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This is why extremely steep marginal takes rates improve economic efficiency. If you can’t get rich by playing office politics you might as well enjoy making a

This is why extremely steep marginal takes rates improve economic efficiency. If you can’t get rich by playing office politics you might as well enjoy making a good product.

alisonkisk 6y ago
What is "extremely steep marginal takes rates" ? Are you saying that low profit enterprises create more value? The thesis is attractive but also makes me wonder about Apple, high profit and also highly creative.
- jdlshore 6y ago
  I think they meant 'tax rates'
AnthonyMouse 6y ago
> If you can’t get rich by playing office politics you might as well enjoy making a good product. It seems to me this would go the other way. Making a good product (in the sense that it's successful in the market) is what you want a company to do, but that's the thing mostly aligned with the profit incentive. If profits are taxed heavily then spending resources on making a better product so that more people buy it doesn't make you a lot more money, but spending resources on office politics brings non-monetary personal benefits like status and control, so managers would have a greater relative incentive to do those things. See e.g. Soviet Union. One of the biggest problems today is actually that the tax code provides incentives for corporations to retain profits within the organization rather than paying them out to shareholders to invest in something else, which results in inefficient corporate bloating.
- andrewjl 6y ago
  Corporate tax rates can be lower, ideally at 0, but I doubt our current system incentivizes corporations retaining profits. On the contrary, recently many needed to be bailed out because they paid out too much to shareholders instead of saving enough for a rainy day. Making a better product also doesn't necessarily lead to profits. That's an oversimplified perspective. There's a far greater correlation between monopoly power and profit. In some cases this monopoly status comes from truly groundbreaking work. Not in all cases though.
  - AnthonyMouse 6y ago
    > Corporate tax rates can be lower, ideally at 0, but I doubt our current system incentivizes corporations retaining profits. Multinational corporations commonly avoid taxes by keeping profits offshore in a low tax jurisdiction. In order to pay the money to shareholders they have to repatriate them and pay corporate income tax on the money, and then the shareholder has to pay tax again on the dividend or the capital gain from the buyback. Or they can leave the money where it is, not pay any of those taxes and invest it in some index fund from there. But then the money is stuck inside the corporation, and gets invested in some index fund instead of potentially going to some higher risk/reward investments that some of the original shareholders would have chosen. > On the contrary, recently many needed to be bailed out because they paid out too much to shareholders instead of saving enough for a rainy day. COVID-19 isn't a rainy day, it's a once in a century pandemic. Most companies have never made enough money to be able to survive it, and the ones that did still shouldn't be hoarding it just in case. Systemic problems get solved through systemic actions, e.g. lowering interest rates or sending stimulus checks. To expect companies to have saved enough money to survive rare systemic events without that is to penalize and destroy any company lean enough to have been unable to save it to begin with. > Making a better product also doesn't necessarily lead to profits. Making a worse product in a competitive market has a strong relationship with going out of business. > There's a far greater correlation between monopoly power and profit. But that's an independent problem. The solution there isn't to raise taxes, it's to break up monopolies.
    - andrewjl 6y ago
      > Multinational corporations commonly avoid taxes by keeping profits offshore in a low tax jurisdiction. That does happen, but many including the biggest tech companies found a clever way around it. Via a combination of ultra-low interest bearing bond sales and share repurchases. It does the same thing but avoids those taxes. So there's no incentive for profit retention on net. > COVID-19 isn't a rainy day, it's a once in a century pandemic. Part of going into business is accepting risk, including systemic risk. That's why the corporate veil exists and it's generally positive for the overall economy when weak businesses fail. A strong business would have an operating model that can withstand such risk. > To expect companies to have saved enough money to survive rare systemic events without that is to penalize and destroy any company lean enough to have been unable to save it to begin with. Maybe those companies shouldn't have been in business then and that capital would have been better deployed somewhere else. I'm surprised that opportunity costs of capital allocation are ignored when defending bailouts. They introduce market inefficiency and reward complacency. > Making a worse product in a competitive market has a strong relationship with going out of business. In principle, yes. In reality, most markets are not competitive to that degree. Perfectly competitive markets don't exist in a modern regulated economy. We can talk about removing regulatory burden to make this true, but that's not where we are now.

