As Ed says, the argument is that "we can't have progressives taxes because somebody's rich uncle might not have the wherewithal to subsidize somebody's business start-up."
I'm not going to dignify this with a response. I'll just note that Schramm is president and CEO of the Kauffman Foundation and I believe he was in the room when I first heard the "rich uncle" argument, so I may have been present at the creation of this particular talking point. Meanwhile, the crippling long-term budget deficits that will result from refusing to raise new revenues are not going to be doing any wonders for entrepreneurs. And perhaps more directly to the point, the lack of a guarantee of affordable health coverage is a major impediment to entrepreneurship in the United States. The status quo systematically discourages talented, skilled people form leaving jobs at existing firms in order to strike out on their own, and this is one of the things the administration is trying to address in its budget proposals.
It sounds deep and smart when you call it "capital formation", and stupid and crazy when you call it "the rich uncle argument", but they're essentially the same thing. And it should be noted that many, even most, liberals believe that this is true--or at least, they used to, back when they were discussing the Bush tax cuts. At the time, the ground was thick with liberals complaining that it was a terrible idea to cut taxes on the rich during a downturn, because the rich save their money, while the poor and the middle class spend it.
Then or now, saved money is where all the capital that funds startups--or any other sort of investment activity--comes from.
Of course, if we will have a government, we are going to have to tax someone to fund it, and the rich have more spare cash in their possession than anyone else. But of course, when we tax the rich, they don't just cut back on their yachts; they also cut back on their saving and investment activity, which in the long run means that we will all be a little poorer. Life is full of tradeoffs that can not be vanquished with even extremely biting sarcasm.
the crippling long-term budget deficits that will result from refusing...
To avoid blowing trillions on crap?
they don't just cut back on their yachts...
Boy, what do people have against shipyard workers?
I once worked at a yacht builder as a pipefitter. It was good work and an honest living. That's more than I can say for my present job as a Federal employee.
Life is full of tradeoffs that can not be vanquished with even extremely biting sarcasm.
I come for the econ talk, I stay for lines like that.
Brilliant.
the rich are different in that they often have to devote some thought/energy to maintaining their current status, as well as how to improve - think of it as having to play offense as well as defence
the lower down you are wrt income/asset decile, the less you play defence (to save what?? exactly) and the more you can play offense
no wonder (given mission complexity of the rich) that the 3rd generation after great wealth creation, you often see little/no evidence of the ancestors' wealth
carry on....
I know my investment decisions -- particularly those about start-ups -- will not change because of tax rate. Good ideas and good business plans will still get investment.
And crazy-old-uncle investment, where there's no understanding of how the start-up process works -- wasn't ever all that great an idea to begin with. Too much family feuding as a result of failure.
You missed the point. The point was that there would be less capital to fund those "good ideas and good business plans".
Rick
What I love about both McArdle and her readers is their tendency to confuse conceptually plausible rationalizations with hard data.
This is the perfect template for a "libertarian" economics blog. A lot of sound and fury signifying nothing because no one involved has the slightest grasp of scientific method. Scientific method involves extrapolating a hypothesis to make a prediction subject to quantitive proof or disproof.
You can see why she hates Krugman so much. he is actually pretty good at it, despite his overabundance of strong opinions.
But don't let me rain on your parade? Who need statistics? Stick with "the concept".
Krugman is no scientist. Careful examination of his hypothesis reveals a good deal of question begging. Variables defined by other variable in an elaborate circular reasoning exercise.
Good science starts with precisely defined terms. Objective and useful measurements are impossible without them.
Is she not really a libertarian? Otherwise, why the scare quotes? Why not just defend Yglesias point if you think he's right?
I totally got the point; and I responded. I would till fund appropriate angel investments despite any increases in my taxes, including charitable contributions.
It's those investments that make me able to make charitable contributions. And pay my taxes.
And perhaps more directly to the point, the lack of a guarantee of affordable health coverage is a major impediment to entrepreneurship in the United States.
Right -- because entrepreneurship has been almost unknown in the U.S. due to lack of universal health-care, whereas entrepreneurship has flourished in Europe during the same time frame. This is why Google, Microsoft, Apple, and Amazon, for example, are all European rather than American companies.
Slocum beats me to it. Matt's a bright kid, but he can really be a hack sometimes.
Indeed.
Sometimes the truthful rebuttal can be funny.
The guys that founded the companies of all your examples were very young, and some of them (like Bezos) had quite wealthy parents, so health care wasn't a problem for any of them. It will probably never a much of a problem for single guys in their 20s that come from wealthy or upper middle class families.
Health care is more of a problem in starting a business for older people and/or people with families.
Also, there are plenty of examples of relatively recent big companies in Europe. There are huge companies like Vodafone, the largest mobile telecommunications network company in the world (it owns 45% of Verizon). There's T-Mobile, Nokia and IKEA (the last 2 are technically not recent, but their explosion occurred after the nineties), to cite some of the better known in the U.S.
In general, for a given sector, the U.S. tends to have a smaller number of bigger companies than Europe. This has advantages and disadvantages.
The guys that founded the companies of all your examples were very young, and some of them (like Bezos) had quite wealthy parents, so health care wasn't a problem for any of them.
That's a gross logical error. Quality health care is often necessary for entrepreneurship to flourish, but quality health care is not synonymous with universal health care. In many ways the are opposites.
Do we really want the same people who gave us Walter Reed veteran's hospital to run the entire health care system?
Recently 10,000 veterans who received colonoscopies at VA hospitals need to be tested for HIV, hepatitis, and other infectious diseases due to the use of dirty equipment. Some have already tested positive for hepatitis B. Read the complete story here.
http://www.cbsnews.com/stories/2009/03/27/health/main4896815.shtml
Hmm... You cited me, but what you said had nothing to do with the citation.
I disagree with you, but the main thing is that health care quality is not even being discussed. What's being argued here is that employer financed health may hamper business initiative, by:
1 - raising costs to employers, making some businesses unappealing.
2 - making employees dependent on their current job for coverage, and hence discouraging job switching.
More to the point in all this is the fact that the rich have the resources to avoid heavy taxation. And also...who exactly counts as 'rich'? People with 7-digit incomes? Households with 7-digits? How about high six digits? How about any household with more than one earner? They are all richer than lots of 'the masses'. Isn't it already true that a small percentage of tax payers stump up the majority of payments?
