What incentive would anyone have in making more then 400K a year if you were going to be taxed at 90%?
It's actually quite terrifying that people would advocate for taking up to 90% of someone's income. We need to work on solving inequality but this simply isn't the answer.
Edit: It's also important to remember that taking more money away from the rich, and feeding it into an already broken and inefficient system (our government) does not equate to lifting people out of poverty.
Interestingly, the top U.S. tax rate from 1951–1963 was >90%, and it was >50% during the half-century from 1932–1986 – https://en.wikipedia.org/wiki/Income_tax_in_the_United_State...
This is another variation on the "rich people hoard cash" theory, which is completely false. Rich people invest all of their money back into the economy. Even bank deposits are invested back into the economy (when the bank loans it out).
Scrooge McDuck cash vaults do not exist.
The reason Apple, etc., invest a lot of their cash overseas is not because those are better investments, but because the US corporate taxes are so much higher those foreign investments become more attractive.
Level the taxes, and the money will be reinvested back in the US.
To know what they are investing in, consult the Apple Annual Report, which says. Even if the balance sheet says "cash", what they mean is "bank deposits". Bank deposits get loaned out to others, and those others spend it.
Nobody borrows money in order to hoard a pile of currency.
Of course it is. What do you think those funds invest in? Piles of cash?
> Bank lending is driven by demand, not deposits.
If that were true, banks wouldn't need deposits and certainly wouldn't offer free checking. They're not charities.
> If that were true, banks wouldn't need deposits
That doesn't follow from what I said. Banks are required by law to back their loans up with reserves. So when they don't have enough reserves, they borrow on the interbank lending market or from the central bank.
http://www.bankofengland.co.uk/publications/Documents/quarte...
Of course it is. Buying a piece of a company is investing in it.
> Buy that logic, high-frequency traders are investing in the economy.
And they are - even if they hold a particular stock for a millisecond. The aggregate invested across the market is what matters.
It's a bit like calculus. All those infinitesimal bits add up to real amounts.
> That doesn't follow from what I said.
Maybe you can explain why banks offer free checking.
The original comment was implying that rich people contribute to the economy by investing their spare savings back into it. I'm not claiming that there's no benefit to buying secondary stocks and derivatives on them, just that this is not even remotely the same in terms of creating economic growth as actually investing in creating new business opportunities and such. It's kind of like saying that trust fund kids who don't work contribute to the economy by spending money. And often this "investment" in the stock market is the mere fueling of bubbles.
HF traders don't hold for long, so why are they equivalent?
"investing" != "giving it out". "growing economy" != "less inequality".
So, they do circulate through the broader economy. There's no silo of cash sitting somewhere paying dividends.
Money in bank accounts is loaned to others and "thrust back" into the economy.
Money in other investments (stocks, bonds) also funds economic activity.
Your argument only makes sense if the wealthy are hoarding cash under their mattresses, which is not what they do.
Apple got initial funding of only 250k, and that was split between equity and loan, very feasible even with a 400k yearly cap. (And I'd also note that 10% of "any money over that" still adds up given some of the salaries paid to top execs)
Secondly, Google's initial funding was only 100k in 98` dollars. The significant 25m round was from kleiner perkins and sequoia, and I certainly imagine that corporate funds for investment would not be held to the same limits as personal income tax.
Finally, facebook was bootstrapped out of their own pocket until they got a 500k invesmtent from thiel in 04 $'s. Once again the "big" investment a year later came from a firm.
In all of these cases the initial seed/bootstrapping money would come FAR under the 400k limit expressed, adjusted for inflation, and that assumes people wouldn't both save over multiple years, or that we wouldn't see more reliance on companies rather than individuals in early stage investment if the tax code shifted such that it was more advantageous.
I defend this largely because in my own readings of history I've attributed a large amount of the current economic state to events of the late 70's and 80s, the tax code changes being a major one of them, and I think your points unfairly detract from the validity of reintroducing such tax structures.
I'd note however that my original point was to emphasize the smallness of most of the initial investments. One does not need to be a billion dollar entity to have enough diversification in high risk investments to make it a worthwhile component of your portfolio.
(I'd also defend America's ingenuity prior to the advent of VC; we were a pioneer in the sciences and technology long before venture capital was a thing. This is an entirely separate discussion about the viability of various forms of tech. growth stimulus that I'm neither qualified nor desirous to have, but I mention it to suggest that if we've found success in other systems before, there may be reason to experiment further when we observe a clearly deleterious trend in the current state.)
When I worked at a hardware store we had a brochure we could order in a gold-plated Ducane grill for $4 million.
