To an extent, of course they were. Look, it makes a difference if the Rockefeller family is taxed at 91% versus 25. Period. Sure, they could still afford big houses and nice things. Why shouldn’t they? The goal here isn’t to stop the google founders from having extravagant lifestyles. The goal is not to completely destroy the Kennedys or Rockefellers, or crush their spirit to innovate, a la chairman Mao. Yes, their families were still relatively (and I stress relatively) very rich in the 50′s too.

But I don’t think you fully appreciate the kind of wealth divide I’m trying to talk about here. Maybe because you haven’t seen it. “Big House” doesn’t quite cut it as a description. The funny thing is, for all the Kim Kardashians on TV, most people don’t really understand how the highest income bracket people can live today. Its a different world, and its kept private.

Anyway, about taxes and the crushing of the will to innovate and take risks- I don’t think its as clear cut as “for every percentage you raise the taxes of the wealthy, a job dies”. I can’t speak for entrepreneurs, but I can speak for myself. Consider this-

Say last year I made 150,000 dollars profit on my quite successful small business. Say my family lives well and saves for retirement adequately on 100,000.

Now I have decisions I have to make on whether I want to expand. Although my core business is doing quite well, the economy is down and people aren’t buying like they used to, so there’s a bit of a risk there. I’m not obligated to put the money back in my business. In fact, if I put my mind to it, there are a number of nice things I could buy with the extra money. I could put a down payment on a cottage, for example.

Now suppose the income tax rate for income over 100,000 increases, and the income I earn over 100k will now be taxed at a considerably higher rate than the first 100k. How does that incentivize me?

Again, I can’t speak for a budding Bill Gates, Steve Jobs or Rockefeller. But me? I would be more likely to put those extra profits back in my business as a result, not less.

Why? Because if I don’t, a big share of that money is just going to be wasted and go back to the government, lost to me in every way (save for very indirect benefits). If I use it to expand, I can at least write it off as a tax deduction and make use of it somehow. Even if the expansion isn’t profitable, at least I’ll have the shot. If I just let it get taxed, it goes away.

Again, that’s just me. But there is some empirical evidence that that kind of scenario might be closer to what we’re seeing right now. The Wall Street Journal (not exactly known for its liberal propaganda) recently did a poll of businesses (job creators) and asked why they don’t expand. The main reason? Consumers aren’t buying right now, and demand is low.

So instead, they sit on their cash. So it appears the problem is not that the “the government is taking money I could be putting into my business”. It’s that right now, businesses aren’t sure anyone will bite if they do. So instead, they hold on to their profits and wait for better times.

Now sure, if I spend it as personal income and put the money in a yacht, that’ll help the economy too. But right now we’re in a situation where a very small percentage of the population receives 70% of the new wealth generated. There are only so many G4 jets and helicopters they can buy. In a recession, a lot of that capital just stays in the bank, where its safe.

Again, this is NOT an argument that taxes boost the economy. Just to illustrate that the “tax hike = deadly blow to the economy” isn’t so clear cut.

Anyway, not trying to get in the last word, just giving my opinion. It’s been interesting talking to you guys, even if it got a little heated at times.

Well I apologize for the hyperbole. But sometimes it seems like tax cuts are all anyone with certain political leanings can talk about (that, and abolishing the fed for the gold standard).

Thanks for the apology.

The year is 2000, and the federal government is finally running a surplus? To hell with using it to pay off the deficit, let’s have tax cuts for the rich!

I rather agree with you here. I think the economic growth advantages of the small, single tax cut were overplayed and it didn’t end up paying for itself through increased economic growth.

That said, I do believe recovery from the 2001 recession would have been slower without them, and the faster growth offset some of the revenue lost through the rate cut.

Also, the assumption that spending wouldn’t have caught up to surplus revenues is not born out by history. Even Clinton’s own 2001 budget proposed increase spending that consumed most of what would have been the surplus.

Perusing through the fortune 500 (irritating standalone page by standalone page), the top 10 companies are all things like Ford, Bank of America, GM, Walmart, energy concerns like Exxon, and (ducks for cover) Fannie Mae- all established well before 1981. When I do see newer companies (IBM and Hewlett Packard make the top 20) they are…based on technology that didn’t even exist until relatively recently.

OK, so, of the companies you cite, all but two (Walmart and HP) were founded and grew significantly *before* the high-tax era. (I discount Fannie Mae from this analysis given it’s exceptional relationship with the federal government.)

None of the companies you cited were founded at the peak of the high-tax era: 1942-1955, in which all but the lowest tax bracket paid a marginal rate greater than 50%. HP, founded very close to the beginning of this peak-tax era, didn’t begin to grow significantly until the 1960s.

So far, you’ve posted nothing that refutes the position that it is more difficult to grow a company during an era of high taxation vs. a low one.

So to answer your question- the reason you’re seeing more companies like Google in the past 30 years is most likely because they provide services that people hadn’t even dreamed of before the modern era.

This ignores a key component of innovation: the losers.

Let’s look at search engines. Was Google the first? No. It was a relative latecomer to the game. Lycos, Altavista, Excite, Yahoo! (a web directory, but competing with search engines), Dogpile, Inktomi, HotBot, Ask Jeeves. All of these came *before* Google.

All but one rose to prominence at one point only to fall to being a bit player after Google came along. But, each of these contributed to Google’s success by trying things that seemed like good ideas but turned out not to be. If two-thirds of those companies hadn’t been there, how many more mistakes would Google have made? Would one of them have been fatal?

