Taxing Top Incomes in a World of Ideas [pdf]
www8.gsb.columbia.edu
www8.gsb.columbia.edu
Like, how do you even measure an idea? The paper feels like the author has done a load of maths and shoehorned one particular interpretation onto his equations.
>Does anyone really believe that 1/ the "stock' of ideas can be measured by a real number and 2/ national output is proportional to some power of the "stock" of ideas?
System dynamics can be modeled with numbers that can never be measured or are hard to measure. The exact number of working hours and capital spend to produce innovation is hard to measure and approximations (like what companies announce or number of patents) don't capture the whole picture. It's still reasonable to assume that the number exists.
Optimal taxation and economic growth are big subjects and this paper is not trying to solve it or propose a policy. The paper explores the dynamics of taxation and growth under three conditions mathematically ignoring the rest. Trying to see how big effects small changes can have is interesting.
That sounds like an argument from authority to me. If he decides to use the form Y = A^b L and I decide to use, say, a confluent hypergeometric function, who's to say who is correct?
Nobody. My friend studied econometry. I was appaled to hear that they just take some real process, assume it's governed by some equation then massage all the maths they can out of it.
They consider different equation for the same process (although they usually have favorite one) and never bother themselves with proving if any of them is actually reflected in reality of said process.
It's basically philosophy for people that can do some math.
They also use the math without deep understanding of it (sort of cargo cultishly). That I know because I worked for a prof and a post docs of econonometry on some project later.
Someone who knows the economic growth theory better than I do. I have studied growth theory maybe 16-20 hours total. I'm not humble guy but I know I don't have the ability to join the debate and argue against. My hope is to learn the gist of the paper. In my comments I didn't try to argue for or against, I was trying to describe what the article is about.
Assuming that you are random guy in the internet who suffers from insomnia, I think your level of knowledge is even smaller than mine.
> If he decides to use the form Y = A^b L
That form is not his idea. It's very basic for all steady-state growth models. These models require strong assumptions like Cobb-Douglas production function, labor-augmenting technological growth and linear differential equation (only asymptotic requirement). To go trough all the assumptions would require a seminar.
If not, how do you know the assumptions are reasonable?
Yes. Starting page 58. Cobb–Douglas was derived to match empirical observations (constant factor share, constant capital and labor share) and it was proved to have some nice properties.
Note that Cobb–Douglas only approximately true starting point. It does not capture everything. For example capital and labor shares are not completely constant. The simplicity of the function makes it useful and it's taught in basic econ. classes because it holds true well enough. You need slightly more complex models or relax the function for some stuff.
Paul Douglas was a U.S. senator from Illinois from 1949 to 1966. In 1927, however, when he was still a professor of economics, he noticed a surprising fact: the division of national income between capital and labor had been roughly constant over a long period. In other words, as the economy grew more prosperous over time, the total income of workers and the total income of capital owners grew at almost exactly the same rate.
Douglas' evidence isn't actually presented in Mankiw, it's just stated as fact: do note that I asked for empirical evidence in my earlier post. The observations are over 90 years old, and the government didn't even collate national statistics in the 1920s. Do they still hold? Do they hold in non-US countries?
I'm not these modelling choices (cobb-douglas above, and the assumptions in TFA) are wrong, I'm saying that they're unjustified.
[0] http://irfanlal.yolasite.com/resources/N.%20Gregory%20Mankiw...
Is this proven anywhere? I don't believe high taxation reduces innovation, in fact perhaps the opposite is true overall.
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.
People with drive don't do it to just be one of millions to reach a given milestone. People with real drive don't enjoy doing something that many before them have done.
Guys like Jeff clearly set out to be the best. Breaking the score bord could very well prevent something like Amazon, and we might have ended up knowing Jeff as the guy who has the largest POG collection.
There's a story about a society of peacocks who grew their tails so big and beautiful it started interfering with survival. They'd get it stuck in branches, be too slow to run from predators, etc. No one peacock was willing defect and shorten his tail because he'd lose out on the mating game. If they could all just get together and agree to shorten their tails by 25%, they could keep the relative pecking order and also be agile enough to survive.
If anything, a lot of the megacorps just seem to kill smaller business while at the same time being better at not paying taxes.
While money is certainly an incentive to innovate, it's also not the only incentive (and probably far down the list if you're already rich), and creative, driven people will do what they do whether or not a chunk of their "earnings" gets given/taken back to the society that enables them to do it.