The 'deep pockets' fallacy...the notion that somebody, whether 'the rich', or 'big corporations' or insurance companies, or governments or certain social classes have a whole bunch of spare cash that some public-spirited groups or individuals can spend better than the people who earned it, is thoroughly mischievous, if not discernibly evil.
"...the lack of a guarantee of affordable health coverage is a major impediment to entrepreneurship in the United States"
This is obvious garbage. Yglesias is trying to figure out why we have no entrepreneurs, while we're sitting here up to our earlobes in the little vermin. We have more entrepreneurs than anybody. Do we need to raises taxes and expand government to support even more entrepreneurs than we've got? Why? What for? Does he want a new career?
Meanwhile, I've worked in several software startups since the mid-1990s, and they did not fail due to lack of socialized health care, nor is anybody holding off starting one for that reason. The killers are finding angel funding and venture capital, not affording health care. Maybe it's different for startups in other fields. I doubt it.
I assume he only believes this gibberish because he's got an emotional commitment to a politician who claims to believe it, but that's a poor excuse. The politician in question has never earned a living (sorry, politics and "activism" don't count); what's Matt's excuse?
Actually, affordable health care is a problem; I've seen a number of startups that couldn't hire/keep the caliber of people they needed because of it.
I doubt you are correct. Going with a start up is high risk in any case. My guess is that health insurance is not the tipping point. Case in point, my last manager had a chance to go with a start up when he was younger. But, he had a family and decided not to risk no income. He stayed with the big company.
Rick
You're own answer is exactly what I said; your manager decided not to go with a start-up.
Many folks will take a lower salary in exchange for future gains, a small piece of the pie. Microsoft's success assured that. But without health insurance, many people can't take that risk. Separating insurance from employment is critical if we want business to be successful.
OK, I haven't seen everything. Still, I'm not convinced there's a problem. We cannot and should not rescue startups that fail because they don't have enough money. No doubt we lose some good ones along with the bad ones, but on the other hand we already keep some bad ones along with the good. And very few are good. Keeping the dogs afloat an extra six months with a health-care subsidy simply keeps good engineers working on stupid projects.
I remain unconvinced that "saving marginal startups" is a compelling argument for nationalizing healthcare.
Actually, salary is a problem; I've seen a number of startups that couldn't hire/keep the caliber of people they needed because of it.
Therefore, I call for government subsidies of employee salary as well.
As a libertarian, I'd think you would want to see business and health insurance unlinked. It's a horrific drain on the business part of the equation.
Am I getting this right? Because the government did not burden profitable firms and taxpayers with providing universal coverage, those relatively less profitable startups you observered were hampered in hiring away the more succesful firms' employees?
Okay. I really want to keep working on my perpetual motion machine start up. I expect you to provide my workers with dental benefits and health care, so I can hire the caliber of people needed. Your disinterest in providing them that benefit is "a problem", I feel.
Token,
I like that. "The Deep Pockets Fallacy".
I'm going to steal it.
You're welcome, Xmas. I'll take credit for the catchy name, but the concept goes way back. Meanwhile I've been flummoxed for years by socialists and garden-variety idiots that seemed to feel that some groups or individuals had a practically inexhaustible pool of cash that could be confiscated and [mis]spent without economic repercussions of any kind. Subconscious memories of Scrooge McDuck and his skycraping piggy bank, I suspect.
I swear, the phrase "cut government spending" just doesn't exist for some people.
Bullhooey. I started a company and like most entrepeneurs I never expected someone else to pay my bills if I got sick. And yes, I started it to make money, so a massive tax hike would have been a disincentive.
Anyways, there is no such guarantee; like most leftist tropes this is a utopian fantasy. Yes kids, governments ration too and may in fact leave you to die -- some places will even helpfully remind you you could commit suicide to save the taxpayers money.
I think it just shows how we should be moving to a consumption tax system rather than income taxes. Consumption taxes are neutral towards savings and investment. That way the million dollar yachts get taxed and the startup funding doesn't.
But of course, when we tax the rich, they don't just cut back on their yachts; they also cut back on their saving and investment activity, which in the long run means that we will all be a little poorer.
It's hard to see how this effect works in a global economy with a global pool of savings. Ok, maybe Earthians will be a bit poorer when the American government raises taxes on the rich. But non-rich Americans?
I think it just shows how we should be moving to a consumption tax system rather than income taxes.
Warren Buffett and I can both get behind such a proposal, provided it's a progressive consumption tax.
zic —
If I were in the class that Yglesias wants to tax at 95%, said rate would certainly change my investment decisions. If getting a 5% after-tax ROI required the underlying portfolio return 100%, I'd buy tax-exempt munis instead. (Assuming I didn't just move to Australia/Britain/Canada/Ireland/New Zealand and avoid all U.S. investments.)
You give me a link to where Matt says he wants to tax anyone -- other than those who got a bonus
Otherwise, this is a conversation just blowing smoke.
Hmmm, how about this one:
http://yglesias.thinkprogress.org/archives/2009/03/why_not_arbitrary_limits_on_executive_pay.php
His argument is that a 95% tax rate on incomes over $10 mill would not be a catastrophe.
You really need to research a bit better.
Rick
And the Yglesias post you cite is clearly referring to compensation, not investment income. Nor is Yglesias indicating that he wants to tax at 95% - this is simply a hypothetical for the purpose of illustrating a separate point.
So yes, Lunatic is just blowing smoke.
The rich put their money in:
1) Tax havens
2) Housing market
3) Hedge Funds
4) Ponzi schemes
Start-ups are the last place where they would consider putting money. It's far too risky.
5) Venture capital funds.
6) Angel investment funds.
In my experience, they tend to have a well-mixed portfolio, some of which is in private equity funds targeting high-growth, pre-public companies.
They also tend to do foolish things with their money, like directly funding younger people with crazy business schemes. When they do this--always against their accountant's and lawyer's advice, I note--they are called "angel" investors. Perhaps because heaven is the only place such investors get rewards sufficient to cover the risk.
I'm not going to dignify this with a response. I'll just note that Schramm is president and CEO of the Kauffman Foundation and I believe he was in the room when I first heard the "rich uncle" argument, so I may have been present at the creation of this particular talking point.
Why is it every time someone on the left runs across an argument he can't refute it gets labeled as a "talking point"? Of course he won't dignify this with a response - anything he says will look foolish to people who've actually been involved in starting a company.