This is why extremely steep marginal takes rates improve economic efficiency. If you can’t get rich by playing office politics you might as well enjoy making a good product.

alisonkisk 6y ago

What is "extremely steep marginal takes rates" ? Are you saying that low profit enterprises create more value? The thesis is attractive but also makes me wonder about Apple, high profit and also highly creative.

jdlshore 6y ago
I think they meant 'tax rates'

AnthonyMouse 6y ago

> If you can’t get rich by playing office politics you might as well enjoy making a good product. It seems to me this would go the other way. Making a good product (in the sense that it's successful in the market) is what you want a company to do, but that's the thing mostly aligned with the profit incentive. If profits are taxed heavily then spending resources on making a better product so that more people buy it doesn't make you a lot more money, but spending resources on office politics brings non-monetary personal benefits like status and control, so managers would have a greater relative incentive to do those things. See e.g. Soviet Union. One of the biggest problems today is actually that the tax code provides incentives for corporations to retain profits within the organization rather than paying them out to shareholders to invest in something else, which results in inefficient corporate bloating.

andrewjl 6y ago
Corporate tax rates can be lower, ideally at 0, but I doubt our current system incentivizes corporations retaining profits. On the contrary, recently many needed to be bailed out because they paid out too much to shareholders instead of saving enough for a rainy day. Making a better product also doesn't necessarily lead to profits. That's an oversimplified perspective. There's a far greater correlation between monopoly power and profit. In some cases this monopoly status comes from truly groundbreaking work. Not in all cases though.
- AnthonyMouse 6y ago
  > Corporate tax rates can be lower, ideally at 0, but I doubt our current system incentivizes corporations retaining profits. Multinational corporations commonly avoid taxes by keeping profits offshore in a low tax jurisdiction. In order to pay the money to shareholders they have to repatriate them and pay corporate income tax on the money, and then the shareholder has to pay tax again on the dividend or the capital gain from the buyback. Or they can leave the money where it is, not pay any of those taxes and invest it in some index fund from there. But then the money is stuck inside the corporation, and gets invested in some index fund instead of potentially going to some higher risk/reward investments that some of the original shareholders would have chosen. > On the contrary, recently many needed to be bailed out because they paid out too much to shareholders instead of saving enough for a rainy day. COVID-19 isn't a rainy day, it's a once in a century pandemic. Most companies have never made enough money to be able to survive it, and the ones that did still shouldn't be hoarding it just in case. Systemic problems get solved through systemic actions, e.g. lowering interest rates or sending stimulus checks. To expect companies to have saved enough money to survive rare systemic events without that is to penalize and destroy any company lean enough to have been unable to save it to begin with. > Making a better product also doesn't necessarily lead to profits. Making a worse product in a competitive market has a strong relationship with going out of business. > There's a far greater correlation between monopoly power and profit. But that's an independent problem. The solution there isn't to raise taxes, it's to break up monopolies.
  - andrewjl 6y ago
    > Multinational corporations commonly avoid taxes by keeping profits offshore in a low tax jurisdiction. That does happen, but many including the biggest tech companies found a clever way around it. Via a combination of ultra-low interest bearing bond sales and share repurchases. It does the same thing but avoids those taxes. So there's no incentive for profit retention on net. > COVID-19 isn't a rainy day, it's a once in a century pandemic. Part of going into business is accepting risk, including systemic risk. That's why the corporate veil exists and it's generally positive for the overall economy when weak businesses fail. A strong business would have an operating model that can withstand such risk. > To expect companies to have saved enough money to survive rare systemic events without that is to penalize and destroy any company lean enough to have been unable to save it to begin with. Maybe those companies shouldn't have been in business then and that capital would have been better deployed somewhere else. I'm surprised that opportunity costs of capital allocation are ignored when defending bailouts. They introduce market inefficiency and reward complacency. > Making a worse product in a competitive market has a strong relationship with going out of business. In principle, yes. In reality, most markets are not competitive to that degree. Perfectly competitive markets don't exist in a modern regulated economy. We can talk about removing regulatory burden to make this true, but that's not where we are now.