6 ms·

Inequality and Risk

21 points by kirubakaran 18y ago

melmel 18y ago
Did Bill Gates really think about how much of his future wealth would be taxed when he started Microsoft? Or how about Steve Jobs when he started Apple? My guess is ego and the desire to succeed were more important.
- chops 18y ago
  You're probably right, but what about Joe Everybody Handyman who decides that the possible payout isn't worth the risk of starting a business. Sure he could do it, if he really wanted to try, but the prospect of starting a business is already a pretty daunting one without removing more of the incentive. Why take on the added risk to get paid about the same salary as you could when you're just an employee? For some people, though, the financials aren't even considered. Some people just want their freedom and they want to create, and taxes aren't going to dissuade them. Others, like VCs, do get into this game with the express goal of making a pile of money. If the payout is less, the risk they're going to be willing to take on is less, and that means less development. With companies that bootstrap, this may not be as big a concern, but many companies simply wouldn't exist without the VCs willing to take on the risk. It's not an ego thing for them, it's all about the Benjamins.
- nazgulnarsil 18y ago
  steve jobs and bill gates are only one part of the picture. you have to look at the behavior of everyone involved with the early success of a company. Investors, early large customers, even the family urging them on or telling them its pointless.
- randallsquared 18y ago
  Even if they didn't think about that, I think it's far more likely that they would have if there was a 99% tax on everything over 100K or some similarly draconian tax.
- pg 18y ago
  In those two cases, probably not. What does influence a lot of founders, though, is what happens to peers who try it. Their friend starts a startup and sells it a few years later. How much better off is he economically? Does he merely get enough not to work for a few years, or does he never have to work again? Tax laws make a visible difference here. In a smaller acquisition, which most are, taxing capital gains at the rate of regular income would very often make the difference between someone having enough not to have to work again versus just enough to take a few years off.
chops 18y ago
While this is an older essay, this is up there with one of my favorite PG essays This part always has particularly far-reaching consequences. The problem here is not wealth, but corruption. So why not go after corruption? People like to assail lobbyists and the super-rich corporations that supposedly buy favorable policy, and of course, everyone then blames the rich for it. But it's not the rich that deserve the fundamental blame. It's the politicians that directly create policy, and can enforce that policy at gunpoint. No amount of money gives you legal authority to stick a gun in someone's face. It's the government, and only the government that make the laws - not the lobbyists and not the rich. Economic power is not the same thing as political power. Which is why transparency (which PG also speaks about) is so key.
- randallsquared 18y ago
  I would suggest that instead of trying to reduce bad uses of political power via the proxy of transparency, it might be more effective to reduce the amount of political power there is at all.
doki_pen 18y ago
We act as if most of our tax money goes to poor people. That just isn't the case. This entire argument is a lie on it's face. I don't think anyone seriously thinks we should all be equal financially, only that people deserve health care, food and shelter, even if they are "lazy" or "stupid". Guaranteeing these basic human needs wouldn't cost as much as people think. Even reducing the taxes that poor people pay would help immensely. It's a fallacy that the poor don't pay taxes, they do. There are other taxes besides income taxes, some of them even go into the same exact pool of money. Many rich end up paying _less_ taxes then poor people do, as a percentage of their income.
- doki_pen 18y ago
  I should also say I believe everyone should have equal access to education, but anyone who can't see how this benefits society as a whole isn't worth arguing with. The only valid argument for non-equal access is pure selfishness and competitive advantage for the offspring of the wealthy.
  - nazgulnarsil 18y ago
    you can't create equal access to education without a police state. what are you going to do? make laws that the rich aren't allowed to hire private tutors for their kids? what you're actually saying is that a certain minimum level of education should be publicly funded. Who decides what metrics we use to judge education? It would seem that we're currently doing a terrible job at this.
    - gnaritas 18y ago
      No we're not, most kids get out of high school with the ability to read and write. Before public education, you could not say that about most people. Public education is that minimal level of education and it accomplishes that job quite well. Could it be better, sure, but without it things would be much worse.
      - nazgulnarsil 18y ago
billybob 18y ago
I didn't understand this part: "If you want to reduce economic inequality instead of just improving the overall standard of living, it's not enough just to raise up the poor. What if one of your newly minted engineers gets ambitious and goes on to become another Bill Gates? Economic inequality will be as bad as ever." What about your newly minted teachers and other middle-class citizens? Does everyone who rise from poverty become super rich? I don't understand economics well, so I can't really counter his overall argument, but this seemed a little offhanded.
- nazgulnarsil 18y ago
  part of the point is that these "super rich" that everyone likes to point fingers at are such statistical outliers that formulating economic policy around them is ridiculous. In essence you wind up with special rules for .01% of the population. How egalitarian is that?
  - AlisdairO 18y ago
    Why so ridiculous? Those .01% often have a vastly disproportionate impact on the rest of the society, so it only makes sense to have special rules for them.
    - nazgulnarsil 18y ago
      the point is that it's hypocritical from the egalitarian soapbox that the people stand on.
      - AlisdairO 18y ago
        Not really. The .01% generally have vastly greater power and effective rights within society - ensuring that that doesn't go overboard isn't so crazy.
- pg 18y ago
  What I meant was that you can't assume that making the poor richer will decrease inequality, because many measures that make the poor richer also make the rich richer, so the gap between them remains just as big.
forinti 18y ago
You don't have to eliminate inequality, but if society gave people a better foundation to work with (health care, care in old age and education), I think people would be more willing to take risks AND would be less prone to corruption.
biohacker42 18y ago
Strongly agree with the second part: The problem here is not wealth, but corruption Kind of confused by the first part. Was that about progressive tax rates or communism? I don't know anyone who has ever declined an opportunity to make money just because the tax on the profit was too high. Does anyone have specific examples?
- randallsquared 18y ago
  I used to work in manufacturing, and it was fairly common to hear people decline overtime using the reason that it would be taxed enough more that it wasn't worth it for them. Part of this might have been due to a misunderstanding of how income taxes work (everyone I knew there, including myself, had the impression that higher rates were applied to the entire amount of your income), but that doesn't alter the point in this case.
  - asdlfj2sd 18y ago
    but that doesn't alter the point in this case Uhm, yes it kind of does. In that if they had know how taxes actually work, they would have worked.
mdasen 18y ago
Well, there are some ways that you can make start-ups more appealing for founders without increasing the reward. In the United States, creating a startup has considerable risk and cost. Health insurance comes to mind as the largest cost. Europeans don't have to worry about this in the same way and, therefore, are able to eliminate a cost of several thousand dollars from their startup budget. They don't risk being without health coverage by creating a startup (and that does lower the risk, therefore requiring less reward). Likewise, unemployment insurance is better which makes it easier for those whose start-ups might not pan out to feel secure. So, the government can lower the risk for founders in a meaningful way. I'm not saying that socialism is awesome or anything, just that certain social programs reduce the risk of doing a start up. Aaron Swartz (of reddit fame) once wrote an essay on this topic arguing this point: http://www.aaronsw.com/weblog/prostartup http://www.aaronsw.com/weblog/prostartup The lack of a social safety net requires founders to be in a good position - good health, no dependents (spouse, kids), etc. - or get enough VC that they can afford to go in that direction. It's clearly not the only issue - investment dollars still need to come from somewhere and this doesn't change that risk (other than lowering the amount initially needed since the VC wouldn't have to pay for things like health insurance), but personally it would go a long way for risk-averse me.

