Wednesday, January 06, 2016

In defense of Paul Graham's "Inequality"

The simplest way of trolling people is to defend that which everyone hates. That's what Paul Graham discovered this week in his support for "inequality". As a troll, I of course agree with his position.

When your startup is a success, you are suddenly rich after living like a pauper for many years. You naturally feel entitled to exploit all those tax loopholes and exemptions that rich people get. But then your accountant gives you the bad news: those loopholes don't exist. You'll have to give more than half of your new wealth to the government. The argument that the "rich don't pay their fair share of taxes" is based on cherry picking exceptional cases that apply to a tiny few. They certainly don't apply to you, the startup founder. Statistically, the top 1% earn ~20% of the nation's income but pay ~40% of taxes [*], twice their "fair share". There's nothing a successful entrepreneur can do to evade these taxes.

I point this out because the point of To Kill a Mockingbird is that to understand a person, you need to walk around in their shoes. That's the backstory of Paul Graham's piece. He regularly hears statements like "the rich don't pay their fair share of taxes", which are at complete odds with his personal experience. This is just bigotry, an argument made by people who envy and hate the rich. They'll continue to cherry pick the exceptions rather than look at it from another point of view. Paul Graham's entire piece, though, is looking at the debate from another point of view -- that of a Silicon Valley entrepreneur. Specifically, the more you confiscate the winnings of startup founders, the fewer startups you'll get, and consequently, fewer life changing innovations like the iPhone.

Ezra Klein at Vox attempts to rebut Paul Graham's piece, but falls victim to the same sort of cherry picking. He points to Sweden, which has less income inequality while still having a vibrant tech startup culture (Skype, Minecraft, Spotify, Candy Crush, etc.). But he's only picking the part of Sweden that agrees with his argument.

While Sweden has better income equality than the United States, it has worse wealth inequality [*]. A greater percentage of Swedish wealth is held by the rich than America. Moreover, while most millionaires in America are self-made, having earned their money, most millionaires in Sweden inherited their money. This seems counter intuitive, because Sweden has exactly the sort of confiscatory taxes that anti-inequality activists want for the United States, to prevent accumulations of wealth among rich families. But that's because the rich don't follow the law, and evade taxes. Silicon Valley entrepreneurs pay their tax bill, the Swedish rich do not.

More to the point, incoming inequality is rising in Sweden. Activists want you to believe that rising incoming inequality is a uniquely American thing, due to deficiencies in the American system. That's not true: it's rising in every other rich country as well [*][*]. It's probably due to technology advances -- the more advanced the technology, the more a person can produce. An engineer using modern computers is vastly more productive today than they were 20 years ago, while those performing manual labor are no more productive.

Nobody wants to live in a "plutocracy", a system where the rich govern. Not even the rich want this. It would mean spending all their time and wealth bribing politicians instead of relaxing on their yacht.

But confiscating their hard-earned wealth is not the only answer. When you raise taxes to confiscatory levels, you encourage the corrupt system (as in Sweden) rather than doing anything to stop the influence of money in politics. If you could somehow make everyone obey the law, unlike Sweden, then all you'd get is less productivity and fewer startups. It's pointless going through all the pain that startups entail (and it's a lot of pain) if the government takes all your earnings anyway. Without these startups, everyone will be worse off, not getting the innovations these startups create.

Better answers are those that would apply equally to France, Germany, Sweden, and Japan -- countries that are likewise seeing dramatic increases in income inequality. They can't confiscate even more wealth, so have to look to other solutions, such as increasing STEM education, or making it easier for everyone to share in the wealth generated by startups.

5 comments:

Unknown said...

> Specifically, the more you confiscate the winnings of startup founders, the fewer startups you'll get

Do you have evidence for that? It's certainly true in the limit, but is it true on the margin at anything near current tax rates?

pjt said...
This comment has been removed by the author.
pjt said...

I agree with the point of the article, but this claim is not accurate:

"Activists want you to believe that rising incoming inequality is a uniquely American thing, due to deficiencies in the American system. That's not true: it's rising in every other rich country as well ..."

Not quite. I live in Finland, which is a "rich" country, and here the income equality has been going mostly down for seven years now. http://www.findikaattori.fi/fi/58

This of course does not stop activists from claiming that income equality keeps rising. It doesn't stop the government broadcaster from repeating these claims, even if they would be refuted simply if anyone looked at the official statistics.

And it's no reason to celebrate of course, because diminishing income equality comes with very high tax rates which are still not able to generate enough revenue to cover government expenses, so that the government debt - so far comparatively low - is growing rapidly.

Simon Majou said...

"He regularly hears statements like "the rich don't pay their fair share of taxes", which are at complete odds with his personal experience. This is just bigotry, an argument made by people who envy and hate the rich. "
...
"But that's because the rich don't follow the law, and evade taxes."

Oh, ok.

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