Inequality and Risk(paulgraham.com)
paulgraham.com
Inequality and Risk
http://www.paulgraham.com/inequality.html
7 comments
I would suggest that instead of trying to reduce bad uses of political power via the proxy of transparency, it might be more effective to reduce the amount of political power there is at all.
Well, there are some ways that you can make start-ups more appealing for founders without increasing the reward. In the United States, creating a startup has considerable risk and cost. Health insurance comes to mind as the largest cost. Europeans don't have to worry about this in the same way and, therefore, are able to eliminate a cost of several thousand dollars from their startup budget. They don't risk being without health coverage by creating a startup (and that does lower the risk, therefore requiring less reward). Likewise, unemployment insurance is better which makes it easier for those whose start-ups might not pan out to feel secure.
So, the government can lower the risk for founders in a meaningful way. I'm not saying that socialism is awesome or anything, just that certain social programs reduce the risk of doing a start up.
Aaron Swartz (of reddit fame) once wrote an essay on this topic arguing this point: http://www.aaronsw.com/weblog/prostartup
The lack of a social safety net requires founders to be in a good position - good health, no dependents (spouse, kids), etc. - or get enough VC that they can afford to go in that direction.
It's clearly not the only issue - investment dollars still need to come from somewhere and this doesn't change that risk (other than lowering the amount initially needed since the VC wouldn't have to pay for things like health insurance), but personally it would go a long way for risk-averse me.
So, the government can lower the risk for founders in a meaningful way. I'm not saying that socialism is awesome or anything, just that certain social programs reduce the risk of doing a start up.
Aaron Swartz (of reddit fame) once wrote an essay on this topic arguing this point: http://www.aaronsw.com/weblog/prostartup
The lack of a social safety net requires founders to be in a good position - good health, no dependents (spouse, kids), etc. - or get enough VC that they can afford to go in that direction.
It's clearly not the only issue - investment dollars still need to come from somewhere and this doesn't change that risk (other than lowering the amount initially needed since the VC wouldn't have to pay for things like health insurance), but personally it would go a long way for risk-averse me.
Did Bill Gates really think about how much
of his future wealth would be taxed when he
started Microsoft? Or how about Steve Jobs
when he started Apple? My guess is ego and
the desire to succeed were more important.
In those two cases, probably not. What does influence a lot of founders, though, is what happens to peers who try it. Their friend starts a startup and sells it a few years later. How much better off is he economically? Does he merely get enough not to work for a few years, or does he never have to work again? Tax laws make a visible difference here. In a smaller acquisition, which most are, taxing capital gains at the rate of regular income would very often make the difference between someone having enough not to have to work again versus just enough to take a few years off.
You're probably right, but what about Joe Everybody
Handyman who decides that the possible payout isn't worth the risk of starting a business. Sure he could do it, if he really wanted to try, but the prospect of starting a business is already a pretty daunting one without removing more of the incentive. Why take on the added risk to get paid about the same salary as you could when you're just an employee?
For some people, though, the financials aren't even considered. Some people just want their freedom and they want to create, and taxes aren't going to dissuade them.
Others, like VCs, do get into this game with the express goal of making a pile of money. If the payout is less, the risk they're going to be willing to take on is less, and that means less development. With companies that bootstrap, this may not be as big a concern, but many companies simply wouldn't exist without the VCs willing to take on the risk. It's not an ego thing for them, it's all about the Benjamins.
For some people, though, the financials aren't even considered. Some people just want their freedom and they want to create, and taxes aren't going to dissuade them.
Others, like VCs, do get into this game with the express goal of making a pile of money. If the payout is less, the risk they're going to be willing to take on is less, and that means less development. With companies that bootstrap, this may not be as big a concern, but many companies simply wouldn't exist without the VCs willing to take on the risk. It's not an ego thing for them, it's all about the Benjamins.
steve jobs and bill gates are only one part of the picture. you have to look at the behavior of everyone involved with the early success of a company. Investors, early large customers, even the family urging them on or telling them its pointless.
Even if they didn't think about that, I think it's far more likely that they would have if there was a 99% tax on everything over 100K or some similarly draconian tax.