21 points by kirubakaran 18y ago

Did Bill Gates really think about how much of his future wealth would be taxed when he started Microsoft? Or how about Steve Jobs when he started Apple? My guess is ego and the desire to succeed were more important.

chops 18y ago
You're probably right, but what about Joe Everybody Handyman who decides that the possible payout isn't worth the risk of starting a business. Sure he could do it, if he really wanted to try, but the prospect of starting a business is already a pretty daunting one without removing more of the incentive. Why take on the added risk to get paid about the same salary as you could when you're just an employee? For some people, though, the financials aren't even considered. Some people just want their freedom and they want to create, and taxes aren't going to dissuade them. Others, like VCs, do get into this game with the express goal of making a pile of money. If the payout is less, the risk they're going to be willing to take on is less, and that means less development. With companies that bootstrap, this may not be as big a concern, but many companies simply wouldn't exist without the VCs willing to take on the risk. It's not an ego thing for them, it's all about the Benjamins.
nazgulnarsil 18y ago
steve jobs and bill gates are only one part of the picture. you have to look at the behavior of everyone involved with the early success of a company. Investors, early large customers, even the family urging them on or telling them its pointless.
randallsquared 18y ago
Even if they didn't think about that, I think it's far more likely that they would have if there was a 99% tax on everything over 100K or some similarly draconian tax.
pg 18y ago
In those two cases, probably not. What does influence a lot of founders, though, is what happens to peers who try it. Their friend starts a startup and sells it a few years later. How much better off is he economically? Does he merely get enough not to work for a few years, or does he never have to work again? Tax laws make a visible difference here. In a smaller acquisition, which most are, taxing capital gains at the rate of regular income would very often make the difference between someone having enough not to have to work again versus just enough to take a few years off.

chops 18y ago

While this is an older essay, this is up there with one of my favorite PG essays This part always has particularly far-reaching consequences. The problem here is not wealth, but corruption. So why not go after corruption? People like to assail lobbyists and the super-rich corporations that supposedly buy favorable policy, and of course, everyone then blames the rich for it. But it's not the rich that deserve the fundamental blame. It's the politicians that directly create policy, and can enforce that policy at gunpoint. No amount of money gives you legal authority to stick a gun in someone's face. It's the government, and only the government that make the laws - not the lobbyists and not the rich. Economic power is not the same thing as political power. Which is why transparency (which PG also speaks about) is so key.

