treated these deposits as equivalent, even though trust company deposits were backed by far less actual gold. Traditional banks, eager for the higher returns that aggressive lending could generate, had tied themselves to trust companies through various channels. You had, in effect, multiple layers of claims on the same limited gold base.

This was not a failure of regulation or a breakdown of ethics. This was the financial system doing what it had to do to provide enough effective money supply for a rapidly growing economy when the actual monetary base—gold—couldn’t keep pace. The problem was that this credit structure was inherently unstable. When confidence faltered and people wanted actual gold (or at least claims backed more directly by gold), the elaborate edifice would collapse.

So in 1906, when the San Francisco earthquake and fire caused damage13 of between 1.3 and 1.8 percent of GDP, the gold outflows from British insurers, and the Bank of England responded according to the rules of the game by raising interest rates. As those policies had to be paid anyway, this just caused pain to the British economy, while Shaw’s finance bills prevented the typical summer outflow of gold. As a result, the Bank of England discouraged lending to American banks until Shaw discontinued the instrument. Still, credit tightened and the American economy slowed a little bit. Friedman and Schwartz note that despite slowdown in production and freight loadings, prices did not fall and the rate of commercial failures did not dramatically increase.

For copper producers, however, this was a bit more drastic. You can’t just shut down a mine because prices fall a little bit, which meant that supply remained robust and prices fell sharply. This probably contributed to the fall in the price of shares in United Copper, but after the largest holders of the stock, the Heinze brothers, discovered a large short position, they saw an opportunity for a short squeeze. Even in a declining market, this is not always a bad thing. Porsche’s short squeeze of Volkswagen shares in 2008 is well remembered. But the Heinze brothers failed, and took down the shadow bank they borrowed from.

As the crisis moved through the financial system, an excess demand14 for currency over bank deposits emerged. This was a problem, because there was a functional limit to how much money exchangeable for gold can be created. Eventually, an ad hoc coalition—a J.P. Morgan led bailout, Regents bank of France desterilizing gold, and a lending scheme by Canadian government—helped stabilize the financial economy and moving demand for currency over bank deposits back in line. This was not the gold standard working. This was the gold standard failing, requiring extraordinary improvisation by private actors and foreign central banks to prevent complete collapse. The system survived only because people were willing to bend and break its rules. To try to prevent that, from happening again, Congress crated the Federal Reserve system.

The strictures of the gold standard had incentivized the financial system to innovate its way to providing enough money for the economy to function, but it had done so by building a towering pyramid of credit on a narrow base of actual gold. The pyramid was necessary given the constraint. The pyramid was also doomed to periodic collapse.

Let me be precise about what killed the gold standard: the complete disconnect between gold supply and economic output. The numbers don’t work. While the velocity of money will, by definition, adapt, if the money supply doesn’t grow in relation to output, bad things happen.

For the most part, the gold supply has grown slower than the economy. For crypto people, who love—but have never experienced—deflation, this seems ideal. If your economy grows at 3 percent per year but your money supply grows at 2 percent, you get 1 percent deflation. That might sound appealing if you’re holding cash, but it’s economically catastrophic. Deflation increases the real burden of every debt contract. It rewards hoarding over investment—why buy capital equipment today when it’ll be cheaper next month? It creates deflationary spirals as consumers postpone purchases, reducing demand, causing more deflation.

The denizens of the classical system understood this problem, which is why they embraced credit creation: banks lending out multiples of their gold reserves, creating money through fractional reserve banking. But this just converted one problem into another. Instead of chronic deflation, you got credit booms that inevitably ended in crashes when people wanted their actual gold back. The choice was between slowly suffocating the economy with deflation or creating an unstable credit structure prone to regular crises.

Moreover, gold discoveries bore no relationship to economic needs. The California Gold Rush and later discoveries in South Africa and Alaska happened to create modest inflation in the late 19th century—but that was pure luck, not systematic policy. When gold discoveries slowed in the 1870s and 1880s, the world experienced deflation despite ongoing economic growth. When they accelerated again after 1897, prices rose despite no particular change in underlying productivity.

