8 ms·

Taxing Top Incomes in a World of Ideas [pdf]

29 points by barry-cotter 8y ago

barry-cotter 8y ago
This paper considers the taxation of top incomes when the following conditions apply: (i) new ideas drive economic growth, (ii) the reward for creating a successful innovation is a top income, and (iii) innovation cannot be perfectly targeted by a separate research subsidy — think about the business methods of Walmart, the creation of Uber, or the “idea” of Amazon.com. These conditions lead to a new term in the Saez (2001) formula for the optimal top tax rate: by slowing the creation of the new ideas that drive aggregate GDP, top income taxation reduces everyone’s income, not just the income at the top. When the creation of ideas is the ultimate source of economic growth, this force sharply constrains both revenue-maximizing and welfare-maximizing top tax rates. For example, for extreme parameter values, maximizing the welfare of the middle class requires a negative top tax rate: the higher income that results from the subsidy to innovation more than makes up for the lost redistribution. More generally, the calibrated model suggests that incorporating ideas and economic growth cuts the optimal top marginal tax rate substantially relative to the basic Saez calculation.
nobodylovesmeee 8y ago
People talk about how much they make pre tax. I think past a certain level of income, you gain the same status per marginal dollar and the actual additional purchasing power does not matter...
- darawk 8y ago
  That is true, but the numbers are probably higher than you think. At least for me, I think wealth at least (as distinct from income) makes a non-trivial difference to me up until I can afford to live the rest of my life comfortably without continuing to work for someone else. Now, above that level, there are actually some other emotionally satisfying wealth strata, such as: - Ability to invest in or personally found/fund companies for ideas that you have - Ability to found/fund charities that you think would make the world better I'm not saying that everyone needs to achieve these things to be happy. But I would say that I think it's easy to look up to say, 2-3x your own income and say "how could anyone ever want more than that", but then when you get there, you find that actually there's a lot of interesting stuff that you might be able to do if you made 5-10x more still, and at least for me, it's mostly not about luxury. It's about being able to pursue interesting things with autonomy.
  - ForHackernews 8y ago
    > up until I can afford to live the rest of my life comfortably without continuing to work for someone else. There are probably a few exceptions (i.e. 19 year old superstar athletes who just signed their first major league contract) but I would generally assume that when we're talking about people with annual income in the > $10MM range, then those people already have more than enough wealth to live comfortably forever without working.
    - darawk 8y ago
      Totally, but the point of this paper isn't the people who already have $10mm. It's the people who want to get there, and what they're willing to sacrifice to do it. Building a massive business like say, Amazon, takes enormous personal sacrifice and risk. The high incomes that result from it incentivize that sacrifice/risk. They cause the person who currently has relatively little, to risk what they do have to produce something great, something that we all benefit from. The point of this paper is that there is an amount of risk/sacrifice people will make for $10mm, that is different from what they will make for $100mm, and different still from what they'll make for $1b. By truncating the reward distribution at $10mm, you tell those people to pursue something else instead. Bezos is actually an excellent example. In his career at DE Shaw, he was almost certainly making very high 6 figures or maybe even 7, or certainly on a career track to be doing so shortly. He threw that away to take a massive personal risk to build Amazon. Would he have done that if you capped his potential reward at $10mm? Or would he have stayed in his comfortable finance job, making a bit less than that?
      - dlp211 8y ago
        Considering that Bezos derives the vast majority of his wealth through capital gains as opposed to income, I'd say yes.
        dahfizz 8y ago
        That's avoiding the issue. If the tax code were such that capital gains and all other income was captured, your parent's logic holds. The loopholes of the current tax system doesn't affect theoretical considerations.
jacknews 8y ago
"by slowing the creation of the new ideas ... top income taxation ..." Is this proven anywhere? I don't believe high taxation reduces innovation, in fact perhaps the opposite is true overall.
- mirajshah 8y ago