Meanwhile, the crippling long-term budget deficits that will result from refusing to raise new revenues are not going to be doing any wonders for entrepreneurs.
No amount of revenue-raising will avert a banana republic economy if we're going to spend like Congress is proposing this year. I wonder how Matt supposes people will buy products from these startups when their money has been taxed away?
Then or now, saved money is where all the capital that funds startups--or any other sort of investment activity--comes from.
This is how it's supposed to work, anyway. In reality, because we have a central bank and a fiat currency, loans can fund deposits, not the other way around. Megan, you badly need to take a Red Pill. Good post from contributor winterspeak on this:
http://www.winterspeak.com/2009/01/nytimes-1-chicago-0.html
In other words, when measured monetarily, savings does not necessarily equal investment. For a good explanation of why looking at these elements in terms of money is completely bunk anyway (and why, I think, winterspeak goes wrong with his 'savings must be funded through deficits' mantra), see Chapter 8 of Hazlitt's Failure of the New Economics:
http://www.mises.org/books/failureofneweconomics.pdf
Clay,
Winterspeak can defend his position himself, but I have always had the interpretation of his arguments that deficit spending must fund the risk free "savings" that a lot of people seem to want to engage in. In essence, these "savings" are not really investment in capital at all, but rather a kind of parasitism since they also demand a positive return.
Actually I have been wondering about the availability of affordable health care and it's impact on entrepreneurship. I started my first company when I was 23 so healthcare wasn't much of a concern. It seems to me that separating healthcare from employment could lead to more middle aged entrepreneurs. Healthcare is now important to me but I always seem to be off starting companies -> which is why I have always relied on my wife's health care until the company throws off enough cash to make offer it.
Relying on your wife's health care? Ohmygod, does that make you an enemy of traditional family values?
Another McArdle blog. I have wasted my quarterly half hour on the babbling of McArdle and her adherents.
A meta question Matt's post raises, which I addressed elsewhere last year (“Questioning the Conventional Wisdom of Microfinance and Encouraging Entrepreneurship”), is whether the U.S. government does too much already to encourage entrepreneurship. In that post, I mentioned Scott Shane’s argument that most start-up businesses in America were economically unproductive, created relatively few jobs, and what jobs they did create tended to be lower paying and have fewer benefits than those at larger companies. The reason for this, according to Shane, was that there simply are fewer talented entrepreneurs with high levels of human capital than there are Americans who start small businesses, and that many small businesses are started by unemployed or underemployed individuals who are motivated to do so partly by government incentives (e.g., government small business loans, grants, training and other encouragement) and by the relatively low opportunity costs for them of starting a small business, due to their current employment status.
That's fairly obvious Dave. Most small businesses fail and it's fairly obvious that many people shouldn't be starting businesses and they drastically underestimate the difficulty of acquiring customers. I used to read 4-5 business plans a week and it's clear that entrepreneurs are nothing but optimistic ;-)
It may be fairly obvious to you and me, but apparently not to policy makers.
Most fail. The vast majority never become large companies.
But every once in a while, your tiny little group of wildly overoptimistic misfits becomes Microsoft, Apple, Google, Netscape, WalMart, etc.
Markets have winners and losers. Without the losers, you cannot have the winners.
I wrote some, and they have to be overly optimistic to be read till page 2. The projections I could stand behind had "too little growth". I still don't know who was cheating whom, but it looks like some fund managers like fairy tales.
Megan, no one is denying that rich people save more, your own sarcasm notwithstanding.
But of course, when we tax the rich, they don't just cut back on their yachts; they also cut back on their saving and investment activity, which in the long run means that we will all be a little poorer.
There is a good basis for believing that this is false. Specifically, the CBO and Joint Committee on Taxation found that the 2001 and 2003 tax cuts, if financed by borrowing, were "likely to reduce, not increase, national income in the long term".
You suggest that calling this the "rich uncle" argument is just sarcasm, but in fact that is exactly the argument that Yglesias cites - not that rich people save generally, but that rich people invest in their relatives' start-ups, and that increases in tax rates at the high end are particularly bad for this reason. This is argument by anecdote - by hypothetical anecdote at that. If there is a real argument here then show us the numbers so the tradeoffs can be evaluated.
This may have changed since I first read it several years ago, but IIRC, the number one cause of failure for small business start-ups is lack of adequate capitalization. This would be to cover not just expenses for employees, stock, advertising, etc, but for basic necessities like monthly rent, utilities and the like.
Specifically, the CBO and Joint Committee on Taxation found that the 2001 and 2003 tax cuts, if financed by borrowing, were "likely to reduce, not increase, national income in the long term".
That's an argument for cutting spending.
This may have changed since I first read it several years ago, but IIRC, the number one cause of failure for small business start-ups is lack of adequate capitalization.
LMAO Sure, that's what they'll tell you, but don't believe it. "Oh, if I just had another month I could make it profitable." No, the above commenter was right, it's all about finding and keeping customers. If you have that the banks will throw money at you.
Matt's huffy "I'm not going to dignify this with a response" is just the PG version of STFU, the classic left blogger/commenter comeback. It means you're argument is stupid and I don't like it, but I do not have the candlepower to counter it, so rather than looking foolish or undermining the credibility of my philosophy, I'm going to go passive-aggressive on your ass.
I used to think Yglesias was among the sharpest left commentators, but lately, whew, he's been a river of sophistry and straw men.
The problem with his idea of taxing the well-paid on the promise of reducing "crippling long-term budget deficits" is that it won't do that. The sad fact is, the only way to avert those deficits is to spend less. Clinton did it by cutting way back on military expenditures. The liberals are right in saying that cutting taxes is no guarantee of a Laffer-like surge in revenue, but the conservatives are simply describing reality by saying that hiking taxes on the rich always yields a disappointing revenue result.
Meanwhile, the crippling long-term budget deficits that will result from refusing to raise new revenues
They won't result from greatly increasing spending? Taxes stay the same, spending greatly increases, crippling budget deficits then arise from lack of taxes. OK...
Anyhow, on to the point he intended.
Income over $10 million is overwhelmingly investment income, such as cap gains, so ...
1) A 95% tax on it is itself a direct taking of capital. Duh.
2) In the entire history of the income tax the highest effective tax rate on capital gains that "the rich" actually paid was 23% -- and that was during the years after the 1986 Tax Reform when the highest tax bracket of all was 28%!