This is monetary policy by geological accident. You wouldn’t design a system this way if you were trying to create stable, prosperous economic growth. The fact that it ever worked at all required either slow economic growth (so money supply could roughly keep pace) or increasingly creative financial engineering (which eventually became unstable).

By 1907, the American economy was growing too fast for the gold supply to keep up, even with unprecedented accumulation. The only way to maintain gold convertibility was through elaborate credit structures that substituted bank money for base money. When those structures inevitably cracked, the gold standard offered no solution. You couldn’t print more gold.

Which brings us to cryptocurrency. Its enthusiasts have misunderstood the fundamental lesson: they think algorithmic scarcity solves the problems of fiat currency, when in reality they’ve just recreated the deflationary ideology of the gold standard—minus the excuse of living through its consequences.

Confidence in the system, on the other hand is durable. As J.P. Morgan said in his testimony to the Pujo committee, “character” is the most important thing in finance.

To clear up the usual confusion, a land value tax (LVT) is very different from the property taxes the roughly 65 percent of Americans who live in property-owning households know and don’t especially love. The distinction requires explaining what real estate assets actually are: a combination of a depreciating good (whatever is built on the land) and an appreciating asset they aren’t making more of1 (the land). Most property taxes tax both, but an LVT only taxes the land.

While the difference seems small, it has massive implications. Under a traditional property tax system, if you own a vacant lot in a desirable neighborhood, and you’re thinking about developing it, you know that building something will increase your property taxes. So there’s this built-in disincentive to development. Under an LVT, your taxes are based on the land value regardless of what you do with it. So if you’re sitting on a valuable vacant lot, you’re paying the same taxes as if you’d built a skyscraper on it. Which means—and this is the key part—you have a strong incentive to actually build the skyscraper! Or at least something productive. Because otherwise you’re just hemorrhaging money on taxes2 for an empty lot.

This simple change in incentives produces spectacular results. Especially in light of some of the most pressing challenges we face as a country today: the housing shortage and unsustainable national debt. While those problems do not seem linked, as the members of the subreddit r/georgism are so fond of saying, “a LVT solves this.”

Starting with the housing shortage, and working from the assumption that local efforts to block construction (NIMBYism) is the main cause of it, the current property tax system incentivizes that behavior. Keeping the improvements the same moderates the rate of property tax increases, even as the shortage of land raises land values. This structure creates powerful incentives for existing homeowners—especially older, whiter and richer ones—to engage with the local planning process to prevent new construction. While it is in the interest of existing homeowners to utilize scarcity to raise the value of what is almost certainly their largest asset, the micro and macroeconomic consequences are drastic.

When housing is blocked, communities suffer. People need places to live, and with all other avenues blocked, the result is sprawl. As a child of the suburbs, I can say that there is value in the experience, but there are massive social and economic costs. Socially, when driving becomes the only feasible means of moving around (especially for families), isolation is a natural consequence. And when housing is in such short supply, the economic proposition of a “third place” stops making sense.

To suburbanites, the costs of sprawl are also massive. Not only is driving everywhere expensive, but the costs of building and maintaining infrastructure for the same number of people over a larger area is pretty negative (as this graphic from Halifax’s Regional Municipality below shows).

On a national scale, the consequences are even more dramatic: Hsieh and Moretti (2019) find that between 1964 and 2009—before the more restrictive lending standards to buyers and builders accelerated the housing shortage—housing restrictions in New York, San Francisco, and San Jose cut real income per worker growth in half. The commonly cited counterfactual from their paper—in which those cities did not have overly restrictive housing construction policies—was an increase in national income of between 3.7 and 8.9 percent, depending on the overall mobility of labor. That is primarily due to the cuts to aggregate productivity growth due to workers not being able to move to these dynamic cities, and access agglomeration effects they provide. For more on this, I recommend Moretti’s book, The New Geography of Jobs.

That sort of change in productivity growth is pretty striking. As Paul Krugman so adeptly noted, productivity growth really is the most important determinant of long term growth. Working from the baseline of productivity growth boosted by Hsieh and Moretti’s work, the power of compound interest is such that less NIMBYism would leave us in a dramatically better place today.

