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Comment by aoeuasdf1 | Hacker News Reader

Suppose you have two options:

- 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.

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Hypothetical scenarios are only valuable insofar as they're close to reality.

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.

If one can create $1 million/year in revenue for $BIGCORP it's completely plausible that they could create $5 million/year in expected value on some better, innovative idea of they own (or a startup's). The only problem is that the second option comes with a double-digit probability of failure. Extremely progressive tax systems artificially distort this decision towards complacency and mediocrity.

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.

>artificially distort this decision towards complacency and mediocrity.

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?

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