Look at the MP3 player. Another case of important losers. In most people’s minds, MP3 players came into existence with the iPod. But the iPod came a full three years after several small companies created the MP3 player market.

When sales proved to be lackluster after an initial surge, makers started getting information as to why: limited storage, clunky interfaces, slow transfer speed, dismal battery life.

A couple of players in the early market tackled the storage space issue by using 2.5″ hard drives. This created players that were just a little to big.

It was only with this information that Apple could make the iPod. Large capacity, fast data transfers, longer battery life, a 1.8″ hard drive, and a sleek, simple interface combined to make *the* winner in the space.

This is why risk-reward tradeoffs and the ability to build companies are so important. Big successes come from many failures. When risks are poorly rewarded and building companies is more difficult, fewer companies attempt to innovate, and so fewer failures occur. Without the information from these failures, successes are more difficult.

Well it’s funny you should bring up the Rockefellers and the Kennedys, because you just named two family dynasties that were established at the turn of the century, before income taxes were high and before the estate tax was established.

Of course I did. That was my *point*. Even with the high income taxes, they were not stopped from continuing to live the elite rich lifestyle based on the the wealth accumulated before the high-tax period.

At a certain point, one gathers enough wealth to become basically self-sustaining without any external income. Larry Ellison is a perfect example of this.

Well look, obviously there needs to be some sense to any proposals. If you jacked it up to something like 90 people making 300K a year would have double the take home; obviously that makes no sense. For starters, there should probably be a new top 0.1% bracket, as the divide between your run of the mill top 1% and your upper top 1% is actually also very wide now.

My point was, and still is: if you believe the elite rich lifestyle is a driver of class-based strife and want to use taxation to diminish the elite rich lifestyle, it is not possible to do via the income tax alone.

What the beginning of the high-tax era created was a bunch of dynasty families like the Kennedys and the Rockerfellers. These families continued to live the elite rich lifestyle despite the massive diminishing in the ability to accumulate wealth through personal income because they were already wealthy.

Ushering in a new high-tax era would do the same. The elite rich group is smaller, but still extant. Entry into it through personal income is several times more difficult, while entry into it through birth is just as easy.

On that basis alone, I would resist a new high-tax era a la the 50s and 60s because I would not want to have the kind of glass ceiling it creates for those not in the elite rich.

But at any rate, would it kill anyone making 1.3 million a year to have their personal income tax hiked up from 33% to, say, 40 (which is more than Obama is proposing to do by the way)? Well, no. Not really. The top rate was at 40% through the 90’s, and as you’ve said yourself, the economy did just fine then.

A 7% top bracket increase wouldn’t kill anyone, and would still keep the country in a generally low-tax zone. My personal rule of thumb to differentiate between low-tax and high-tax for purposes of economic impact is 50%. Nothing hard and fast about that, just a rule of thumb (if anyone can suggest another one, I’m happy to hear it).

The increase would cause a temporary decrease in growth and, very importantly, increase unemployment as small businesses affected by the higher tax rate have less money available to hire or retain employees. But once the impact made its way through the economy, it wouldn’t matter terribly much.

Considering this is an recession based on unemployment, anything that would cause it to go up is unwise at this point.

>In the low-tax era (1981-2010), is the emergence of these kinds of companies nearly as exceptional? I don’t think so. That’s my point.

Emergence of tech, PC and internet companies such as Google, etc? I can think of one big reason why those mostly emerged after the early 80′s. And as a hint, it doesn’t have anything to do with tax cuts.

Perusing through the fortune 500 (irritating standalone page by standalone page), the top 10 companies are all things like Ford, Bank of America, GM, Walmart, energy concerns like Exxon, and (ducks for cover) Fannie Mae- all established well before 1981. When I do see newer companies (IBM and Hewlett Packard make the top 20) they are…based on technology that didn’t even exist until relatively recently.

So to answer your question- the reason you’re seeing more companies like Google in the past 30 years is most likely because they provide services that people hadn’t even dreamed of before the modern era.

> So, there was no class of flamboyantly rich people during the period?  Really?  The old-money families gave up their yachts and mansions and their servants?  What exactly were the Kennedys and Rockerfellers up to in this period?

Well it’s funny you should bring up the Rockefellers and the Kennedys, because you just named two family dynasties that were established at the turn of the century, before income taxes were high and before the estate tax was established. In Kennedy Sr’s case, the much of the fortune was likely made through dealings that would be considered illegal later. What they were up to during that period was a phenomenally higher tax bracket. I doubt Rockefeller Sr. would have objected much, as he was a noted philantrophist who gave away 10% of his salary to charity even as a young man before he hit it big, but by the 1950′s, the heirs of those families were paying 91% income tax and likely tax on inheritances from the old men. So no, while they were still very wealthy, they went through extreme forms of taxation during that time period, even as the common man gained fantastic ground.

>Would the bottom end of the elite rich, who can’t sustain the lifestyle without a high-income drop out of the elite rich? Yes.

Well look, obviously there needs to be some sense to any proposals. If you jacked it up to something like 90 people making 300K a year would have double the take home; obviously that makes no sense. For starters, there should probably be a new top 0.1% bracket, as the divide between your run of the mill top 1% and your upper top 1% is actually also very wide now.

But at any rate, would it kill anyone making 1.3 million a year to have their personal income tax hiked up from 33% to, say, 40 (which is more than Obama is proposing to do by the way)? Well, no. Not really. The top rate was at 40% through the 90′s, and as you’ve said yourself, the economy did just fine then.

