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If you're successful, a 25% capital gains tax is not all that onerous. What's the difference between $20M and $15M? Sure, it's $5M, but what can $20M buy you th

If you're successful, a 25% capital gains tax is not all that onerous. What's the difference between $20M and $15M? Sure, it's $5M, but what can $20M buy you that $15M cannot? After the fact, yes. But a 25% capital gains tax reduces your expected outcome by 25%, so if you are thinking of starting a business that within a year you suspect has a 10% chance of being worth $1 million, and a 90% chance of being worthless, your expected return goes from $100K to $75K -- and that might rule it out for people who are already making a decent amount of money.

nostrademons 18y ago
Only math dorks go by expected returns. ;-) (Which includes myself, since initially I got into entrepreneurship because I figured "10% chance of $40M, 90% chance of 0 - hey, a $4M expected return for a couple years of work beats most other professions." Silly me.) Utility functions aren't linear, and often aren't continuous. For most people, the increase in utility from $75k to $100k is negligible - it just means you can buy a fancier car, get a bigger TV, and have a few more lattes. The increase in utility from $100K to $15M is enormous, because it means you never have to work again. The increase in utility from $15M to $20M is, again, negligible.
- byrneseyeview 18y ago
  As far as I know, people act as if they're math dorks, even if they don't make those explicit calculations (the same way your average basketball player doesn't know that f = ma, but can still apply f sufficient to give a particular m the a necessary to make a three-pointer). For most people, the increase in utility from $75k to $100k is negligible Well, the savings rate is not variable enough by income for that to be true. It looks like people ratchet up their consumption nearly as fast as their income increases, so it is fairly linear. And if you consider utility to be the optimal bundle of goods, even rapidly diminishing marginal utility doesn't change the fact that you get exponentially more consumption bundles with more money, so the best bundle is likely to require a high income. I still think that talking about the final outcome is not useful, since the final outcome is hidden behind the probability of failure. You can't talk about the incentive to play the lottery just by reciting the prizes -- the odds are important, too.
- byrneseyeview 18y ago
  And anyway, math dorks are a disproportionate number of successful entrepreneurs.

nostrademons 18y ago

Only math dorks go by expected returns. ;-) (Which includes myself, since initially I got into entrepreneurship because I figured "10% chance of $40M, 90% chance of 0 - hey, a $4M expected return for a couple years of work beats most other professions." Silly me.) Utility functions aren't linear, and often aren't continuous. For most people, the increase in utility from $75k to $100k is negligible - it just means you can buy a fancier car, get a bigger TV, and have a few more lattes. The increase in utility from $100K to $15M is enormous, because it means you never have to work again. The increase in utility from $15M to $20M is, again, negligible.

byrneseyeview 18y ago
As far as I know, people act as if they're math dorks, even if they don't make those explicit calculations (the same way your average basketball player doesn't know that f = ma, but can still apply f sufficient to give a particular m the a necessary to make a three-pointer). For most people, the increase in utility from $75k to $100k is negligible Well, the savings rate is not variable enough by income for that to be true. It looks like people ratchet up their consumption nearly as fast as their income increases, so it is fairly linear. And if you consider utility to be the optimal bundle of goods, even rapidly diminishing marginal utility doesn't change the fact that you get exponentially more consumption bundles with more money, so the best bundle is likely to require a high income. I still think that talking about the final outcome is not useful, since the final outcome is hidden behind the probability of failure. You can't talk about the incentive to play the lottery just by reciting the prizes -- the odds are important, too.
byrneseyeview 18y ago
And anyway, math dorks are a disproportionate number of successful entrepreneurs.