randallsquared 18y ago
I would suggest that instead of trying to reduce bad uses of political power via the proxy of transparency, it might be more effective to reduce the amount of political power there is at all.

doki_pen 18y ago

We act as if most of our tax money goes to poor people. That just isn't the case. This entire argument is a lie on it's face. I don't think anyone seriously thinks we should all be equal financially, only that people deserve health care, food and shelter, even if they are "lazy" or "stupid". Guaranteeing these basic human needs wouldn't cost as much as people think. Even reducing the taxes that poor people pay would help immensely. It's a fallacy that the poor don't pay taxes, they do. There are other taxes besides income taxes, some of them even go into the same exact pool of money. Many rich end up paying _less_ taxes then poor people do, as a percentage of their income.

doki_pen 18y ago
I should also say I believe everyone should have equal access to education, but anyone who can't see how this benefits society as a whole isn't worth arguing with. The only valid argument for non-equal access is pure selfishness and competitive advantage for the offspring of the wealthy.
- nazgulnarsil 18y ago
  you can't create equal access to education without a police state. what are you going to do? make laws that the rich aren't allowed to hire private tutors for their kids? what you're actually saying is that a certain minimum level of education should be publicly funded. Who decides what metrics we use to judge education? It would seem that we're currently doing a terrible job at this.
  - gnaritas 18y ago
    No we're not, most kids get out of high school with the ability to read and write. Before public education, you could not say that about most people. Public education is that minimal level of education and it accomplishes that job quite well. Could it be better, sure, but without it things would be much worse.
    - nazgulnarsil 18y ago

billybob 18y ago

I didn't understand this part: "If you want to reduce economic inequality instead of just improving the overall standard of living, it's not enough just to raise up the poor. What if one of your newly minted engineers gets ambitious and goes on to become another Bill Gates? Economic inequality will be as bad as ever." What about your newly minted teachers and other middle-class citizens? Does everyone who rise from poverty become super rich? I don't understand economics well, so I can't really counter his overall argument, but this seemed a little offhanded.

nazgulnarsil 18y ago
part of the point is that these "super rich" that everyone likes to point fingers at are such statistical outliers that formulating economic policy around them is ridiculous. In essence you wind up with special rules for .01% of the population. How egalitarian is that?
- AlisdairO 18y ago
  Why so ridiculous? Those .01% often have a vastly disproportionate impact on the rest of the society, so it only makes sense to have special rules for them.
  - nazgulnarsil 18y ago
    the point is that it's hypocritical from the egalitarian soapbox that the people stand on.
    - AlisdairO 18y ago
      Not really. The .01% generally have vastly greater power and effective rights within society - ensuring that that doesn't go overboard isn't so crazy.
pg 18y ago
What I meant was that you can't assume that making the poor richer will decrease inequality, because many measures that make the poor richer also make the rich richer, so the gap between them remains just as big.

forinti 18y ago

You don't have to eliminate inequality, but if society gave people a better foundation to work with (health care, care in old age and education), I think people would be more willing to take risks AND would be less prone to corruption.

biohacker42 18y ago

Strongly agree with the second part: The problem here is not wealth, but corruption Kind of confused by the first part. Was that about progressive tax rates or communism? I don't know anyone who has ever declined an opportunity to make money just because the tax on the profit was too high. Does anyone have specific examples?

randallsquared 18y ago
I used to work in manufacturing, and it was fairly common to hear people decline overtime using the reason that it would be taxed enough more that it wasn't worth it for them. Part of this might have been due to a misunderstanding of how income taxes work (everyone I knew there, including myself, had the impression that higher rates were applied to the entire amount of your income), but that doesn't alter the point in this case.
- asdlfj2sd 18y ago
  but that doesn't alter the point in this case Uhm, yes it kind of does. In that if they had know how taxes actually work, they would have worked.

mdasen 18y ago

Well, there are some ways that you can make start-ups more appealing for founders without increasing the reward. In the United States, creating a startup has considerable risk and cost. Health insurance comes to mind as the largest cost. Europeans don't have to worry about this in the same way and, therefore, are able to eliminate a cost of several thousand dollars from their startup budget. They don't risk being without health coverage by creating a startup (and that does lower the risk, therefore requiring less reward). Likewise, unemployment insurance is better which makes it easier for those whose start-ups might not pan out to feel secure. So, the government can lower the risk for founders in a meaningful way. I'm not saying that socialism is awesome or anything, just that certain social programs reduce the risk of doing a start up. Aaron Swartz (of reddit fame) once wrote an essay on this topic arguing this point: http://www.aaronsw.com/weblog/prostartup http://www.aaronsw.com/weblog/prostartup The lack of a social safety net requires founders to be in a good position - good health, no dependents (spouse, kids), etc. - or get enough VC that they can afford to go in that direction. It's clearly not the only issue - investment dollars still need to come from somewhere and this doesn't change that risk (other than lowering the amount initially needed since the VC wouldn't have to pay for things like health insurance), but personally it would go a long way for risk-averse me.