You don't have to eliminate inequality, but if society gave people a better foundation to work with (health care, care in old age and education), I think people would be more willing to take risks AND would be less prone to corruption.
We act as if most of our tax money goes to poor people. That just isn't the case. This entire argument is a lie on it's face. I don't think anyone seriously thinks we should all be equal financially, only that people deserve health care, food and shelter, even if they are "lazy" or "stupid". Guaranteeing these basic human needs wouldn't cost as much as people think. Even reducing the taxes that poor people pay would help immensely. It's a fallacy that the poor don't pay taxes, they do. There are other taxes besides income taxes, some of them even go into the same exact pool of money. Many rich end up paying _less_ taxes then poor people do, as a percentage of their income.
Please do at least a cursory review of the US Budget if you're going to make claims like this. There is a ton of freely available information from places like the tax foundation and many many other sources with which to corroborate. Knee jerk morality is not economic analysis.
It isn't a fallacy that the poor don't pay taxes. If a poor person pays X to the government and gets Y in social services and Y>X then they are a net tax eater.
Your assertion that the poor pay more taxes as a percentage of income is so ludicrous that I don't even know how to respond.
It isn't a fallacy that the poor don't pay taxes. If a poor person pays X to the government and gets Y in social services and Y>X then they are a net tax eater.
Your assertion that the poor pay more taxes as a percentage of income is so ludicrous that I don't even know how to respond.
Um, perhaps actually enumerating what X and Y are would be a start? Or defining what "poor" means?
A lot of people conveniently forget about sales tax (and potentially other sorts of government fees, like vehicle registration fees) when saying "poor people don't pay taxes." Sales tax is an incredibly regressive form of taxation, as are gasoline taxes, cigarette taxes, etc.
A lot of people conveniently forget about sales tax (and potentially other sorts of government fees, like vehicle registration fees) when saying "poor people don't pay taxes." Sales tax is an incredibly regressive form of taxation, as are gasoline taxes, cigarette taxes, etc.
sigh
okay let's say we have a consumption tax of 10%. By definition your tax rate can not exceed 10% (it will be 10% if you spend all your money).
this is peanuts. the tax rates for the top 2 quintiles range from 25% to 32%, and that's straight income before paying all those same consumption taxes.
frankly, your argument is flawed from the get go. if we're going to assume a decreasing marginal utility of money (which is what theft from the highly productive is usually justified with) we can't use straight up percentages of income as our metric since the whole thing relies on the idea that taking 10% from a poor person is worse than taking 10% from a rich person.
But if we do that we have a whole new problem on our hands. How do we determine the rate at which the utility of money decreases?
okay let's say we have a consumption tax of 10%. By definition your tax rate can not exceed 10% (it will be 10% if you spend all your money).
this is peanuts. the tax rates for the top 2 quintiles range from 25% to 32%, and that's straight income before paying all those same consumption taxes.
frankly, your argument is flawed from the get go. if we're going to assume a decreasing marginal utility of money (which is what theft from the highly productive is usually justified with) we can't use straight up percentages of income as our metric since the whole thing relies on the idea that taking 10% from a poor person is worse than taking 10% from a rich person.
But if we do that we have a whole new problem on our hands. How do we determine the rate at which the utility of money decreases?
I was disagreeing with your statement "It isn't a fallacy that the poor don't pay taxes." It very much is a fallacy; they pay all kinds of taxes (as pointed out by the other commenter they pay medicare tax and social security tax as well as sales taxes, gas taxes, etc.). I wasn't making the argument that they pay more in taxes as a percentage of their income, or any argument around utility. There are arguments to be made around that, but I wasn't making them.
I was also basically saying that the whole "your argument is so ludicrous I won't dignify it with a response" thing was a cop-out. Just assuming they must receive more in social services than they pay in taxes, without any attempt to quantify either number, doesn't make for a compelling argument.
I was also basically saying that the whole "your argument is so ludicrous I won't dignify it with a response" thing was a cop-out. Just assuming they must receive more in social services than they pay in taxes, without any attempt to quantify either number, doesn't make for a compelling argument.
if the poor paid more in taxes than they receive in benefits why wouldn't social programs be net profitable? the argument makes no sense.