Well of course they’re exceptions. They’re 2 of the most profitable companies in the world. They’re the exceptions at everything. And yet these are the types of companies we always bring up when we try to discuss ingenuity and give exemplars of good capitalism.

In the low-tax era (1981-2010), is the emergence of these kinds of companies nearly as exceptional? I don’t think so. That’s my point.

But what I don’t agree with is that the notion that an economy with higher taxes will always, without exception, as a fundamental law of nature, lead to lower growth than an economy with higher ones, and vice versa. As if taxes are the only thing businesses care about, and the sole vice that stops everyone from succeeding everywhere, or even trying.

Good, neither do I. Taxes are *a* factor that makes it harder for business to grow, for the reasons both Brad and I have pointed out. They are not they only one, and in the current recession taxes have *nothing* to do with the lack of growth. It’s an unemployment recession.

See, this strikes me as pretty thin gruel if its supposed to be the black and white evidence that higher taxes are going to lead to sure and certain economic destruction.

That was the beginning of a scenario to show the impact of higher-versus-lower taxes on the ability of a business to grow, in response to your assertion that higher taxes encourages business owners to put money back into their businesses rather than keeping it for themselves.

If you read through the scenario as a scenario, it shows that the constraint of lower after-tax profits due to high tax rates actually *do* make it more difficult for a business owner to grow the business.

I mean look- if Obama proposed doubling the income tax for the top 1%, you would screaming blue murder. You would be saying it would be the end of the united states as we know it. You would be saying that the whole country would soon sink into the ocean, smoldering in fire from coast to coast as it went.

I still don’t understand why you think attributing positions to me that I don’t hold is a technique I will find either honest or convincing. It should be perfectly clear I find it is offensive and demolishes your credibility.

My actual position on this has been stated so many times in this thread I won’t repeat it here.

Except- your own graph shows that GDP went up just fine at those rates. Talk about how rates were being cut during that time all you want, it won’t change the bottom line that the rates at their lowest for the top were still double what they are now.

You don’t believe that there’s much of an difference between tax increases, I do. Can we leave this as an agree to disagree?

So does cutting taxes give small businesses more to spend, even putting aside the obvious fact that all their expenditures are tax-deductible anyway? Well sure. But does this therefore mean that cutting taxes again and again and again should be the #1 priority for the future of an economy and country, bar nothing?

Yes, cutting taxes gives small businesses more to spend, hiking them gives small businesses less to spend. Absolutely.

No, since this is *not* a tax-related recession, the best thing to do would be leave taxes alone. This is a recession being driven by unemployment. What we should be doing right now is addressing the root causes of unemployment.

Well, no. I just don’t see it. Literally I don’t, looking at your own graphs, and your own opinion about 1991-2000. It’s a matter of personal priorities.

Not surprising, since you’re looking for a straw man you created out of my arguments that never existed anywhere outside the confines of your own skull.

Going back to an earlier comment, I also want to address this:

By the 50’s, that had changed. The rich generally didn’t have huge houses with servants by then. While they dressed well, they didn’t dress so much better that they were clearly above the common man (think Marie Antoinette in full regalia walking past the riff-raff). A common guy could get all the same basic things- a car, a home with indoor plumbing, electricity, etc. The difference between the rich and the poor was fundamentally like the difference between a chevrolet and a cadillac- sure, the cadillac was nicer, but you could get to the same place in either vehicle. There would be a nice neighborhood with bigger houses, but fundamentally, you all co-habited the same planet.

So, there was no class of flamboyantly rich people during the period? Really? The old-money families gave up their yachts and mansions and their servants? What exactly were the Kennedys and Rockerfellers up to in this period?

Now, could it be possible that the reason the top 5% in the fifties held a much smaller share of total income was because the top 5% of income earners were not the elite rich of the period? What if, instead, the elite rich were maintaining their lifestyle by using assets accumulated before WWII?

If you don’t think that’s possible, let’s do a little thought experiment. Next year, top tax rates jump back up to 90%. How would that effect the elite rich?

Would Sergey and Larry suddenly not have the GoogleJet? Would Larry Ellison lose the megayacht? Would the Kennedys sell Kennebunkport? Probably not.

Would the bottom end of the elite rich, who can’t sustain the lifestyle without a high-income drop out of the elite rich? Yes.

But the social stratification between the now smaller population of elite rich and everyone else would still be present while entry into the elite rich would be more difficult by any means other than birth. The result would be more dynasty families.

The only way to really bring the level of the elite rich down would be to confiscate some portion of the existing wealth as well as high income taxes to prevent them from reaccumulating it. (Note I absolutely, positively do NOT endorse such a course of action. I’m merely pointing out that that’s how the result could be achieved.)

Well of course they’re exceptions. They’re 2 of the most profitable companies in the world. They’re the exceptions at everything. And yet these are the types of companies we always bring up when we try to discuss ingenuity and give exemplars of good capitalism.

>If you’re going to argue the position that high taxes actually *enable* companies to grow, I’d like the answer to that question.

I’m not. Even liberal economists like Krugman will concede that cutting taxes can spur the economy, at least in some cases. But what I don’t agree with is that the notion that an economy with higher taxes will always, without exception, as a fundamental law of nature, lead to lower growth than an economy with higher ones, and vice versa. As if taxes are the only thing businesses care about, and the sole vice that stops everyone from succeeding everywhere, or even trying.