In contrast, in the liberals' much longed for "good old days" of the 91% top tax bracket, during the 1950s and early 1960s, the effective tax rate on capital gains that "the rich" actually paid was ... 14%!
So just how does loony Yglesias propose to raise that rate to 95% ????
Maybe he should ask himself why when the top tax bracket rate was >90%, as he so wants to see again, the rate the rich actually paid was 14% -- lower than when the top tax bracket rate was 28%.
That might lead him to learn about one of the most fundamental principles of the economics of taxation -- that the deadweight cost of a tax increases by the square of the increase in the tax rate.
As tax rates increase this puts exponentially increasing pressure on politicians to put ever more loopholes and preferences in the Tax Code to exempt the income of "the rich" from the tax both (1) for the legitimate and necessary purpose of saving the economy from the deadweight loss, and (2) because as the deadweight cost of taxes rises, politicians can profit exponentially more by selling tax breaks to special interests.
As a 91% tax bracket is 3.25x a 28% tax bracket, the deadweight cost of the 91% rate is more than ten times the cost of the 28% rate.
Thus, cutting the top rate from 91% to 28% reduced the deadweight cost of the tax by more than 90! -- which is how the tax loopholes and preferences were eliminated, so the efffective tax rate rose.
BTW, during the Clinton years after he increased the top tax bracket to 39.6%, the average effective tax rate on capital gains fell to 19% -- wow, just like someone familiar with the effect of the deadweight cost of taxes might predict.
So tell us again, how is this Matt fellow going to collect a 95% tax rate?
I hear some people say Yglesias is a clever kid -- and cleverly rejecting the fundamental principles found in any textbook on public finance while contemplating his navel may draw hits to his blog, which is of course what matters.
But if he has any hope of actually writing anything worth reading, he'd do well to constrain his cleverness and very boringly gain some acquaintance with basic, relevant factual reality.
Megan, I see that several of your commentors are straying into uncivil territory. Could you make some sort of comment about saying something like "Anyways, there is no such guarantee; like most leftist tropes this is a utopian fantasy." or "Why is it every time someone on the left runs across an argument he can't refute it gets labeled as a "talking point" "?
These are the sorts of comments - by no means the only two - that tempt me to play tit for tat to show the offenders just how rude they are being(and for which I get called out as the instigator, sigh.)
This may have changed since I first read it several years ago, but IIRC, the number one cause of failure for small business start-ups is lack of adequate capitalization. This would be to cover not just expenses for employees, stock, advertising, etc, but for basic necessities like monthly rent, utilities and the like.
This is inane. In other words, the most common cause of failure for start-ups is that they run out of money because they can't turn a profit. Thanks for that.
lol. I was thinking, "Oh, you mean expenses exceed revenue? 'Undercapitalized' looks like a fancy word for broke."
90% tax rates won't just impede capital formation, they'll lead to capital destruction. Many of the rich will choose to increase their consumption rather than see their income taxed away at confiscatory rates. Yglesias might see "increased consumption" as a good, until he sees that much of that increased consumption will take place in the form of travel outside the United States. How much tax does our country generate from a new villa overlooking the Mediterranean? How many US jobs will be created in building and staffing the new home-away-from home? How much tax revenue does the US generate from an expensive meal in a Paris restaurant? How does encouraging the sale of investments to fund extended stays outside the US stimulate the US economy? Deny people the benefits of investing in the US economy and they'll put their capital to other uses. They won't just save less, they put a portion of their existing savings to another use entirely.
that tempt me to play tit for tat to show the offenders just how rude they are being(and for which I get called out as the instigator, sigh.)
The reason you get called out as an instigator is that you respond to popguns of incivility with a 1200 rounds/min of .50 cal's worth of incivility. You bring a chain gun to a pillow fight, which is rightly considered unsportsmanlike.
Fundamentally, the reason people pick on you specifically is that your rhetoric usually vastly outstrips your point. A while back we had a discussion about the CPI, technological change, and the proper basket of goods for inflation calculations. You had an important point to make--evaluating the effect of technological change on inflation calculations is tricky, particularly as regards the difference between a worker becoming richer because his productivity increases and goods becoming cheaper because other people's productivity increases--but your responses to others (I seem to recall Ann being involved) was so contemptuous and aggressive that it could only be justified if she had been denying the fundamental theorem of calculus based on a Biblical verse. And even then, a softer tone would have been more polite.
I've never been clear on why people would want to attract flies, but for those who do, I'm told that honey is indicated.
Rob,
His is a personality disorder, and I don't think he is capable of actually changing it, which is why I stopped wasting my time with him. He occasionally makes good points, but they are too few to spend much time dealing with his exaggerated sense of self-importance and overly aggressive verbal attacks.
No, Clay. It means that all other things being equal(read: boring statistical stuff), if two businesses are alike in every way except how long they can survive in the no-profits zone, the one that can survive longer will tend to ultimately become profitable and survive for some time.
This is just common sense, really. If one business owner estimates he can survive for six months without turning a profit, and another one estimates he can survive a year and a half (all other things being equal of course), the latter business owner has a better chance of acquiring a steady customer base before failing.
What I am saying, again if IIRC, is that this is not just a reason for a small businesses to fail, it is the number one reason.
There are basically two kinds of start ups. Mom and pop businesses that get funded by the entrepreneur and their friends and family and businesses that require more capital (e.g. > $1 million) and get funded by professional venture capitalists. Either way tax rates have a huge impact on the after tax expected return and the willingness of people to put money into these business. Starting and running a business is all about getting the capital, and anyone who thinks the tax rate doesn't matter doesn't know anything about starting or running a business.
Also as to the health insurance argument, it may apply if you are going into the gardening business, but if you start a company with more than a half dozen employees or so it allows you and your company to get group medical insurance.
Matt Yglesias' post reminds me of the comforting pre-election belief had by many in the middle of the political spectrum: Once elected Obama will be constrained by the need to govern and will, therefore, forgo his liberal tendencies and will govern from the middle. That's proven to be a comforting, yet untrue, belief. Unconstrained by the need for more than token Republican support (meaning he can get virtually any thing he wants from Congress, needing only one or two RINOs to go along in the Senate), Obama has governed from the far left. Most of his major policies are barely within shouting distance of the middle of the political spectrum.
