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Comment by mirajshah | Hacker News Reader

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.

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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.

The absolute values do matter. If Jeff Bezos expected Amazon to be much less profitable as it is for him, he may have decided to just stop and retire once it provided enough passive income to let him live comfortably. He would be paid more for the added time and stress of continuing to grow Amazon, as you say, but if that marginal income approaches zero, it just isn't worth it (and we are left without Amazon).

Since this is a claim asserted without basis (nobody can claim to know a counterfactual, let alone someone else's mind), I can also assert the opposite: Bezos didn't get to where he was without having a hell of a drive for success, and that drive is not 100% driven by monetary reward. Prestige, power, influence are all incentives built into us at the biological level, and if he gets to be the all powerful CEO of a $800B company instead of a $1T company, I don't imagine he'd throw in the towel.

I think you underestimate how much welth is used as a proxy to guage prestige, power, and influence amung the super rich.

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.

Ok so he's a guy with insatiable drive, a hunger for success, a need to be the best- aw, hell, tax rates are a bit too high, why not throw in the towel?

No he would use the same talent to minimize taxes. Why would anyone expect otherwise lol ?

I think we need a movement that glorifies the payment of taxes.

I don't buy this, because we're not proposing to only tax Bezos until he has the exact same net worth as Joe Schmoe who collects POGs--this is a straw man. If we tax all the uber-rich 5% more, everyone would be in the exact same position on the leaderboard, just with slightly deflated numbers. We'd be having the conversation about breaking the $1T barrier 12 months down the line, BFD! It's just numbers to the rich, but it's life or death to the poor.

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.

The problem with these game theory "let's just all work together" solutions is that they are not stable points. It is in everyone's best interest to undercut the cartel. Even if you did get all the peacocks to shorten their tail, if there is some advantage to having a larger tail, it is irrational to expect noone to try and grow it out again.

You don’t solve the prisoners dilemma by saying “fuck it let’s just all stab each other’s backs”. I’m arguing humanity should cooperate to achieve the better state, and punish defectors if needed to balance the incentives. This at least should be our aim.

But does Amazon provide a large net value? Google I can understand provides a service we didn't have, but amazon just provides "selling stuff" - something that was possible before too. If anything, Amazon now sells tons more stuff using a lot fewer jobs, so what is the net contribution Amazon does to the US economy in terms of job creation, tax revenue, and the Global ecnonomy?

If anything, a lot of the megacorps just seem to kill smaller business while at the same time being better at not paying taxes.

Whilst I sympathise with this view, it does ignore AWS and the value it provides to the businesses that use it, many of whom are SMEs/startups that might have struggled to get going otherwise.

Yes I was considering only Amazon the online store and its value compared to having multiple other/smaller stores - both physical and online.

Efficiency. By using Amazon I save time and can use the time saved to create something of value or to bill more hours or something else that will lead.to more tax revenue.

The net contribution is consumer surplus.

Come on, I don't believe Bezos would put on his slippers and retire to a country cottage because tax rates were too high.

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.

True, but it's not just an incentive, it's also an enabler. SpaceX was on the verge of going broke, and their first successful launch was do or die. Had Musk been taxed more heavily before that, and had substantially less money to pour into the company, they likely would not have survived to make that launch.

Even if that were true, would that have reduced innovation? How many other innovators has Amazon crushed—fueled by the “top income”?

Taxes may not affect the relative ordering of the (ex-post) outcome of the different options. But they can affect the relative ordering of the (ex-ante) expected value of the different options.

Applied innovation is risky requires investments into new devices, training, new logistic chains etc.

>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.

Even if innovation is motivated by top income we don't know how exactly they are related. For example if top income is taxed it's still top in relation to other income. With people usually relationships matter not the absolute values.

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"

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