That entirely depends on how you define "the poor" and how you quantify benefits. Is the military a social program? Police? National defense? How do you quantify one person's portion of that?
If we're talking purely about direct social programs like welfare or housing vouchers or medicaid, then homeless people will definitely receive more benefits than they pay in taxes, and people earning $30k year will almost certainly not.
If instead you include all that other stuff like defense and highway spending and assume everyone receives a roughly equal share of those benefits then the argument becomes pointless; the average person pays less than 1/300 millionth of the overall tax revenue but receives 1/300 millionth of the benefits.
If we're talking purely about direct social programs like welfare or housing vouchers or medicaid, then homeless people will definitely receive more benefits than they pay in taxes, and people earning $30k year will almost certainly not.
If instead you include all that other stuff like defense and highway spending and assume everyone receives a roughly equal share of those benefits then the argument becomes pointless; the average person pays less than 1/300 millionth of the overall tax revenue but receives 1/300 millionth of the benefits.
I don't know exactly what effective tax rates are for the poor (but when I was poorer I was much more concerned about how much I was paying in taxes, for whatever that's worth, and this was just two years ago), but it could easily be the case that such services mostly would be profitable were they not run by an organization with an interest in justifying a higher budget, instead of making a profit. My own feeling is that many things the government now does at a loss could be done profitably in a competitive market, and lots of services for the poor fall into this category.
I agree. the poor in our country live like kings not because of social programs but because the market forces prices down to a level where everyone can afford more luxuries.
Making $30k/year, you are taxed at 15% for social security, another 6% for medicare, 13% federal income taxes, and then depending where you live you pay state income taxes and city income taxes as well. Then you pay 10% sales tax. You get no write offs for a mortgage, because you can't afford a house.
The total easily comes to 40% (15% + 6% + 13% + 10% sales tax, not even including state taxes), well exceeding the 25-32% paid at the top. Because the top earners spend a much lower percentage of their income, they are far less effected by sales tax proportionally. Medicare and social security top out at 100k income. So the top earners pay 32%, and that's it (actually less when you include the tax breaks a good accountant can find you).
And that's how you can say that the poor pay more taxes than the rich.
The total easily comes to 40% (15% + 6% + 13% + 10% sales tax, not even including state taxes), well exceeding the 25-32% paid at the top. Because the top earners spend a much lower percentage of their income, they are far less effected by sales tax proportionally. Medicare and social security top out at 100k income. So the top earners pay 32%, and that's it (actually less when you include the tax breaks a good accountant can find you).
And that's how you can say that the poor pay more taxes than the rich.
The numbers you cited sounded kind of high, but I hadn't looked at this in a while so I went to verify them. I filled out the 1040ez and the 540ez2 and checked the FICA and SDI rates from the 2008 tables. I found that, for a single person living in CA and earning $30k before taxes, that the total taxes as a fraction of total income (not marginal rates but total rates) are 9.2% fed income, 2.2% state income, 7.65% combined medicare and socsec, and 1.1% ca sdi. The socsec and medicare are matched by the employer, so maybe you want to double that figure assuming that it comes out of effective wages. That gives a total of 27.8%. Sales tax runs around 8.5% but doesn't apply to rent, food, healthcare - arguably all of the non-discretionary items in a poor person's budget, so add another 2% and and the worst case $30k earner with no deductions is going to pay 30% give or take a bit. At the rich end I guess it's harder to say, but in my one an only year of 7 figure income I paid 29% of total income in taxes. It might be worth noting that, of the 30% paid by the 30k earner, 16.5% goes to services that directly benefit that individual and 13.5% go to the common good. In my 7 figure year less than 1% went to services that benefited me directly and 28% went to the common good.
Social security has been raided to pay for the general fund for years. While nominally it goes "to your account", in practice it's a tax used to pay for things in the general fund just like income taxes are.
I may have read the tax table wrong, because I got a 4% higher tax rate for federal income tax. My bad - looks like it's as you say.
While it should already feel a little weird to pay slightly less (percentage-wise) than someone who makes $30k/year with a seven figure income, you actually paid far more than someone who regularly makes that amount would. You had far less incentive and time to set up tax shelters. A "regularly" rich person would pay an even lower percentage of their income.
