Even the 73% optimal tax rate proposed by Saez and Diamond is based on bogus analysis. The point of taxation is not to maximize government revenue -- if the government wants to maximize revenue it could just print dollar bills. The point is to maximize purchasing power. Thus the downside of high taxes is not manifested in lower government revenue in dollar terms. It is manifested in fewer startups and fewer risky investments, and thus fewer new technologies and new products. Overly high taxes change the equation for risk taking -- why try to start a business when if you succeed, you won't keep that much of the winnings? If fewer people start businesses, the economy becomes more sclerotic as big corporations no longer have to face competition from upstarts.
The problem is that it is fundamentally impossible to quantitatively measure the impact of taxes on startups and economic dynamism. We know that if we taxed at 100%, we would likely have very few startups. But we do not know how much any given incremental change will hurt the economy. But as rough estimate, if the current tax rate is ~33%, and a tax rate of 100% would kill all startups, then a tax of 73% (the max rate proposed by Saez) would kill about half of startups (or rather, mean that they never exist. Immigrant founders would choose to start companies elsewhere, other founders would sell out early to a big company, and the big company would then just ruin the product like they normally do, etc.) Very roughly, such a tax rate might raise around an additional $100 billion. Would increasing total government revenue by 2% be worth killing half of all startups? That doesn't sound like a good trade to me. (Of course I am personally biased on this issue).
> why try to start a business when if you succeed, you won't keep that much of the winnings?
I'd call $9.9 million or less a year pretty big "winnings" without hitting these tax thresholds. Plus the way tax brackets work mean you get a pretty big payday on the money below the top most threshold.
It is completely unrealistic to claim that people won't start businesses because any personal profits they make over $10mil/year will be taxed too highly. It is completely out of touch with the financial position that most normal people are in.
It is completely unrealistic to claim that people won't start businesses because any personal profits they make over $10mil/year will be taxed too highly. It is completely out of touch with the financial position that most normal people are in.
If the high tax rates only apply above $10 million, then the big impact would be on:
1. The most skilled global talent, who might choose to start their business elsewhere, where there would be the prospect of becoming super rich.
2. Angel investors and second-time founders. A major reason these founders would want to take risks, reinvest, and double down is to hit the home run, and have change-the-world amounts of money.
3. First-time founders who sell-out early to a big company, rather than try to go big. This could really do great damage to the pipeline of new and great products, since big companies are often where innovation goes to die.
I do agree that a high percent tax rate on income over $10 million would not do much to discourage run-of-the-mill new businesses, such as restaurants and landscaping companies. But I think it could majorly discourage the types of startups which drive the continued advancement of technology.
Whenever we're discussing startups or entrepreneurs, we're already out of touch with most normal people. That alone isn't a reason to ignore the sector.
Ok... I might be completely off base here, but why can't we increase taxes on mega-earnings, AND refactor tax laws such that startups are incentivized? Eg, you spend 4 years bootstrapping a business while taking a bare minimum salary and then, through whatever mechanism, are ready to 'cash out'. Why can't we look favorably upon people doing this and apply some kind of retroactive benefit to their earnings, taking those 4 years into account?
I don't understand why tax laws are applied evenly (in theory...) across industries. If you make a product that effectively poisons the masses (tobacco, prescribed opiates, watered sugar), resulting in huge negative health outcomes, why aren't those profits taxed unevenly? Do we not need to fix those problems then in the health sector? Humans are irrational, ads are made to take advantage of the bugs in our decision-making code, but it's all on the victims to take care of themselves? Something they've already demonstrated to be incapable of doing.
I'm sure there are intractable problems with this approach that I'm simply unaware of... but it seems better than what's on the table. We need taxation with an ethical component. Make unethical behavior un-profitable.
You could try to design the tax code to try to distinguish people who were getting rich from zero-sum games, versus those who were getting rich from taking risks and creating wealth. In practice, there is a lot of subjectivity in doing so, and it would make taxes more complicated and unpredictable. In general, the more subjective and complicated government policy is, the more room there is for powerful and unscrupulous entities to manipulate the system to their own benefit. Complexity almost always favors the parasites.
How is that different from a hedge fund manager not earning much for a few years, but then hitting a big liquidity event?
I think the assumption here is that a lot of people with eight-digit incomes choose to continue participating in the workforce, but I don't know if there's data to support that.
"Why try to start a business when if you succeed, you won't keep that much of the winnings?"
Some people start businesses to solve legitimate problems. I suspect that higher corporate tax rates would encourage the average Silicon Valley startup founder to seek more fruitful income streams, but people who are passionate about solving real-world problems would still attempt to do so. Furthermore there are people like me who don't work well outside of a startup environment who will pursue startups regardless of the tax rate. I doubt small businesses will be taxed at such a high rate anyway, given that they are the lifeblood of the American middle class. I'd rather have a thousand medium-sized businesses that suppress their growth to avoid higher taxes than ten massive businesses with low tax rates.
Few businesses would suppress growth to lower the tax base. One way to avoid profit (and punitive taxes associated with it) is to expand the business or seek new markets. Amazon, Alphabet and Warren Buffett are fans of this approach.
The problem is that it is fundamentally impossible to quantitatively measure the impact of taxes on startups and economic dynamism. We know that if we taxed at 100%, we would likely have very few startups. But we do not know how much any given incremental change will hurt the economy. But as rough estimate, if the current tax rate is ~33%, and a tax rate of 100% would kill all startups, then a tax of 73% (the max rate proposed by Saez) would kill about half of startups (or rather, mean that they never exist. Immigrant founders would choose to start companies elsewhere, other founders would sell out early to a big company, and the big company would then just ruin the product like they normally do, etc.) Very roughly, such a tax rate might raise around an additional $100 billion. Would increasing total government revenue by 2% be worth killing half of all startups? That doesn't sound like a good trade to me. (Of course I am personally biased on this issue).