Yglesias' post indicates there is a corollary of this phenomenon that applies to political pundits. Unconstrained by the need to seem reasonable to a governing middle/right majority in government, Matt has become farther left in his policy prescriptions. I not only don't think Matt would have posted something similar 2 years ago; I don't think the thought would have even occurred to him. Success at the ballot box has been extremely liberalizing to the liberal mind; the results are frightening.
I would suggest Rob, that since the real instigators in these affairs of which you seem to have a rather biased memory are never called out at all, that your theory is wrong. I would also suggest that what you consider popguns vs what you consider chain saws is very much in the eye of the beholder.
In any event, since this is happening right now, and since Megan has announced that henceforth this sort of behaviour is verboten, and since I am not playing tit-for-tat, but merely pointing out the uncivil words of others, may I suggest that rather can attention to any imputed bad conduct of mine in the past that you actually say something about the real bad conduct of others right now in the present.
Instead of like, you know, ignoring it? The very thing I have dilated upon at length in the past? That was the reason for my escalation to tit-for-tat?
I would also suggest that what you consider popguns vs what you consider chain saws is very much in the eye of the beholder.
First off, chain guns. But yes, it is indeed very much in the eye of the beholder. And my eye--biased though it undoubtedly is--tells me that your rhetoric frequently outstrips your point, which is a shame, because nobody bothers to read your point when you couch it in excessive rhetoric. You yourself have noted how you sustain criticism while others do not, and am merely offering one possible reason for that. You may of course reject my theory if you wish and substitute your own. But you may also wish to note note that unquestionable liberals like Freddie, Jasper, and Dilan Esper somehow avoid the treatment you receive.
What it comes down to is your personal goals. Do you want to be the "moderate" Basic Fact, and provide people with a 'taste of their own medicine,' (that they will ignore because they don't care), or do you want people to listen to you and think about what you say? Only you can set your goals; I can merely point out a possible path to achieving them.
As for my commentary on the "real bad conduct" in this thread, 1) it's so mild as to barely rate a mention, and 2) it's matched with similar mildness on the other side by tc125231. So the tat has already been provided, thank heavens.
Iow, you won't say anything about this. As I've said before.
Oh, and for the record?
Yes. You're being extremely biased.[1] As well as being illogical; bad behaviour by one 'side' does not excuse bad behaviour from the other 'side'.
[1] Saying things like this:
Really don't make them so. And distracts from what is going on now.
No, Clay. It means that all other things being equal(read: boring statistical stuff), if two businesses are alike in every way except how long they can survive in the no-profits zone, the one that can survive longer will tend to ultimately become profitable and survive for some time.
Even more profound. In other words, given two imaginary businesses exactly alike in every other way, the one with more capital has an advantage. Thanks for that.
Let's tease it out a bit. So, the solution to start-ups failing is obviously just to give them more capital to lose so they can stay afloat until they might no longer lose it. Actually ... that's a pretty good summation of what the USG is doing now (aside from the start-up nuance)! I take it all back. Sheer genius.
The real problem with very high tax rates on rich people is it severely limits the amount of risk they're willing to take. If you're planning on investing a million dollars in a venture that has a 50% chance of going broke and a 50% chance of tripling your money, your break-even tax rate is 50%.
Of course in the real world you don't know what the percentages are for a given investment, so there's no reason to take any appreciable risk if, when you finally hit the jackpot, the government takes 90% of your payoff. High tax rates encourage tax advantaged, risk-averse investing. The reason the Reagan tax cuts generated extra revenue is wealthy people moved their money out of double-tax-free munis into higher paying taxable investments. Like venture capital funds.
Man, that Reagan tax cuts myth is resilient.
Reagan tax cuts were not the cause of the revenue increases that occurred during the 1980s. On the contrary, increases were smaller than expected. You can verify it here.
Quote of interest - "Income tax receipts grew noticeably more slowly than usual in the 1980s, after the large cuts in individual and corporate income tax rates in 1981."
Iow, you won't say anything about this.
No. If Basic Fact starts in with the "not my president" shtick, I might say something about that, for all the good it did last time.
Right. Not that I asked you to of course, and not that your perceptions aren't waaaaay off, either:
But . . . you are also the person who said that comparing vegetarianism to a religion is okay in order to justify calling liberals 'fascists'. And then laughed it off later as light-hearted whimsy. I don't think I trust your judgment to rate these sorts of offenses, nor your ability to accurately recall them.
May I suggest then, that you keep your biases to yourself in the future, and confine yourself to objective criteria when making these sorts of judgments?
Sigh. It's quite possible to see revenue streams increase, and to reliably project them into the future. If you see that your revenue stream is increasing at rate that will make you profitable in eight months, and you only have enough funds to last three more months, the odds are that you will be going out of business. If the exact some company has a projected revenue stream increase that ensures profitability in eight months and has an additional thirteen months worth of capital to draw upon, the odds are that it won't go out of business.
I'm puzzled by your obduracy on this point. This is just basic Finance 101 after all.
With care and forethought, one can construct a thoroughly offenssive post without resorting to any "naughty words". For example:
SoV, you seem to be struggling mightily to understand why some take offense to your language. It's not your ideas, it's the manner in which your ideas are expressed. It's not your vocabulary (by itself), it's your tone. Finally, it's not your point of view; it's your insistence of repeating the same point over and over again -- as if the shear volume of posts will move the balance of logic in your favor.
You're one of the few posters on this blog I routinely ignore. In general, I'll read the first two or three of your posts and then skip the rest if I find your tone too strident or that you are making the same argument again and again. It's not a left/right thing. I react to some posters on the other side of the political spectrum in like manner (BF, I'm thinking of you). Quit being so dismissive of others viewpoints and start trying to understand what others are saying (rather than deliberately misunderstanding), and I'll add you to the list of liberal posters I look forward to reading. That may not be a big deal to you, which is fine with me. I only mention it because you raised the subject.
Generally, entrepreneurs don't go to their rich uncles for startup funds. They go to financial institutions. And any economy premised on the idea that only those lucky enough to have rich uncles can start businesses will not be a dynamic economy. (See: Russia.) Also generally, rich people don't give large percentages of their savings to their niece who wants to start a business. They mostly put it in financial institutions. Any economy premised on the idea that rich people have no better way to invest their money than giving it to their nieces to start new businesses will not be an economy where capital is allocated efficiently. (See: Vietnam.)
