When marginal tax rights are higher in the U.S. than in other countries, the U.S. is set at an increasing competitive disadvantage in this country vis-a-vis other countries.

Question: Is the current tax regime fair?

Peter Thiel: Well I think “fair” is always a tricky word.  I don’t think it’s a terribly good regime, I guess.  I’ll use an absolute term rather than a relativistic term.  It’s not good for the U.S. because the United States, at this point, is living in an increasingly competitive world.  And when you have marginal tax rights at 40 or 50 percent in the U.S., and they are 10 or 15 percent in other countries, we are at an increasing competitive disadvantage in this country vis-a-vie other countries.  And so it is not good for the U.S. to have a tax regime that discourages businesses from setting up shop in the U.S. 

For that reason, the debates about whether it’s fair, and whether the rich are paying their fair share and things like that actually miss the point almost altogether, that in this global world, we have to really think about how is the U.S. going to be the most competitive and maintain the kind of leadership it’s had in the 20th century, which I think it’s very much at risk of losing.

Question: What type of taxation do you endorse?

Peter Thiel: I think it certainly should be simplified.  I think marginal rates around 15 to 20 percent rather than 50 percent would probably be a good starting point. 

I think we should be taxing consumption rather than savings as a general matter.  So the U.S. tax is consumption more than any other country in the world relative to taxing consumption less and savings more than any other country in the world.  That ends up encouraging people to take a very short time horizon with respect to a lot of the decisions they make, which is a very big problem the U.S. has.

Question: Does private equity deserve a special place in the tax structure?

Peter Thiel:  I think that it would not be good for the U.S. to lose the finance industry, and for the industry to leave New York City in particular and relocate to, say, London or elsewhere in the world.  That would be an unmitigated disaster for the U.S. 

The marginal tax rate in London on expatriate people work in London is effectively zero percent.  I don’t think we have to get it to zero in the U.S. to be competitive; but 50 percent is not competitive.  And if we talk about raising it even more, that’s almost suicidally crazy. 

I think you have all sorts of internal fairness problems; where if you have super rich people paying a lower rate than people in the middle or upper middle class, that does create a lot of legitimate questions.  But I think the way we deal with those is not by taxing the rich more, but rather by taxing the middle class and the upper middle class a lot less; and then basically starting to disentangle those middle class entitlements that people have gotten too used to.

Question: Is the government capable of changing the system?

Peter Thiel: There are political reasons it’s very difficult to do this.  It’s obviously always a deep set of questions why libertarianism has been so utterly ineffective as a political philosophy or governing philosophy; and why are there so few people who are libertarian; and even the ideas that seem to make a lot of sense to many people – why are they so bad at getting implemented in any way?  We have all kinds of different reasons why that is. 

I tend to think it is very difficult to reform things by, say, pitching up camp in D.C. and trying to lobby congressmen, and licking envelopes, and going door to door trying to get people elected who are marginally better than the other people who are marginally worse on a given set of issues. 

The way reform will happen will be by creating more structural competition between countries and between jurisdictions.  And so the kind of reforms I would advocate for are ones where it’s easier for people to leave the U.S., to move into the U.S. 

I’d be in favor of Quebec succeeding from Canada.  I think this would create probably a series of low tax havens right around the U.S. 

One of the problems the U.S. has is that all of the low tax countries are really far away from the U.S.  It’s actually the threat of our most talented people leaving is not that great.  And that’s why I think we’re overly complacent. 

If you were a smaller country like France or Sweden, there would be much more pressure on us to reform.  And so trying to create those kinds of mechanisms is probably a very important starting point. 

A lot of what goes under the sort of loose label of “globalization” has been a very powerfully positive force in this respect.  And so the globalization of finance is forcing the allocation of resources towards countries that have better regimes.  And the allocation of human labor where people can work in different countries, and we have free trade between countries is driving this as well. As long as that globalization stays on path, I think the world will become significantly more libertarian, even though almost none of our elected leaders would like it to.

Recorded on: Sep 05, 2007