I may have read the tax table wrong, because I got a 4% higher tax rate for federal income tax. My bad - looks like it's as you say.
While it should already feel a little weird to pay slightly less (percentage-wise) than someone who makes $30k/year with a seven figure income, you actually paid far more than someone who regularly makes that amount would. You had far less incentive and time to set up tax shelters. A "regularly" rich person would pay an even lower percentage of their income.
you just asserted that income taxes for the poor are 34%...
The percentage of income paid in taxes by the poor is about 34% (ignoring state and city taxes which can easily bump the total above 40% alone).
Sales tax is equivalent to income tax for a poor person (albiet at a discount rate given that their rent, and in some cases food, is not taxed).
Sales tax is not the equivalent for a rich person, who can save the bulk of their income.
Therefore it is fair and not misleading to include sales tax as an additional part of income taxes for the poor. And it's correct to say that poor people pay more than the rich in taxes.
Because of the way the tax system is structured, someone making around 100k a year is taxed most heavily, then less and less in either direction away from that point.
Sales tax is equivalent to income tax for a poor person (albiet at a discount rate given that their rent, and in some cases food, is not taxed).
Sales tax is not the equivalent for a rich person, who can save the bulk of their income.
Therefore it is fair and not misleading to include sales tax as an additional part of income taxes for the poor. And it's correct to say that poor people pay more than the rich in taxes.
Because of the way the tax system is structured, someone making around 100k a year is taxed most heavily, then less and less in either direction away from that point.
no. the poor pay about 10-15% in income tax, then about 7-9% in sales taxes.
Social security is 15% of a poor person's income alone. Medicare is another 6%. At 30k/year, you additionally pay 13% federal income tax. That means that the amount of money from your paycheck going to the federal government totals 34%.
A poor person making $30k/year is paying 34% of their income to the federal government, before any other taxes. It's not all officially named "income tax", but it's paid as a percentage of income which meets the definition of an income tax. (http://www.google.com/search?q=define%3Aincome+tax&ie=ut...)
A poor person making $30k/year is paying 34% of their income to the federal government, before any other taxes. It's not all officially named "income tax", but it's paid as a percentage of income which meets the definition of an income tax. (http://www.google.com/search?q=define%3Aincome+tax&ie=ut...)
Where are your numbers coming from? The employee's social security tax is 6.2%, and medicare is 1.45%.
You can argue that the employee indirectly pays the employer's portion as well, but you specifically said that 15% comes "from your paycheck," which is wrong.
For the record, I think even my numbers are unconscionably high.
You can argue that the employee indirectly pays the employer's portion as well, but you specifically said that 15% comes "from your paycheck," which is wrong.
For the record, I think even my numbers are unconscionably high.
Unless you don't believe that wages are set by the market, the employer's portion definitely comes from your paycheck. If you dropped the social security tax on the employer side, wages would rise (the employer doesn't care whether the money goes to the government or the employee). It's effectively an income tax. The accounting is slightly different, but that's just the name we give it. You can see another example of this in that the self-employed pay the full tax - in the limit of one person, the lack of a distinction becomes obvious.
http://www.ssa.gov/OACT/ProgData/taxRates.html
http://www.ssa.gov/OACT/ProgData/taxRates.html
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Doesn't your 10-15% ignore social security and medicare taxes?
only that people deserve health care, food and shelter
Why? These aren't automatically available in nature. They require work, and the application of the mind, to acquire. Health Care is a service provided by individuals. People have a "right" to health care only inasmuch as those who are capable of delivering said health care are willing to do so (that is, voluntarily).
The same goes with food gathering/storing/preparation and building manufacturing. Someone has to provide these services, and to state that because someone "deserves it" that those services must be rendered (without concern for rendering individual's agreement), well, that's the master-slave relationship.
Why? These aren't automatically available in nature. They require work, and the application of the mind, to acquire. Health Care is a service provided by individuals. People have a "right" to health care only inasmuch as those who are capable of delivering said health care are willing to do so (that is, voluntarily).
The same goes with food gathering/storing/preparation and building manufacturing. Someone has to provide these services, and to state that because someone "deserves it" that those services must be rendered (without concern for rendering individual's agreement), well, that's the master-slave relationship.