>”Wow. Are you really that naive about why business owners make investments? Assume all else is equal between these two economies except tax rates. Steve is a sole proprietor who runs a flower shop. In our low-tax land, this puts him at a 25% marginal rate. In our high-tax land, this puts him in at a 70% marginal rate. He has a family, and needs to make $40,000 in income after taxes a year to support them. Everything above that can go back into the business. So, already, in the high-tax scenario, Steve’s business needs to make more money above and beyond business expenses to make his personal ends meet.”

See, this strikes me as pretty thin gruel if its supposed to be the black and white evidence that higher taxes are going to lead to sure and certain economic destruction.

Yes, if you draw a line in the sand that you need a net 40k to go back to your family, you’re going to have less to put back in your business. Even I can figure out that much. But is that it? That’s the whole argument? The whole rationale for why taxes are choking the economy to death and returning us to the dark ages?

I mean look- if Obama proposed doubling the income tax for the top 1%, you would screaming blue murder. You would be saying it would be the end of the united states as we know it. You would be saying that the whole country would soon sink into the ocean, smoldering in fire from coast to coast as it went.

Except- your own graph shows that GDP went up just fine at those rates. Talk about how rates were being cut during that time all you want, it won’t change the bottom line that the rates at their lowest for the top were still double what they are now.

Except- Both Bush I and Clinton raised taxes, and this was followed by what is in your own opinion the second biggest economic expansion in US history. Huh?

So does cutting taxes give small businesses more to spend, even putting aside the obvious fact that all their expenditures are tax-deductible anyway? Well sure. But does this therefore mean that cutting taxes again and again and again should be the #1 priority for the future of an economy and country, bar nothing?

Well, no. I just don’t see it. Literally I don’t, looking at your own graphs, and your own opinion about 1991-2000. It’s a matter of personal priorities.

Where were all those startups in the high-tax era that went large and made life better through innovation? Apple and Microsoft are the exception, not the rule.

If you’re going to argue the position that high taxes actually *enable* companies to grow, I’d like the answer to that question.

On the contrary- in my experience, it seems like it actually helps expansion, because it encourages entrepreneurs to write off as many things as possible. Say your business makes a profit of 200,000 dollars. Look, if you hire another person for 50k, tax won’t prevent you from doing that. On the contrary, you just wrote off 50k. You only pay tax on what you keep after you’ve made all your expenditures.

Wow. Are you really that naive about why business owners make investments?

Assume all else is equal between these two economies except tax rates.

Steve is a sole proprietor who runs a flower shop. In our low-tax land, this puts him at a 25% marginal rate. In our high-tax land, this puts him in at a 70% marginal rate. He has a family, and needs to make $40,000 in income after taxes a year to support them. Everything above that can go back into the business.

So, already, in the high-tax scenario, Steve’s business needs to make more money above and beyond business expenses to make his personal ends meet. Writing off these personal expenses as business expenses, by the way, is a form of tax evasion.

In the high-tax environment, Steve has $1,000 in profit to reinvest in the business, while in the low-tax environment he has $2,000 in profit.

Steve wants to hire another part-time employee at $25,000 a year to increase the hours of operation from 40 per week to 60 per week. He expects to make $30,000 pre-tax from the spend. He needs $2,000 to make the initial hire before he can expect to see returns off it.

In the high-tax environment, he’s $1,000 short, so he needs to borrow.

He hires the employee 3/1. Over the next nine months, the employee costs $18,750 and the increased hours produce $23,750 in income–more than Steve estimated. Cool.

In the low-tax environment, this leaves Steve with a $5,000 profit to pay tax on. In the high-tax environment, he’s got to go back and pay the bank $1,000 plus interest (let’s say, $25) before he turns a profit of $3,975.

So, before he even takes a tax hit on the profit from the investment, he’s already at a disadvantage in the high-tax environment.

In the low-tax environment, Steve is left with $3,250 after taxes and supporting his family. In the high-tax environment, he’s left with only $1,192.

Now, assume Steve wants to invest in a point of sale system to allow him to take credit and debit cards. It costs $10,000 and he expects to make $12,000 in revenue from it. Steve needs to finance the balance. In the low-tax environment, he needs to finance $6,750, while in the high-tax environment he needs to finance $8,808.

Steve buys the system and has it up and running on 2/1. It meets his revenue estimates perfectly, producing $11,000 in income over 11 months. He fully repays the amount he finances, $7,000 after interest in the low-tax environment and $9,100 in the high-tax environment.

So, before taxes in that year, he has $4,000 in the low-tax environment. In the high-tax environment, he has $1,900.

Can you honestly still argue that businesses are more able to expand under a high tax regime than a low-tax one?

>”Sorry, but I’m a living counterexample to this. My calculation of my economic well being is very much attuned to absolute income. If I have enough income to satisfy my needs and enable me to do what I want in life, I’m completely satisfied. The fact that someone has way more stuff than me doesn’t even begin to bug me. I’m very much a typical geek when it comes to how I regard social status.”

Well, me too. But I don’t think that describes most people.

>”When you’re looking up from beneath, you judge who’s rich and who’s not on the basis of the stuff they have. If you are prone to bitter feelings about people you perceive to be wealthier, you’re going to judge it based on their consumption, not their income.”

I would argue that that turns into a matter of semantics. Yes, a rich person who wears the same clothes as you and behaves the same way but just saves most of his income will inspire less jealousy than someone who flaunts it. But inevitably, if you have a social class that has 5-30 times the income as everyone else as opposed to, say, double or triple, you’re going to see a divide develop.

Now, we can talk about things in terms of psychology, and how people should get over comparing themselves to others, etc. But its important to look at the quantitative changes in income distribution over the past few decades. Something really is changing.