  The paper assumes that innovation is incentivized by the "top" income received through it by the innovator. Under this assumption, since taxation reduces "top" income, it thus disincentivizes innovation. The introduction further clarifies the author's definition of the type of innovation that gets disincentivized. "Basic research", i.e. innovations in our understanding of our world, are readily funded by the redistributed tax revenue. "Applied innovation", that which applies the outputs of basic research, includes the creation of Amazon.com or the latest improvements to Google search. This applied innovation is what gets disincentivized. I personally agree with you that this is a shaky, unsubstantiated foundation for an argument about optimal tax policy.
  - yorwba 8y ago
    My immediate question is what the innovators do instead of innovating when the tax rate is higher. Taxes reduce income, but they do so monotonically without affecting the relative ordering of options, which is what matters for income-maximizing decision making. The "top" income may be numerically lower, but it remains at the top.
    - dahfizz 8y ago
      The absolute values do matter. If Jeff Bezos expected Amazon to be much less profitable as it is for him, he may have decided to just stop and retire once it provided enough passive income to let him live comfortably. He would be paid more for the added time and stress of continuing to grow Amazon, as you say, but if that marginal income approaches zero, it just isn't worth it (and we are left without Amazon).
      - sooheon 8y ago
olivepistacchio 8y ago
after decades in Silicon Valley, I think that execution matters much more than the idea. Uber was not alone, Amazon was not the only bookstore, Google was not the only search engine.
- 1123581321 8y ago
  You need to think of ideas about better execution (including the idea to focus on execution in the first place) as ideas.
soVeryTired 8y ago
There doesn't appear to be any empirical justification for anything the author has done here. Does anyone really believe that 1/ the "stock' of ideas can be measured by a real number and 2/ national output is proportional to some power of the "stock" of ideas? Like, how do you even measure an idea? The paper feels like the author has done a load of maths and shoehorned one particular interpretation onto his equations.
- nabla9 8y ago
  That's exactly what he has done and there is nothing wrong with that when it's done right (Charles I. Jones is a top man). >Does anyone really believe that 1/ the "stock' of ideas can be measured by a real number and 2/ national output is proportional to some power of the "stock" of ideas? System dynamics can be modeled with numbers that can never be measured or are hard to measure. The exact number of working hours and capital spend to produce innovation is hard to measure and approximations (like what companies announce or number of patents) don't capture the whole picture. It's still reasonable to assume that the number exists. Optimal taxation and economic growth are big subjects and this paper is not trying to solve it or propose a policy. The paper explores the dynamics of taxation and growth under three conditions mathematically ignoring the rest. Trying to see how big effects small changes can have is interesting.
  - soVeryTired 8y ago
    > That's exactly what he has done and there is nothing wrong with that when it's done right (Charles I. Jones is a top man). That sounds like an argument from authority to me. If he decides to use the form Y = A^b L and I decide to use, say, a confluent hypergeometric function, who's to say who is correct?
    - scotty79 8y ago
      > who's to say who is correct? Nobody. My friend studied econometry. I was appaled to hear that they just take some real process, assume it's governed by some equation then massage all the maths they can out of it. They consider different equation for the same process (although they usually have favorite one) and never bother themselves with proving if any of them is actually reflected in reality of said process. It's basically philosophy for people that can do some math. They also use the math without deep understanding of it (sort of cargo cultishly). That I know because I worked for a prof and a post docs of econonometry on some project later.
cjg 8y ago
What this fails to account for is that the tax raised by taxing the top incomes also has benefits for society - through government spending. It's a trade-off: higher tax revenues vs higher innovation. I suspect that the impact of higher taxes on innovation would be relatively small compared to the benefit of higher tax revenues.
- hackeraccount 8y ago
  Why would there be more benefit to me if money is spent by my congressman vs. by Bill Gates? This is the difference between spending other people's money and your own.
ThomPete 8y ago
So many great ideas are horrible businesses. Not sure exactly how that is going to be done in reality but interesting perspective.
- lazyjones 8y ago
  > So many great ideas are horrible businesses. Maybe, but great businesses are usually based on good ideas.
  - ThomPete 8y ago
    Sure that's not the point though. If you tax ideas and they are shitty businesses are you going to allow people to deduct that too?
johnNash05 8y ago
I need these tax papers in docx format. Can I use PDF Converter for this? https://www.coolutils.com/TotalPDFConverter https://www.coolutils.com/TotalPDFConverter