An economy will generate a certain amount of income per year over and above what its people need for consumption and what its government needs to fund operations. That amount of money will be saved in financial institutions. It doesn't matter whether it's being saved by rich, average or poor people, it is available to be invested either way. You could try to goose the amount of capital in the pool by lowering taxes below the level of the government's annual expenses and giving the money back to the rich, who will save it, but that means the government will have to borrow money which will drain capital away from investment. But if you ideologically persuade the lending class that the government's tax cuts will pay for themselves in the future through greater economic growth because of magic, then the lending class may be persuaded to lend at low rates despite the government's budget deficits.
Alternatively, you could try to goose the capital in the pool by keeping wages down so average and poor people don't have enough for their consumption, leaving rich people with more savings, and letting the average and poor people fund their consumption through borrowing. Of course the borrowing of the average and poor will drain capital away from investment, but if you pretend that the loans taken out by average and poor people are actually assets which can be resold back to the financial institutions that lent them the money, then everyone will magically get richer for quite some time. In fact it looks like the amount of time you can perform this sort of trick might be anywhere from 8 to 20 years before you destroy the economy, but by that time if you're in the rich investor class you will unbelievably rich, and when the economy collapses you'll see some perks as it will hold down yacht prices and servants' wages.
Generally, entrepreneurs don't go to their rich uncles for startup funds. They go to financial institutions.
Of course. Financial institutions which, on Planet Liberal, apparently raise capital by selling cookies door-to-door in poor neighborhoods.
Having just slammed SoV in my prior post, I think it's only fair to point out that SoV has been making a valid point in this part of the discussion. Most start-ups fail and the biggest reason that they fail is because they are under capitalized. While that may seem to be a tautology, it's not. Most entrepreneurs dramatically underestimate their need for capital. They underestimate the time it will take to get the business up and running; they overestimate the price at which they can sell their product or service; and they underestimate their expenses. So, while this is "just basic Finance 101", it's a point that most of us miss. After all, if those directly involved in starting up the business misjudge the amount of capital needed, why should the proper amount be obvious to casual observers?
All this makes policies that limit capital formation (a/k/a that make capital more expensive to acquire) even more destructive than they would otherwise appear on the surface. Which brings us back to the topic of Megan's original post: Matt Yglesias's absurd notion that policies that make capital more expensive will have no deleterious affect on entrepreneurship. That's like saying increasing the cost of wheat will have no affect on the cost of flour. Right.
David Walser: this would be a reasonable argument to make in a world where there was any possible prospect of a shortage of capital or any possible prospect of adequate demand (to supply the customers for that startup business). But we have lived in a world for the past 10 years now, at least, where the world is awash in international cash sloshing mightily from shore to shore at very low interest rates, looking for any halfway decent investment opportunity. And for the past six months we have lived in a world where demand is far below what the US and other economies are capable of producing. In such an environment it is stupid to give capital to Startup X because there is no demand for Product X. We are sitting up to our necks in eggs without any flour, and you're saying we better not trade any of those eggs for flour because you can't bake a cake without eggs.
Did anyone follow this?
Except truly innovative products and products that promise nontrivial increases in efficiency can create demand. That would be sort of useful right now.
Matt, you're wrong. Studies have shown that most entrepreneurs finance their businesses with their personal savings, loans from family, and credit cards. You're right when you say rich people don't give "large percentages" of their wealth to relatives to finance business ventures.
You're wrong with the lesson you try to draw from this fact. Virtually every wealthy person I've ever worked with (I advise wealthy individuals and families on tax matters) has dedicated a portion of their wealth to loans to friends and family. It may not be a large percentage of their wealth, but the amount they loan to friends and family is large to the businesses they finance. Because the rich can make such loans without risking personal bankruptcy, they are far more likely to make the loan on the basis of "giving someone a chance" than is the local bank. Virtually all of them have made and continue to make such loans. They are an important source of funding to entrepreneurs.
They aren't the only source, but they make up a disproportionate share of the financing of start ups. Most banks will not grant a loan to a business unless the entrepreneur has substantial skin in the game (often from a second mortgage on the the entrepreneur's parent's home). Even then, the bank will evaluate the loan on strictly financial terms -- they aren't in the business of giving someone a chance. Once the business takes off (after years of hard work and credit card financing), it's the private equity and venture capital firms that fund growing businesses. Banks are not prepared to finance the rapid growth of these companies. The risks of default are too high for a bank.
Where do the private equity and venture capital firms get their fat war chests? From the wealthy! In most cases, these firms have a minimum investment of $1 million or more and require their investors to have a net worth of $10 million or more. It's only the wealthy that can afford the risks of these types of investments and wait the 5 years or more necessary to get any money back from their invested capital. Venture capital and private equity firms would die if the wealth quit investing in them.
Tax away the rich's wealth, and you'll be right. The banks will be the only place to go. Banks, being banks, will finance stable businesses. The potential high growth companies will die on the vine for lack of capital.
It appears to me that you are arguing that financial institutions are not, in the aggregate, good at allocating capital.
You are correct that most wealthy people dedicate A PORTION of their wealth to friends and family. That reflects the same dynamic as high bonuses in financial institutions: siphoning. It is difficult for wealthy people to deny access to friends and family. I do not believe there is any data on whether the investments wealthy people make with friends and family do better than the ones they make through financial institutions. I would bet dollars to doughnuts that they generally do worse. Assuming this is the case, you are arguing that wealthy people are important to capital formation because financial institutions are not stupid enough to finance entrepreneurs with uncertain prospects, and the economy needs more suckers than it would otherwise produce. I would like to see this argument backed up with some data.
I think the specifics of these arguments are less important than the overall thrust, because that's what keeps coming up again and again: the defense of cronyism and accumulations of vast wealth. The argument you are making now is literally a head-on defense of cronyism.
Wealthy people are qualified to invest in venture funds like no one else. The lack of VC (endemic in Europe, by the way) means risky innovations (uncertain by their nature) are funded from company's revenues. It means lower risk of an immediate crash, but missed opportunities and a high risk of strategic loss to competition.
Calling such entrepreneurs "suckers" is unfair, because the risks are known upfront, and the investors are well qualified to assess and handle them. "Normal" financial institutions, in general, should not get exposed to this sort of deals.