>”I’d argue that the bitterness you’re attributing to income inequality is really consumption inequality. When a 73rd %ile income can enable such conspicuous consumption, it’s time to rethink whether the gap between the top 5% and everyone else is the cause of the negative feelings of those prone to them. The decreasing cost of luxury goods plus the general upward trend in inflation-adjusted incomes up until 1999 plus easily-available consumer credit have enabled people who in 1980 would’ve been solidly middle class to buy rich people stuff.

Actually, no. If you want to talk in terms of flat screen TV’s and iPods, then fine. But as far as the full deal goes, it has never been harder for the average, median-income person to afford a truly rich person’s lifestyle, at least not since the 1920′s. The difference between the average and “rich” is vast now, more so than it has been in several generations.

In 1979, 3 years after Jobs and Wozniak founded apple, the median household income in 2007 dollars was 44,000 for the middle fifth. The top 1% average household income was $346,000, or about 8 times as much. (And this seems like a pretty fair definition of “rich” to me. I don’t know about you, but making 8 times as much as anyone else strikes me as a decent financial incentive to work hard)

But In 2007, median household income had rose to 55,000. But for the top 1%, it was now $1,319,000…about 32 times as much.

That is a massive, massive gap. It doesn’t matter how many credit cards you own- nobody can simulate the difference on an ordinary salary, no matter how much of a bitter show-off they are.

This takes us back to the turn of the century. Let’s look at buying power historically-

If you went back to Lincoln’s time, you would likely find life pretty horrible no matter how much money you had to throw around. If you went to 1910-1920, things would be different. The technology for the staples of modern life- indoor toilets, electricity, telephones, automobiles- already existed. The problem was the common man couldn’t afford most of those things. And so the rich literally lived in a different world to an extent. Their homes were radically, fundamentally better.

By the 50′s, that had changed. The rich generally didn’t have huge houses with servants by then. While they dressed well, they didn’t dress so much better that they were clearly above the common man (think Marie Antoinette in full regalia walking past the riff-raff). A common guy could get all the same basic things- a car, a home with indoor plumbing, electricity, etc. The difference between the rich and the poor was fundamentally like the difference between a chevrolet and a cadillac- sure, the cadillac was nicer, but you could get to the same place in either vehicle. There would be a nice neighborhood with bigger houses, but fundamentally, you all co-habited the same planet.

That’s starting to change again. Now the rich have G4 jets, multiple homes, helicopters to fly them from wall street to the Hamptons…its turning into a separate world again.

Like your graph shows, its not because US GDP is suffering- with the exception of this dip and a few recession-long lags, its rose more or less constantly. But less and less of the gains that have come since 1979 have fell in the hands of the average person. The bulk of it is going to a new social class.

>”That said, without Jobs, would Woz have had the opportunity to leave HP for a startup at all? At 1950 tax rates, which were significantly higher than 1970s tax rates, do you think Jobs would have even bothered with the risk of a startup? He’s a businessman, always has been

Steve Jobs? I think he was born an entrepreneur and would remain one rain or shine, day or night, 50′s or 70′s, 20′s or 90′s. I don’t think the tax rate or much else would make a lick of difference to him, really. I think in the 50′s, he would have been out there selling personal mainframes, or devising more convenient cars. At the turn of the last century, he would have hunted down Nicola Tesla and come up with something we’d still be using today.

I know a couple entrepreneurs in Canada and Sweden with annual income in excess of $300,000 US a year (before tax). The striking thing about them is how little the punitive tax rates seem to change who they are, fundamentally.

Yeah, they’ll bitch about the taxes if you start them on it. But they’re businessmen and they would never be anything else. They give orders, they don’t take them. They make their own path. They want to decide their own destiny. Would either of them say, “hmmm, top rate is a little high…ah screw it, I’ll just live a life of mediocrity”?

Nope, not them. Like I said, I just want a good standard of living. But they’re different, and always would be. Money is part of it, but beyond that, there’s something else that makes them behave the way they do.

Even a cut-throat guy like Bill Gates. For somebody who hypothetically wouldn’t have built an empire under a higher tax rate, he sure does spend a lot of time giving his money away, and urging other billionaires to do likewise.

Brad-

>”The people who are interested in “growth” or “empire-building” businesses are a different breed. I don’t think high tax rates dissuade them from *trying* to grow their businesses — I’m not sure putting brick walls in front of them would dissuade them from *trying* to grow their businesses. However, as I state above, high taxes suck the capital that they need to grow their businesses and employ workers out of their pockets, and hurts their capability to grow more than their desire to grow.”

Here’s what I don’t get- growing your business is tax DEDUCTIBLE, right? So why this fixation on the idea that taxes on post-expenditure PROFITS hurts expansion?

On the contrary- in my experience, it seems like it actually helps expansion, because it encourages entrepreneurs to write off as many things as possible. Say your business makes a profit of 200,000 dollars. Look, if you hire another person for 50k, tax won’t prevent you from doing that. On the contrary, you just wrote off 50k. You only pay tax on what you keep after you’ve made all your expenditures.

My above-mentioned entrepreneur friend writes off absolutely everything. His BMW is in his company’s name. He’ll take me out for dinner and when it’s time to pay say “nah, I got it- you’re giving me good advice so this counts as a business expense”. Its like that all day.

>”But on many measures, absolute standard of living is lower in Europe than in is in America. If you want to compare the same metric I used above, hours worked [by, say, someone at the median income] to obtain a certain lifestyle, I’d say they have to work more hours in Europe to have the same standard of living than someone would in America.”