29 points by barry-cotter 8y ago

This paper considers the taxation of top incomes when the following conditions apply: (i) new ideas drive economic growth, (ii) the reward for creating a successful innovation is a top income, and (iii) innovation cannot be perfectly targeted by a separate research subsidy — think about the business methods of Walmart, the creation of Uber, or the “idea” of Amazon.com. These conditions lead to a new term in the Saez (2001) formula for the optimal top tax rate: by slowing the creation of the new ideas that drive aggregate GDP, top income taxation reduces everyone’s income, not just the income at the top. When the creation of ideas is the ultimate source of economic growth, this force sharply constrains both revenue-maximizing and welfare-maximizing top tax rates. For example, for extreme parameter values, maximizing the welfare of the middle class requires a negative top tax rate: the higher income that results from the subsidy to innovation more than makes up for the lost redistribution. More generally, the calibrated model suggests that incorporating ideas and economic growth cuts the optimal top marginal tax rate substantially relative to the basic Saez calculation.

nobodylovesmeee 8y ago

People talk about how much they make pre tax. I think past a certain level of income, you gain the same status per marginal dollar and the actual additional purchasing power does not matter...

darawk 8y ago
That is true, but the numbers are probably higher than you think. At least for me, I think wealth at least (as distinct from income) makes a non-trivial difference to me up until I can afford to live the rest of my life comfortably without continuing to work for someone else. Now, above that level, there are actually some other emotionally satisfying wealth strata, such as: - Ability to invest in or personally found/fund companies for ideas that you have - Ability to found/fund charities that you think would make the world better I'm not saying that everyone needs to achieve these things to be happy. But I would say that I think it's easy to look up to say, 2-3x your own income and say "how could anyone ever want more than that", but then when you get there, you find that actually there's a lot of interesting stuff that you might be able to do if you made 5-10x more still, and at least for me, it's mostly not about luxury. It's about being able to pursue interesting things with autonomy.
- ForHackernews 8y ago
  > up until I can afford to live the rest of my life comfortably without continuing to work for someone else. There are probably a few exceptions (i.e. 19 year old superstar athletes who just signed their first major league contract) but I would generally assume that when we're talking about people with annual income in the > $10MM range, then those people already have more than enough wealth to live comfortably forever without working.
  - darawk 8y ago
    Totally, but the point of this paper isn't the people who already have $10mm. It's the people who want to get there, and what they're willing to sacrifice to do it. Building a massive business like say, Amazon, takes enormous personal sacrifice and risk. The high incomes that result from it incentivize that sacrifice/risk. They cause the person who currently has relatively little, to risk what they do have to produce something great, something that we all benefit from. The point of this paper is that there is an amount of risk/sacrifice people will make for $10mm, that is different from what they will make for $100mm, and different still from what they'll make for $1b. By truncating the reward distribution at $10mm, you tell those people to pursue something else instead. Bezos is actually an excellent example. In his career at DE Shaw, he was almost certainly making very high 6 figures or maybe even 7, or certainly on a career track to be doing so shortly. He threw that away to take a massive personal risk to build Amazon. Would he have done that if you capped his potential reward at $10mm? Or would he have stayed in his comfortable finance job, making a bit less than that?
    - dlp211 8y ago
      Considering that Bezos derives the vast majority of his wealth through capital gains as opposed to income, I'd say yes.
      - dahfizz 8y ago
        That's avoiding the issue. If the tax code were such that capital gains and all other income was captured, your parent's logic holds. The loopholes of the current tax system doesn't affect theoretical considerations.

jacknews 8y ago

"by slowing the creation of the new ideas ... top income taxation ..." Is this proven anywhere? I don't believe high taxation reduces innovation, in fact perhaps the opposite is true overall.