That recent graph showing the top 1% having a 6% wealth growth rate is wholly unsustainable for any society. So there's something to be said for trying to level it off.
If the wealth continues the trend to concentrate at the top then there will be an increasingly large and unhappy group of people who will elect increasingly non-mainstream politicians who promise to help them, eventually leading to who knows what kind of unpleasantries for all.
100%. Nobody has a Scrooge McDuck cash vault. Bank deposits are also spent, in the form of depositor's money being loaned out by the bank.
Obviously the classic depositing/loaning service of banks is essential for progress. But hundreds of billions of those deposits are going to making the rich richer. It would be nice if we could come up with a way to provide capital to people who need it while also maintaining a strong middle class. I don't know how to do this but it's worth talking about.
What I really want to know is how much of people's savings (passively invested in banks and things like index funds) is going to fund things like the new Facebook vs. how much is not really doing that much.
People tend to invest in things with a high rate of return. That high rate signals it is doing things that people want done and are willing to pay for. I.e. it helps society.
> a way to provide capital to people who need it
That's exactly what banks do. My bank branch is plastered with posters trying to sell a loan to everyone who walks in.
> passively invested in banks and things like index funds
If you're arguing those are not productive investments, I don't think that's very defensible.
> how much is not really doing that much.
If you're arguing that rich people tend to invest in low performing investments, that doesn't make much pragmatic sense. People get rich by investing in highly performing investments, not dogs.
Banks want people to take out loans because they collect fees and offload the risk via MBS. They give people loans who can't afford them and that's not good for anyone, but then they know they'll get bailed out again if something goes south. None of this is sustainable, healthy, or productive.
That's not a good argument for raising taxes, though.
In other words, nothing like that.
Why? Why is that the magic number that is insane??
The point is incentives. People doing work and providing value is a good thing that we don't want to discourage.
There is zero point in doing extra work if it will be taxed at 90%. People would just work for half a year, then take the rest off.
- Work for MEGACORP and produce $400k/year of value
- Develop a new business which has a 30% chance of succeeding. If it succeeds, you estimate it will be worth $50M.
Suppose the marginal tax rate for income above $400k/year is 40%, and you want to maximize your expected earnings (say, to donate to a charity you think is particularly effective). Which option is rational?
Now suppose the marginal tax rate for income above $400k/year is 100%. Now no matter how high we change that $50M number to be, it's always better to just work for $MEGACORP, because you get a guaranteed paycheck.
This is known as a distortion, and is the true cost of taxes. I personally don't care too much where the wealth people creates goes, and I'd like to see less income inequality - but let's not kill the golden goose while we're at it. There are far less distortionary taxes than extremely high income tax rates.
In real life, if I'm taking home $400k/year in salary it's because I'm creating $1 million/year in revenue. Also in real life, a start-up business that will be worth $50 million usually has more like a 1% chance of success, so it's expected value is actually just about 25% more than the proposed salaried job -- less than my value-per-year at my job, actually.
Finally, in real life, most people don't want to maximize expected income -- its buying power in terms of personal needs decreases logarithmically.
Tax law really has little effect once we use a less imaginative scenario.
You mention people are risk averse (logarithmic utility of money). I posit that that is only true for non-altruists. An altruist prefers to save 10000 lives nearly exactly 10 times as much as they prefer to save 1000 lives. Given a secure enough financial base off of which the logarithmic personal rewards factor is a non-issue, this is the primary driver for plenty of people that I personally know.
You seem to be assuming that Starting a Business is always better, more of an achievement, more awesome, than not starting one. I see no reason for this to be true. Maximizing revenue tends to have more to do with building market power than with achieving anything at all.
You're also deliberately shifting the goalposts here. You started out by saying that progressive taxes were bad because they penalize making more money. Now you're saying they're bad because they incentivize complacency and mediocrity, which are life-achievement qualities rather than economic quantities.
It looks like your underlying belief is: "people who make lots of money are heroes, and we need to encourage more people to be heroes, irrespective of what's good for the rest of society."
>Given a secure enough financial base off of which the logarithmic personal rewards factor is a non-issue, this is the primary driver for plenty of people that I personally know.
To be frank, it's their primary excuse for what they really wanted to do, which was to make as much money as possible. After all, how many are giving away their extra money to the most efficient administrator of human-welfare programs around, the state?
This is a major misconception I see on both sides of the argument, (but definitely more of an issue on the "rah rah Laissez-faire crowd") the worry isn't really about the "1%" who are doctors and engineers who make ~$250K/year after working hard, the worry is really the people who make 20 million dollars a year with nowhere near a proportional value add.
I would be quite happy to earn more, and then 400K a year, as you say, even if he was taxed at 90%.