I’m sorry, but this isn’t necessarily accurate, not if you look at standard of living to include things like leisure time, health care and provisions for your family. First, while US per capita income is higher, Germany is competitive, within the top 15 worldwide- 47,000 vs 36,000.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

But let’s take a look at the quality of life received for that 11,000 difference- rather than working harder for that, Germany is working less. Despite Real GDP rising consistently over the past decades with the exception of the crash ( http://research.stlouisfed.org/fred2/series/DEURGDPR?cid=32273 )

and despite rising compensation ( http://research.stlouisfed.org/fred2/series/DEUCOMPQDSNAQ?cid=32273)

Germans are actually working less, not more- ( http://research.stlouisfed.org/fred2/series/DEUAHWEP?rid=204 )

This was a quality of life decision. Germany mandates 4 weeks paid vacation per employee, plus 9-13 bank holidays.

-But you get more for your money still. As you know, health insurance can cost families something like 12,000 a year. In Germany, you have that covered.

-There’s also much cheaper higher education, so you won’t go broke over student loans. This leads more people to seek higher education and improve their skills.

-You get 14 weeks 100% paid maternity leave, plus another 12-14 months at 65% pay

- 12-14 months PATERNITY leave, at 65% pay

- Although they lag behind the rest of Europe, decent, affordable public day care

And beyond all that, its just a nice place to be, generally. The shopping is excellent, and prices are pretty cheap.

It’s a lifestyle choice, to an extent. But if you make 11 grand less but have health care covered, have close to 5 weeks vacation, have a cumulative 2 1/2 years leave between you and your wife per child…well, I’m not saying its a trade-off everybody would make. But it’s not so black and white which is better, either.

Personally, I would much rather raise a family in Germany than in the US. Don’t have to worry about fighting over what gets covered by insurance if the kid is sick. Don’t have to save $100,000 plus in their college funds, because they can get a good education for much cheaper. Know that I can have long summer vacations with them and enjoy their childhood, rather than just working all the time to pay for it.

Great points on the effects of high taxes on small business.

What I was trying to figure out what was why the high-tax era saw so many fewer startups that grew to have significant impacts on the economy than the low-tax era. That’s a perfectly sensible explanation.

My dad is an architect, and was self-employed my entire life. At no point that I can remember did he have more than two employees, and the bulk of my life he’s had only one draftsman working for him. His business is a “lifestyle” business, not a growth business. He wanted to make a nice living doing the kind of jobs he wanted to do, and it was more about the freedom to do what he wanted than the reward of building a business empire.

The people who are interested in “growth” or “empire-building” businesses are a different breed. I don’t think high tax rates dissuade them from *trying* to grow their businesses — I’m not sure putting brick walls in front of them would dissuade them from *trying* to grow their businesses. However, as I state above, high taxes suck the capital that they need to grow their businesses and employ workers out of their pockets, and hurts their capability to grow more than their desire to grow.

When it comes to working for someone else, you raise a good point. Often, when working for someone else, the after-tax number is usually all we think about because of tax withholding. If you don’t see the $8K, it’s harder to miss it. Looking at it that way, I would probably take the same deal (albeit grumpily).

Now, eliminate tax withholding. You accept more responsibility, take home $10k more and then have to cut uncle same a check for $8k. Would that be as cut and dry a choice?

My thoughts on withholding were published as early as 6 years ago. Eliminating withholding would lead to a revolt that would make the current debate over the debt ceiling look like tiddlywinks.

But I’m not sure I believe the premise that even someone who is self-employed will regularly choose to work less hard due to higher tax rates. Most self-employed people are pretty driven, and those who are driven towards growth will usually try to jump any hurdle in front of them. What I do believe is that the high tax rates suck money out of productive GDP-growth-increasing uses and funnels it to non-growth uses. It’s not that high tax rates make the employer *not want* to hire and invest and grow. It’s that high tax rates make it IMPOSSIBLE to do so because the money is no longer there.

I love that Louis CK bit. He’s one of my favorite comedians.

Well where’s the contradiction between those two possibilities? Why can’t it be unfair that the majority of wealth generated since the early 80’s or so has gone disproportionately to the top 1-5%, and that it messes with everyone else psychologically, too?

“Fair” is a tricky concept, and impossible to debate. But I would argue that there are actually objective reasons why you would want to live in a more equal society. About a year ago I did a correlation between the gini index (income equality measure) and violent crime rates, and found a pretty solid correlation. This paper here seems to get similar results-

“Fair” is a very tricky concept. Fair depends on ideological first principles that are not consistent across people. You’ve stumbled into a libertarian blog where liberty is valued more highly than equality. We’re simply speaking different languages here.

Relative standard of living might not be as wide of a gap in western Europe as it is in America. But on many measures, absolute standard of living is lower in Europe than in is in America. If you want to compare the same metric I used above, hours worked [by, say, someone at the median income] to obtain a certain lifestyle, I’d say they have to work more hours in Europe to have the same standard of living than someone would in America.

The reason for this is that America has [and has had for a long time] a higher average annual GDP growth rate than most European nations. This might not make a difference year-to-year, but over a few decades, 1% difference in GDP growth rate can make a HUGE difference.

You talk about “fair”, I talk about a tradeoff. We can make a tradeoff between robust GDP growth and a robust welfare state. We can’t have both. I prefer GDP growth, because it will mean a better life for me in the future (I’m 32) and for my young kids when they grow up. America is the richest country in the world; we can certainly “afford” a robust welfare state. That doesn’t exactly make it a good long-term idea.