mirajshah 8y ago
The paper assumes that innovation is incentivized by the "top" income received through it by the innovator. Under this assumption, since taxation reduces "top" income, it thus disincentivizes innovation. The introduction further clarifies the author's definition of the type of innovation that gets disincentivized. "Basic research", i.e. innovations in our understanding of our world, are readily funded by the redistributed tax revenue. "Applied innovation", that which applies the outputs of basic research, includes the creation of Amazon.com or the latest improvements to Google search. This applied innovation is what gets disincentivized. I personally agree with you that this is a shaky, unsubstantiated foundation for an argument about optimal tax policy.
- yorwba 8y ago
  My immediate question is what the innovators do instead of innovating when the tax rate is higher. Taxes reduce income, but they do so monotonically without affecting the relative ordering of options, which is what matters for income-maximizing decision making. The "top" income may be numerically lower, but it remains at the top.
  - dahfizz 8y ago
    The absolute values do matter. If Jeff Bezos expected Amazon to be much less profitable as it is for him, he may have decided to just stop and retire once it provided enough passive income to let him live comfortably. He would be paid more for the added time and stress of continuing to grow Amazon, as you say, but if that marginal income approaches zero, it just isn't worth it (and we are left without Amazon).
    - sooheon 8y ago

olivepistacchio 8y ago

after decades in Silicon Valley, I think that execution matters much more than the idea. Uber was not alone, Amazon was not the only bookstore, Google was not the only search engine.

1123581321 8y ago
You need to think of ideas about better execution (including the idea to focus on execution in the first place) as ideas.

soVeryTired 8y ago

There doesn't appear to be any empirical justification for anything the author has done here. Does anyone really believe that 1/ the "stock' of ideas can be measured by a real number and 2/ national output is proportional to some power of the "stock" of ideas? Like, how do you even measure an idea? The paper feels like the author has done a load of maths and shoehorned one particular interpretation onto his equations.

nabla9 8y ago
That's exactly what he has done and there is nothing wrong with that when it's done right (Charles I. Jones is a top man). >Does anyone really believe that 1/ the "stock' of ideas can be measured by a real number and 2/ national output is proportional to some power of the "stock" of ideas? System dynamics can be modeled with numbers that can never be measured or are hard to measure. The exact number of working hours and capital spend to produce innovation is hard to measure and approximations (like what companies announce or number of patents) don't capture the whole picture. It's still reasonable to assume that the number exists. Optimal taxation and economic growth are big subjects and this paper is not trying to solve it or propose a policy. The paper explores the dynamics of taxation and growth under three conditions mathematically ignoring the rest. Trying to see how big effects small changes can have is interesting.
- soVeryTired 8y ago
  > That's exactly what he has done and there is nothing wrong with that when it's done right (Charles I. Jones is a top man). That sounds like an argument from authority to me. If he decides to use the form Y = A^b L and I decide to use, say, a confluent hypergeometric function, who's to say who is correct?
  - scotty79 8y ago
    > who's to say who is correct? Nobody. My friend studied econometry. I was appaled to hear that they just take some real process, assume it's governed by some equation then massage all the maths they can out of it. They consider different equation for the same process (although they usually have favorite one) and never bother themselves with proving if any of them is actually reflected in reality of said process. It's basically philosophy for people that can do some math. They also use the math without deep understanding of it (sort of cargo cultishly). That I know because I worked for a prof and a post docs of econonometry on some project later.

cjg 8y ago

What this fails to account for is that the tax raised by taxing the top incomes also has benefits for society - through government spending. It's a trade-off: higher tax revenues vs higher innovation. I suspect that the impact of higher taxes on innovation would be relatively small compared to the benefit of higher tax revenues.

hackeraccount 8y ago
Why would there be more benefit to me if money is spent by my congressman vs. by Bill Gates? This is the difference between spending other people's money and your own.

ThomPete 8y ago

So many great ideas are horrible businesses. Not sure exactly how that is going to be done in reality but interesting perspective.

lazyjones 8y ago
> So many great ideas are horrible businesses. Maybe, but great businesses are usually based on good ideas.
- ThomPete 8y ago
  Sure that's not the point though. If you tax ideas and they are shitty businesses are you going to allow people to deduct that too?

johnNash05 8y ago

I need these tax papers in docx format. Can I use PDF Converter for this? https://www.coolutils.com/TotalPDFConverter https://www.coolutils.com/TotalPDFConverter