Why? These aren't automatically available in nature.
It turns out the answer to your question doesn't require empathy for your fellow man to understand. (Of course, if we were assuming this, the answer to the question would be largely obvious.)
A lot of things aren't automatically available in nature. Police, the military, public schools, and your broadband connection all come to mind.
It turns out that governments and society work based on this concept you may have heard of called a "social contract." Look it up. Saying there's a "master-slave" relationship implied by citizens deserving to have their basic needs met is either really ignorant or very disingenuous. Every citizen of this country is part of the contract, whether you realize it or not.
If you allow a large enough part of the society to become a desperate underclass, you'll find that they'll become dangerous to the rest of the society. Dealing with these problems will cost you more in taxes than simply improving infrastructure at large as a preventative measure.
Or, put more bluntly: the safety of the rich and upper middle class isn't automatically guaranteed in nature either. If you really want to take the nihilist approach you imply, then you'll find that poor people won't just walk idly by your house in despair; they'll just kill you and take your money. Or they'll get so sick that you have no choice but to start paying for their health care lest you catch the plague. In "nature" no one cares how well you code, only how well you can fend for yourself in the wild. Is that really the society you want?
It turns out the answer to your question doesn't require empathy for your fellow man to understand. (Of course, if we were assuming this, the answer to the question would be largely obvious.)
A lot of things aren't automatically available in nature. Police, the military, public schools, and your broadband connection all come to mind.
It turns out that governments and society work based on this concept you may have heard of called a "social contract." Look it up. Saying there's a "master-slave" relationship implied by citizens deserving to have their basic needs met is either really ignorant or very disingenuous. Every citizen of this country is part of the contract, whether you realize it or not.
If you allow a large enough part of the society to become a desperate underclass, you'll find that they'll become dangerous to the rest of the society. Dealing with these problems will cost you more in taxes than simply improving infrastructure at large as a preventative measure.
Or, put more bluntly: the safety of the rich and upper middle class isn't automatically guaranteed in nature either. If you really want to take the nihilist approach you imply, then you'll find that poor people won't just walk idly by your house in despair; they'll just kill you and take your money. Or they'll get so sick that you have no choice but to start paying for their health care lest you catch the plague. In "nature" no one cares how well you code, only how well you can fend for yourself in the wild. Is that really the society you want?
Your point is valid, but I think it's a bit extreme to say that guaranteeing basic care makes everyone else a slave. A slave works for nothing to enrich others; a doctor loses some money caring for indigent patients but doesn't become poor while the patients become rich. There is a natural limit there.
The financial differences are irrelevant. A slave is one who works for another without choice, under threat of force.
The (American) slaves were given basic provisions for life, even some leisure time. Their fundamental problem wasn't the money or their lifestyle, it was the lack of choice. They didn't have the right to say "no, I refuse to serve you."
The (American) slaves were given basic provisions for life, even some leisure time. Their fundamental problem wasn't the money or their lifestyle, it was the lack of choice. They didn't have the right to say "no, I refuse to serve you."
False dichotomy: you're either 100% free to do anything you want, or you're a slave. There's lots of middle ground, namely that making certain choices implies accepting certain constraints. Universal health care, for example, needn't _force_ doctors into providing care for certain people at gunpoint. It may imply, however, that if you choose to enter medicine that you may have to accept certain conditions.
This is already the case, actually. Working at certain emergency rooms obligates one to care for those that come through the door, regardless of whether they can pay. This hardly makes the doctors & nurses who work there slaves.
Similarly, in the US we citizens have a right to council, and if you can't afford an attorney, one is provided by the state. Does that make court appointed attorneys slaves?
This is already the case, actually. Working at certain emergency rooms obligates one to care for those that come through the door, regardless of whether they can pay. This hardly makes the doctors & nurses who work there slaves.
Similarly, in the US we citizens have a right to council, and if you can't afford an attorney, one is provided by the state. Does that make court appointed attorneys slaves?
Doctors can quit.
Right, but this applies to other basic aspects of american society:
- you have a right to trial by a jury of one's peers, but people have better things to do than sit around and listen to you defend yourself or slag on the accused...you don't see people clamoring at the bit for jury duty, do you?