I’m not sure that most average people adjust their work based on tax rates. I know that for myself, I’m constantly pushing to do more and grow more in my career, and if I can make $10K more but at the end of the day I’ll only take home $2K more, if the move is good for my career I’ll gladly take *MORE* responsibility even though the money isn’t huge.

When it comes to working for someone else, you raise a good point. Often, when working for someone else, the after-tax number is usually all we think about because of tax withholding. If you don’t see the $8K, it’s harder to miss it. Looking at it that way, I would probably take the same deal (albeit grumpily).

Now, eliminate tax withholding. You accept more responsibility, take home $10k more and then have to cut uncle same a check for $8k. Would that be as cut and dry a choice?

jjrs,

First, you probably picked the wrong two guys to make an example out of there. Steve Jobs may well be a different story, But do you really think Wozniak was primarily driven by money? He’s a good example of somebody who gets fixated doing what he loves. He wanted the freedom to make his own computer.

Actually, yeah, you’ve got a point about Woz. I went back and reread the section of his autobiography and I was crossed up on his motivations. That said, without Jobs, would Woz have had the opportunity to leave HP for a startup at all? At 1950 tax rates, which were significantly higher than 1970s tax rates, do you think Jobs would have even bothered with the risk of a startup? He’s a businessman, always has been.

No, I would not got to a country with a staggeringly rich top 5% and large segments of poor people. I would go to where I had the best chance at earning a good income.

From a quantitative standpoint, there is no evidence that the higher incomes of the top 5% of earners in any way impacts income levels of the lower quintiles. In the data series you presented, all 5 data series move generally together, indicating that increases and decreases are being caused by something that affects all income levels similarly. Given the significant decrease in the last two years, my guess at the driving factor is demand for labor.

But given the subsequent discussion about relative vs. absolute income, I think you and I would define “good” very differently.

Relative vs. Absolute income- It’s an interesting question. I definitely think people judge their worth in relative terms rather than absolute. I think there’s an instinct in people to compete for status. In a society with large income inequality, you can end up in a situation where the majority of people feel bitter and as if they fall short of some kind of ideal all the time.

Sorry, but I’m a living counterexample to this. My calculation of my economic well being is very much attuned to absolute income. If I have enough income to satisfy my needs and enable me to do what I want in life, I’m completely satisfied. The fact that someone has way more stuff than me doesn’t even begin to bug me.

I’m very much a typical geek when it comes to how I regard social status. It plays very little role in my decision making, economic and otherwise.

When I say something is cool, I use the word to mean I find it really interesting. Doesn’t matter a whit to me whether anyone else in the world finds interesting. If I do, it’s cool to me.

I buy clothes because they look like I want them to look, not because they signal a certain social status. Hell, I’ve had more than one friend accuse me of being allergic to anything fashionable. Not far from the truth, either. I tend to prefer a clean, crisp appearance over one with all the peculiar excesses of modern fashion.

Now, being a geek, I like technology. Most people assume I’ve got the latest and greatest at home. Not even close. I have stereo system from the Ford administration, a TV that’s old enough to be in college, a laser printer that predates American Idol, and a pair of computers that are five years old. The stereo system has an incomparable sound for the kind of music I listen to, so the it definitely stays. The TV, despite being low-resolution, displays very vivid colors and very deep blacks. To my eye, that makes for a more satisfying picture than more pixels. The laser printer is built like a tank, it’s easy to clear paper jams out because the paper path is very simple, and it delivers impeccable black and white prints. And the computers, well, they’re tuned to run just the way I like them to. Replacing them would just be a headache.

In the same five years I’ve had the computers, though, I’ve gone through six cell phones. I kept upgrading because each phone didn’t give me an experience I was happy with. The Nokia I started with? Well, that one broke. The one I replaced that with? Didn’t do e-mail. The HTC Wizard I replaced it with? Did e-mail but was slow, clunky, and had terrible battery life. The Blackberry I replaced that with? Had great battery life and was quick and responsive, but didn’t have a camera and the screen was so-so. The Blackberry I replaced that with? Excellent screen and had a camera, but the browser was crap. The Droid X I replaced that with? Great. The hardware is perfect for me, and after modifying Android to suit my needs it does everything I want very well. Until I find a phone that does everything I want to do with a phone significantly better, I’m going to stick with this even if I have people calling it “that old thing” because I’m still carrying it around in 2015.

One might read that and argue, well, he’s got it pretty good if he can afford six cell phones over 5 years…

Absolutely do. I’ve worked myself into a good job (from the bottom up) that pays well enough for me to have a high level of economic satisfaction and I’m thankful I had the opportunity to do that. There’s still a few things I want to do for myself, but life ain’t worth living without something to strive for.

Well, what if he didn’t have it so good? Maybe he’d be more prone to being unsatisfied because other people had more than he.

Nope. When I was in college, I supported myself primarily by playing weddings and funerals for a semester. I had an unusual class schedule that made it difficult to get a regular job. Had to do 2-3 a week every week to pay the bills. It was a constant struggle, always jockeying to line up the next gig. Couldn’t afford a car, so I got around on the bus and by bumming rides off my friends. Barely, barely made ends meet with a bare bones lifestyle.

But, even though I was playing for wedding ceremonies that cost more than I’d earned in the last two years, I never once got bothered by the fact that they had more than I did. Not once.

Of course, I wasn’t happy with my situation by any means, but it was because I knew the things I wanted to do and have that I couldn’t yet afford to, not because they had more than I did.