Incidentally, I can think of one probably solid case in which family-based capital allocation tends to be as or more efficient than institutional capital allocation: accumulation and investment by tight-knit extended families, typically East Asian, South Asian, Orthodox Jewish, Mormon, etc. But because the family capital in such cases is spread over many individuals, it can be easily sheltered from higher marginal tax rates, and the reason it works well is precisely the reason for higher marginal tax rates: it's communally held money that the members are communally responsible for. Hence the benefits are widely distributed to family members. I mean, the logic of high marginal tax rates is to ensure that earned wealth is distributed broadly. If a Korean-American family owning a chain of groceries chooses to spread out its wealth among wives, nephews, grandchildren etc. to avoid paying high marginal taxes, that's exactly the point of high marginal tax rates -- mission accomplished. And the family resources can still be marshalled to loan Cousin X money to start a new grocery in a promising neighborhood, and Cousin X will work extremely hard to pay that money back because he's responsible to Uncle Y.
"I mean, the logic of high marginal tax rates is to ensure that earned wealth is distributed broadly. If a Korean-American family owning a chain of groceries chooses to spread out its wealth among wives, nephews, grandchildren etc. to avoid paying high marginal taxes, that's exactly the point of high marginal tax rates -- mission accomplished"
But the "logic" of high marginal tax rates is to take money from those who have earned it, in order to give to those who can't or don't want to earn their own. In this hypothetical Korean-American family, the extended family probably worked hard and contributed and all built up this wealth together. The 'mission' won't be accomplished until the money is taken from this hard-working thrifty family and given to someone who had the same opportunities but couldn't be bothered to work hard, save or take chances.
From Steinglass:
I have always disliked this perspective because it actively disquises what actually happens in a healthy, growing economy.
All final consumer goods are actually consumed (its the definition). They are either used up or they are discarded. What is overlooked is who does the consumption and what it is they produce. People need solid incentives to delay earned gratification in order to support the consumption of those engaged in the production of capital goods. This is what investment actually is- the supporting of capital goods production by feeding, housing, entertaining, etc. the laborers in capital goods production at all levels, including the provision of the inputs to such goods. In other words, it isn't money. This misconception leads to much of our present predicament, and we make truly misguided attempts to "goose" capital formation through monetary actions that actively destroy the true source of real savings.
The case against the Rich Uncle/capital formation argument is simple. Only a tiny percentage of the wealth of the rich is used for this purpose. It's a dishonest argument to say that the wealth of the rich shouldn't be taxed because taxation would impede something that's only a small part of what the wealthy do with their wealth. If someone wants to argue for a tax deduction or credit for the wealthy only to the extent that they provide venture capital to a relative's startup enterprise, I'm happy to hear them out.
I tried reading Yglesias and the comments...but couldn't get very far with the comments, because this type of thinking/comment was strongly in evidence:
the rich are just lucky
and - as a corollary -
everyone else deserves to have bones thrown at them for not being lucky
That's just so deeply wrongheaded, I couldn't read more of the comments.
I'm lucky and not rich (yet)...but neither of those facts prevents me from engaging in wealthbuilding behaviors.
It's theft of soul to coach people into thinking other people are just lucky. Only losers think that.
So Liz, why aren't you rich?
May I suggest then, that you keep your biases to yourself in the future, and confine yourself to objective criteria when making these sorts of judgments?
Of course you may. I will give it the same serious consideration that you give to my suggestions.
Why do I get the impression that you won't? And that you never meant your advice seriously? Which is how I took it, for all the good it did me.
BTW, during the Clinton years after he increased the top tax bracket to 39.6%, the average effective tax rate on capital gains fell to 19
Capital gains tax rate was dropped to 20% under Clinton as well, so this makes a whole lot of sense. I don't see why you talk about income tax and capital gains taxes interchangeably when they are treated differently under tax laws.
Sigh. No I'm not. I would think this would be apparent from the fact that I'm complaining about the rude behaviour of others, not the other way around. Behaviour which Megan has specifically warned against.
If you won't admit that I have a valid point, why should I care what you say?
I won't speak to what you call my 'tone' since I can't objectively verify anything there. But on the objective matter of 'repeating myself', perhaps it has something to do with the fact that people don't understand the point on the first or second or more go-around.
In fact, let's look up above. Whaddaya know? I'm repeating myself because Clay doesn't understand a rather elementary fact. May I suggest that he has a rather hostile tone ;-) Dinging me for repeating myself because other posters don't get it? What does that say about you?
Whereas I tend to ignore you because you say silly things like this. Doubtless if I ceased after the second or third repetition and other posters still didn't get it, you'd complain about me 'not answering' my critics.
Now, you can either acknowledge that certain posters have been behaving badly here, and my call was a valid one. Or I can continue to ignore you has someone who is rather partisan and really doesn't have a lot to add besides the talking points already provided ad nauseum by by others. Your call. Shrug.
SOV, are you intentionally avoiding using the the Reply-to-comment action? I actually enjoy some of your posts, but actively subverting the threading really clutters the comments section.
Is your exchange with Rob really so important that we all need to track it at the bottom of the page?
Yes I am. And I disagree with the readability issue, obviously. I dislike the way ancilliary comments get displaced further and further to the right so that lines of text become only a few words long.
btw, since I've said all I needed to say to Rob, I did put my brief remarks into the reply box. What you see here is my reply to Walser. I thought his silliness about 'repeating myself', especially when we have such an excellent example here in this thread was worth commenting on. In the future, I'll be more careful to append the names of the people I'm responding to.
I hate the threading... it makes it difficult to find new posts when I come back to a thread. I'd rather start at the last post I read than have to go through the whole thing again, checking each post to see if it's new.
'Studies have shown', eh? Shouldn't be hard to cite them or produce quotes to that effect then, rather than merely asserting it.
Without some numbers there's no way to make a good argument. But the people who are making the argument should supply some numbers. And perhaps give some thresholds that would make them concede they were wrong.
And perhaps more directly to the point, the lack of a guarantee of affordable health coverage is a major impediment to entrepreneurship in the United States. The status quo systematically discourages talented, skilled people form leaving jobs at existing firms in order to strike out on their own, and this is one of the things the administration is trying to address in its budget proposals.
Yglesias needs to get out more.
If you have coverage at a job, and you leave to start your own company, you can take your coverage with you. You just can't have a significant break in coverage. There are a variety of measures in the Health Insurance Portability and Accountability Act that specifically address Yglesias's concern, even applying specifically to people with preexisting conditions.