- you have a right to trial by a jury of one's peers, but people have better things to do than sit around and listen to you defend yourself or slag on the accused...you don't see people clamoring at the bit for jury duty, do you?
I should also say I believe everyone should have equal access to education, but anyone who can't see how this benefits society as a whole isn't worth arguing with. The only valid argument for non-equal access is pure selfishness and competitive advantage for the offspring of the wealthy.
you can't create equal access to education without a police state. what are you going to do? make laws that the rich aren't allowed to hire private tutors for their kids?
what you're actually saying is that a certain minimum level of education should be publicly funded. Who decides what metrics we use to judge education? It would seem that we're currently doing a terrible job at this.
what you're actually saying is that a certain minimum level of education should be publicly funded. Who decides what metrics we use to judge education? It would seem that we're currently doing a terrible job at this.
No we're not, most kids get out of high school with the ability to read and write. Before public education, you could not say that about most people. Public education is that minimal level of education and it accomplishes that job quite well. Could it be better, sure, but without it things would be much worse.
what are you talking about? illiteracy rates were lower before public education started. You can make claims about differences in population if you want, but purely on a percent basis you're wrong.
I'd happily change my opinion on the matter if you can cite a source that counts more than just white people.
I didn't understand this part:
"If you want to reduce economic inequality instead of just improving the overall standard of living, it's not enough just to raise up the poor. What if one of your newly minted engineers gets ambitious and goes on to become another Bill Gates? Economic inequality will be as bad as ever."
What about your newly minted teachers and other middle-class citizens? Does everyone who rise from poverty become super rich?
I don't understand economics well, so I can't really counter his overall argument, but this seemed a little offhanded.
"If you want to reduce economic inequality instead of just improving the overall standard of living, it's not enough just to raise up the poor. What if one of your newly minted engineers gets ambitious and goes on to become another Bill Gates? Economic inequality will be as bad as ever."
What about your newly minted teachers and other middle-class citizens? Does everyone who rise from poverty become super rich?
I don't understand economics well, so I can't really counter his overall argument, but this seemed a little offhanded.
What I meant was that you can't assume that making the poor richer will decrease inequality, because many measures that make the poor richer also make the rich richer, so the gap between them remains just as big.
part of the point is that these "super rich" that everyone likes to point fingers at are such statistical outliers that formulating economic policy around them is ridiculous. In essence you wind up with special rules for .01% of the population. How egalitarian is that?
Why so ridiculous? Those .01% often have a vastly disproportionate impact on the rest of the society, so it only makes sense to have special rules for them.
the point is that it's hypocritical from the egalitarian soapbox that the people stand on.
Not really. The .01% generally have vastly greater power and effective rights within society - ensuring that that doesn't go overboard isn't so crazy.
Strongly agree with the second part: The problem here is not wealth, but corruption
Kind of confused by the first part. Was that about progressive tax rates or communism?
I don't know anyone who has ever declined an opportunity to make money just because the tax on the profit was too high. Does anyone have specific examples?
Kind of confused by the first part. Was that about progressive tax rates or communism?
I don't know anyone who has ever declined an opportunity to make money just because the tax on the profit was too high. Does anyone have specific examples?
I used to work in manufacturing, and it was fairly common to hear people decline overtime using the reason that it would be taxed enough more that it wasn't worth it for them. Part of this might have been due to a misunderstanding of how income taxes work (everyone I knew there, including myself, had the impression that higher rates were applied to the entire amount of your income), but that doesn't alter the point in this case.
This part always has particularly far-reaching consequences.
The problem here is not wealth, but corruption. So why not go after corruption?
People like to assail lobbyists and the super-rich corporations that supposedly buy favorable policy, and of course, everyone then blames the rich for it. But it's not the rich that deserve the fundamental blame. It's the politicians that directly create policy, and can enforce that policy at gunpoint. No amount of money gives you legal authority to stick a gun in someone's face.
It's the government, and only the government that make the laws - not the lobbyists and not the rich. Economic power is not the same thing as political power.
Which is why transparency (which PG also speaks about) is so key.