Now, because I’m a living counterexample doesn’t mean that examples don’t exist and that they don’t cause problems.

So, if you’re going to address those problems, you need to make sure you’re defining them well. Income and apparent wealth are not necessarily linked. Let me describe two people I know. One wears expensive, fashionable clothing every day, walks around with the latest gadgets, drives a late model luxury car, and lives in a nice condo. The other walks around in blue jeans and flannel shirts, drives an older model Ford F150, has a cell phone that only makes calls, and lives in a 1970s tract house.

Now, you’ve probably already figured out where I’m going with this. The one with the expensive stuff is making $75k, which just barely puts him in the top 30% of incomes. The one driving the F150? Makes over a half a million a year, which puts him in the top 1% of incomes.

Of these people, which one would be more likely to trigger negative feelings and behavior from those oriented to social status? I know enough poor people to bet that they’re gonna be bitching about the BMW, not the half-million-dollar income that gets prudently saved and invested to allow a business to continue running and creating jobs.

When you’re looking up from beneath, you judge who’s rich and who’s not on the basis of the stuff they have. If you are prone to bitter feelings about people you perceive to be wealthier, you’re going to judge it based on their consumption, not their income.

I’d argue that the bitterness you’re attributing to income inequality is really consumption inequality. When a 73rd %ile income can enable such conspicuous consumption, it’s time to rethink whether the gap between the top 5% and everyone else is the cause of the negative feelings of those prone to them. The decreasing cost of luxury goods plus the general upward trend in inflation-adjusted incomes up until 1999 plus easily-available consumer credit have enabled people who in 1980 would’ve been solidly middle class to buy rich people stuff.

http://www.youtube.com/watch?v=8r1CZTLk-Gk

Relative vs. Absolute income- It’s an interesting question. I definitely think people judge their worth in relative terms rather than absolute. I think there’s an instinct in people to compete for status. In a society with large income inequality, you can end up in a situation where the majority of people feel bitter and as if they fall short of some kind of ideal all the time.

>”Does that mean that income inequality in this country is some horrendously unfair situation? Or does it mean that the greater visibility of what happens at the top makes people who were happy with a 1960’s lifestyle suddenly unhappy with a significantly better 2011 lifestyle? I think it’s the latter.

Well where’s the contradiction between those two possibilities? Why can’t it be unfair that the majority of wealth generated since the early 80′s or so has gone disproportionately to the top 1-5%, and that it messes with everyone else psychologically, too?

“Fair” is a tricky concept, and impossible to debate. But I would argue that there are actually objective reasons why you would want to live in a more equal society. About a year ago I did a correlation between the gini index (income equality measure) and violent crime rates, and found a pretty solid correlation. This paper here seems to get similar results-

linkinghub.elsevier.com/retrieve/pii/S0165176507000201

And beyond the stats, I personally just find that more equal countries are more pleasant places to live. It’s true Japan has its problems, but income is still more equal, and as a result you have more of a sense that everyone is in it together. There’s a general sense of trust with your neighbors and even strangers, because in a sense, you’re all kind of in the same boat. You don’t have to worry about getting mugged, partly because while there are poorer people, in a general sense you’re all at relatively equal levels.

I like parts of Europe for the same reason. Even I think Sweden is overtaxed, but a place like say, Germany is a good compromise. Good shopping, abundance on par with the US, and cheap if you know where to look. Solid economy under the circumstances. Cheap education and a therefore highly educated work force. Good paid vacation benefits, but not over the top. And nobody can accuse them of being slackers.

But on the other hand, the States- there are some good places, but there are other neighborhoods that are just scary to go through. You can be on a nice street in Brooklyn, turn a corner and wind up in the wrong place, and suddenly you feel a lot less safe. There’s another extreme, I know. But overall, I would rather live in places where the income brackets are close enough that there’s no reason for someone in a lower one to mug me. Aside from the moral and fairness issues, it just makes for a more pleasant world to live in.

I’m not sure that most average people adjust their work based on tax rates. I know that for myself, I’m constantly pushing to do more and grow more in my career, and if I can make $10K more but at the end of the day I’ll only take home $2K more, if the move is good for my career I’ll gladly take *MORE* responsibility even though the money isn’t huge.

As a general rule, human nature always wants more. I think Woz probably would have tried to push Apple regardless of the return, as I think he probably believed in what he was doing.

jjrs,

If you re-run that scenario to include a top 1% earner in the 1960’s, and compare it to a top 1% earner today…how does it play out? How easily can they play out the 60’s version of luxury, and how much is left over afterwards for new types of excess?

…

So when you look at it that way, it makes more sense why people are so bitter about what they don’t have. There’s a better life to be had, and you’re reminded of it every time you turn on the TV and see people living large.

It’s an interesting question. There have been numerous studies (such as this one) suggesting that people gauge their self-worth NOT on their absolute standard of living, but on their relative standard of living.

So we can argue all day about whether high incomes are earned, and all day about the difference that Quincy points out between high incomes and high wealth. But I don’t think that has anything to do with your question.

Yes, people are less happy with their lives, and more jealous, when they watch the Kardashians and the Real Housewives, and all these other non-representative shows on TV. The *downside* to globalization is that even if you’re in the top 5% of income in the US, you have a lot more visibility into what the top 1% have [and by definition what you don't have].

Does that mean that income inequality in this country is some horrendously unfair situation? Or does it mean that the greater visibility of what happens at the top makes people who were happy with a 1960′s lifestyle suddenly unhappy with a significantly better 2011 lifestyle? I think it’s the latter.