Specific rules can vary by state, and carriers can vary by state. But, in general, you can take coverage with you if you've been on the job for a while, even if you have a preexisting condition, provided you don't let coverage lapse.
http://www.dol.gov/ebsa/faqs/faq_consumer_hipaa.html
Jason, your cite apparently doesn't say what you think it does. Could you quote the section that you think is relevant?
SOV,
Actually, the link says precisely what Jason described. I actually bothered to read the entire thing to the end. Of course, you have to actually pay for the insurance yourself if you leave your job to start your own business (or get fired/laid off), but the protections still apply. I am sure Yglesias probably thinks a guarantee of "free" coverage is better, but that would apply to free food, free rent, and free utilities.
Different sections apply in different instances. And I'm growing weary of spoon-feeding reality to liberals.
Read to the last two sections.
You gotta hold a job for 18 months. If it's a large employer (20 or more employees) you can take COBRA, guaranteed, provided there's no break in coverage. COBRA lasts for 18 months. (In some cases, you can stretch for 36). Strangely enough, 18 months generally covers the 'lookback' period for preexisting conditions.
Small employer? No COBRA eligibility? No problem. As long as no fraud is involved, and there's no break in coverage, the law guarantees you the right to purchase an individual policy. State insurance law governs here. In a lot of cases, the workplace insurer just cuts an individual policy with the same bells and whistles, with premiums capped at, say, 115 percent of the group policy. (Individual policies cost more to service, bill and administer than groups.) YMMV.
I love all these "incentives only work and/or matter when they're ones I agree with" arguments.
Having less wealth is not a disincentive to spending or investment, but having less wealth because you have to pay for all of your health insurance most certainly is a disincentive to entrepreneurship?
Where have I heard this kind of logic before?
Of course high gas taxes will discourage driving and "save gas", but high income taxes will not have any negative effect on investment...?
Please.
But I have to say that I somewhat agree with Matt if only that I think the effect on entrepreneurship caused by hikes in marginal tax rates is likely to be too small to really matter.
Agreed, I've tried to find some. SBA.gov states "Commercial banks and other depository institutions are the largest lenders of debt capital to small businesses. They accounted for almost 65 percent of total traditional credit to small businesses in 2003." But when I drill into their data, I can see that they are only looking at "reporting banks" and financial institutions. So maybe "traditional credit" = banks only, which - like many statistics - makes sense (and may explain Matt's "Generally, entrepreneurs don't go to their rich uncles for startup funds. They go to financial institutions" statement) but creates a misleading conclusion not actually supported by the data. I'll keep looking...
(and I will note that there is some difference between "small business" and entrepreneurial start-ups that might be classified as "pre-small business")
I doubt there really are any good numbers available for "rich uncle" type loans, as these are probably "under-the-counter", not contractual, not usually reported to the IRS, etc. Nevertheless, I have to go with my logical, conceptually plausible gut feel that Generally, entrepreneurs go for the easy money first: family, credit cards.
You realize, of course, that your "all other things being equal" makes this point entirely irrelevant, even if it is true. ALL small businesses fail because they run out of money.
and may explain Matt's "Generally, entrepreneurs don't go to their rich uncles for startup funds. They go to financial institutions" statement)
/facepalm. Where does he think the financial institutions get their money?
ALL small businesses fail because they run out of money.
That is more or less a truism. It's like noting death is the #1 cause of not being alive anymore.
Why do I get the impression that you won't? And that you never meant your advice seriously? Which is how I took it, for all the good it did me.
SoV, I certainly do mean my advice seriously, both for your benefit and for the benefit of these comment sections, to which you could potentially be a very valuable contributor.
I am sure you know more statistics than I do, so if it comes to a debate about the meaning of kurtosis in a plot of educational outcomes, I will readily defer to you.
My bread and butter is communication and persuasion. I get paid to win arguments (in the real world, not at a math conferences). And I can say without doubt that you are losing arguments you might well win--or more precisely, failing to persuade people who would otherwise be persuaded--because your communication style is grossly out of sync with the style of most other people. People find your style offensive and off-putting, and speaking for myself I would say that you seem completely unable to empathize with others--your responses typically reveal only a limited ability to understand what other people are thinking or feeling. Your rejection of contextual cues and dismissal of complaints about "tone" are examples of what I mean.
The fact that this problem cannot be "objectively" measured and determined, or that personal bias can enter the question, does not mean that it should be outright dismissed. Most people do not think or write the way that you do. This does not make you "wrong," but if you hope to effectively communicate, you must take that into account. I suspect you already know this at some level--"generally" does not mean the same thing on a blog as it does in a math class. You merely need to *ahem* generalize that small insight into other aspects of your writing.
Unlike some, I do not actively dislike you. And indeed, I can appreciate that you are considerably more intelligent than a number of our other posters (you're not as smart as you think you are, but then again few if any of us are). If you would prefer to be taken seriously rather than dismissed, ignored, or criticized, then you need to change the way you write.
I would love to see individuals get the same tax breaks for insurance premiums that corporations get so that there would be less of an advantage to getting insurance through your employer. That seems like a less drastic step than socializing the entire industry.
Taxing the "rich" sounds great... but the rich can't pay the budget. In 2006, the total AGI for all tax payers making over $1 million (AGI) was $1.2 trillion. The total budget for 2006 was about $2.7 trillion. So we could sieze all of their income and pay for quite a bit... for that year. The next year you'd probably get a whole lot less and since those people have been paying about 10% of the budget in taxes, losing them would hurt down the road.
P.S. SoV, I agree with others, your tone is annoying and you repost when people actually do understand what you have said.
P.P.S. I still hate threading.
I disagree with the readability issue, obviously
I agree with EI and SoV that nested comments are annoying. I will not use them unless I receive a direct order to do so, and maybe not then, either.
I, too, agree that nested comments are annoying, although I couldn't resist using a nested comment to say this, even though the 'space' just below is still free.
Rob, thanks for your advice to SoV, although I don't know if it will be taken. SoV can be quite interesting and insightful at times, although at other times it's all sighs, personal insults and meaningless debates with specific commentors about "no, you have the burden of proof"/"no, you"/"no, you"....
Actually, the best system would give the reader the option to thread or unthread. I like both, but it is annoying to read an active comments section in threaded mode. Threaded is more useful when the section is dead.
I'm surprised no one has linked to this yet on this thread, "Stuff White People Like: Free Health Care". Excerpt:
Cry me a river...