Taxing Top Incomes in a World of Ideas [pdf]
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Taxing Top Incomes in a World of Ideas [pdf]
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Re: Taxing Top Incomes in a World of Ideas [pdf]
#2This 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.
Re: Taxing Top Incomes in a World of Ideas [pdf]
#3People 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...
Re: Taxing Top Incomes in a World of Ideas [pdf]
#4People 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...
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.
Re: Taxing Top Incomes in a World of Ideas [pdf]
#5People 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...
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/…
> 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.
Re: Taxing Top Incomes in a World of Ideas [pdf]
#6"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.
Re: Taxing Top Incomes in a World of Ideas [pdf]
#7Earlier quoted context omitted.
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/…
> 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 forev…
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?
Re: Taxing Top Incomes in a World of Ideas [pdf]
#8Earlier quoted context omitted.
> 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 forev…
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 produc…
Considering that Bezos derives the vast majority of his wealth through capital gains as opposed to income, I'd say yes.
Re: Taxing Top Incomes in a World of Ideas [pdf]
#9"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.
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.
Re: Taxing Top Incomes in a World of Ideas [pdf]
#10"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.
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 redistri…
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.