>Hall and Woodward (2010) provide a different perspective. Using an extensive data set on venture capital funding from 1987 until 2008, they show that the returns to entrepreneurs are extremely skewed: nearly 3/4ths of entrepreneurs receive nothing at exit, while a few receive more than a billion dollars. An entrepreneur with a coefficient of relative risk aversion of two values this lottery with a certainty equivalent of only slightly more than zero. An implication is that the tax rate that applies to the successful outcome can have a substantial influence on entrepreneurial activity.
I find it hard to see how taxation does not disincentivize applied innovation in the margin.
Also even if people work for a chance to be in "top" the probability of actually getting there might be irrelevant. People horribly overestimate probability of positive outcomes. Basiaclly 1 in a million and 1 in a billion is a the same for people. What's more they don't translate both to "impossible" but to "it's gonna be tough but I got a shot"
The whole reason the priesthood (and to an extent nobles too) was the core of education way back in medieval times was because they didn't have to worry about surviving. On the other hand, peasants could barely innovate at all because they spent most if not all of their time in labor.
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.
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.
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?
That only holds true if you assume people will act the same exact way and with the same exact outcomes. This is a silly assumption to make when you significantly change both the incentives and the difficulty.
> The scraps ... will go to addressing externalities and common goods.
What world do you live in?
Are you willing to work as hard for $1 as for $1000, even if your relative status remains unchanged?
> The scraps that come from slightly lowering your absolute position (but keeping relative position the same) will go to addressing externalities and common goods.
Yes, but the entire point of this paper is that those 'scraps' are actually worth less than the economic gains produced by the ideas that receive these high top incomes.
> the entire point of this paper is that those 'scraps' are actually worth less than the economic gains produced by the ideas that receive these high top incomes.
I'm not convinced by this. Every successful person who has created immense value for the world stood on the shoulders of not only giants but thousands of little people contributing to society. Those top income receiving ideas mean nothing in a society with no law, infrastructure, education, or opportunities. You think taxes stifle innovation? What would Bezos have accomplished had he been born to an uneducated militant in current day Syria?
Choose your own numbers. I made the argument because the point isn't the numbers, the point is that attenuating the reward distribution changes human capital decisions.
> I'm not convinced by this. Every successful person who has created immense value for the world stood on the shoulders of not only giants but thousands of little people contributing to society.
In what way does the necessity of infrastructure, both social and physical, contradict the point of the paper?
The unexamined premise of this question is that society at large benefits from the existence of Amazon and should want to encourage the creation of similar Amazon-like enterprises.
It's not actually a premise, though. The point is that there are good ideas that take large personal risk and investment to build. Swap in Google if you prefer, or any other successful company.
That being said, Amazon is pretty clearly enormously beneficial. AWS alone has enabled thousands of companies that never would otherwise have been able to exist, and saved other companies millions of dollars on hardware, not to mention saving electricity (by better utilization), etc.
Every time a company gets big people whine and then vote with their dollars by shopping there anyway. Why do they do that? Because it benefits them. People buy things from Amazon because it's better. Amazon makes a profit that is smaller than that value delta - the residual is the consumer surplus, aka the net benefit to you and me.
The unexamined assumption in this statement is that giant multinational megacorporations are good and we should encourage them.
I reject the assumption in your last paragraph that individuals making their own self-interested choices always maximizes positive outcomes for society at large: https://en.wikipedia.org/wiki/Tyranny_of_small_decisions
There is no unexamined assumption. Swap in whatever you want.
> I reject the assumption in your last paragraph that individuals making their own self-interested choices always maximizes positive outcomes for society at large: https://en.wikipedia.org/wiki/Tyranny_of_small_decisions
I don't disagree. But the default assumption always ought to be that it indeed does maximize utility, because it usually does, or approximately does. If you want to make the case that there's some better pareto-optimal equilibrium that Google and Amazon are disrupting, i'm more than happy to listen, but I think you're going to find that case a lot harder to make than you think.
This is called the hedonic treadmill and is pretty much built into all humans. Spoiler alert: it never ends.
It's a trade-off: higher tax revenues vs higher innovation.
I suspect that the impact of higher taxes on innovation would be relatively small compared to the benefit of higher tax revenues.
This is the difference between spending other people's money and your own.
Maybe, but great businesses are usually based on good ideas.