In addition to the productivity-boosting effects of disincentivizing NIMBYism, a LVT could have another benefit: boosting revenue. As Jordan Weissmann unfortunately noted, anti-tax extremists seem to have won the messaging battle over income taxes (at least for the short term), and as a result, despite the fact that the United States spends less than many of its OECD peers, it’s revenue collection is even more anemic.

As a result, the debt is becoming unsustainable. The easiest way to think of debt’s sustainability is to if national income is growing faster than the debt load. In the plot below, I show that following the Second World War, that was broadly true until the Great Recession. It stands to reason, therefore, that the best way to improve the sustainability of the debt would be to boost growth and cut the deficit. With limited appetites to raise income taxes, and limited room to cut spending without drastically reducing Americans’ quality of lives, a LVT could have substantial benefits. By disincentivizing NIMBYism, it boosts growth, and it could be expected to raise substantial revenue.

The revenue potential from a LVT should not be discounted. Even assuming a deduction structure where state and local land value (but not improvement taxes) were deductible from it, a five percent rate on land value worth between 125 and 150 percent of GDP (a decent estimate) could raise between 6.25 and 7.5 percent of GDP as revenue annually. Assuming localities phased out taxes on improvements to take advantage of those deductions, that revenue, minus the roughly 2.6 percent of GDP collected by local entities in this program would be enough to bring the deficit under control in the long run. In fact, it could even prove lucrative enough to support a more generous social safety net.

An LVT would not replace the need for income, payroll, corporate profits, or capital gains taxes, but it could dramatically improve our national life. It addresses housing affordability by removing the tax penalty on development, encourages denser and more sustainable communities, unlocks significant productivity gains, and generates substantial revenue—all while taxing an asset that, unlike labor or capital, cannot flee to lower-tax jurisdictions.

Therefore, I find it vital that we start raising it in more concrete policy discussions. The technical details matter, the political obstacles are real, but the potential benefits are too large to ignore. If we’re serious about addressing housing affordability, productivity growth, and fiscal sustainability, a land value tax needs to be part of the conversation.

A state-by-state process, as has been pushed since the ratfucking that followed the 2010 census, is inherently vulnerable to defection. If every state adopted independent redistricting commissions, any single state would face enormous incentives to defect. The first state to abandon its commission could gerrymander strategically, leaving other states insufficient time to respond before the next election cycle. Meanwhile, a Federal independent commission would be inherently vulnerable to the type of court-enabled unitary-executive behavior we have seen from this administration.

While many well-meaning people think that enlarging the house could be a good solution, I see two notable problems: one from precedent, the other from practice. In terms of precedent, the Pennsylvania state legislature, with more than 200 members seems a good case study. After winning it in 2010, Republicans were able to redistrict such that they maintained an almost 10 percent majority in 2012, even as President Obama won the state by more than 5 percentage points. For the practical problem, I would ask you to use any LLM to help you with a pretend redistricting problem and see how easy it is to draw lines to meet pretty much any goal. If you want data, the Times posted a good source here.

My solution is fairly simple: amending the Uniform Congressional District Act of 1967 to require each state elect their representatives through a single multi-member district, chosen through a party-list, rather than first past the post single member districts. How that would work is as follows: each party looking to contest the election in a state would create a list of candidates the same length as the number of representatives for the state. Then, the voting public would vote for a party, rather than an individual candidate. The seats would be divided according to the party split, with candidates at the top of the list being selected first.

This method is practically immune from gerrymandering, but it does raise two problems: constituent service, and party power. The constituent service problem, I think is easily manageable, as I would imagine the state parties would compete over who could offer better constituent services, as it would be a major hedge against national political winds. Furthermore, as the population per district has almost tripled over the last century, a further increase in the number of constituents would not be extreme. Especially because Senators already provide those services to the area of the whole state.

As to the issue of party power, I see it as a benefit. While it is not the point of this post, I see the weakness of American parties as a major contributor to the Democratic backsliding we have seen in the last few decades. While it is unlikely that parties would willingly accommodate insurgent movements, they would have to deal with the treat of a movement forming a third party in the state to compete, and therefore have to either adapt to their populations or see their power collapse. That would also, in my opinion, limit the power of entrenched incumbents. While parties would almost certainly put their most powerful members at or near the top of their state lists, unpopular incumbents would be a much larger drag in this system than in the current one.