, 13 tweets, 8 min read Read on Twitter
1/ Here is a tweetstorm explaining why @paulg is wrong and @vkhosla is right on why a higher income/wealth tax is unlikely to deter growth entrepreneurship.
@paulg @vkhosla 2/

Here is a simple example: suppose that a venture has a 1% chance of creating a $1 billion for an entrepreneur and 99% chance of creating nothing. Suppose that entrepreneur's other option is a safe Wall Street job netting $3 million over the relevant time period.
@paulg @vkhosla 3/

Without any tax, the expected return from being an entrepreneur is $10 million which is higher than the certain option of going to Wall Street. So the entrepreneur becomes an entrepreneur.

Now suppose that 50% (!) of income is taxed.
@paulg @vkhosla 4/ In this case, the Wall Street job nets $1.5 million while the expected return to being an entrepreneur falls to $5 million. So the same choice is made. If 70% of income is taxed, WS becomes $900K and entrepreneurship becomes $3m. Still no change.
@paulg @vkhosla 5/

The reason this all works is maths. If p = prob of start-up success, w = Wall Street income, u = start-up success income, t = the tax rate then you become an entrepreneur if tpu > tw or pu > w and otherwise don't. But the tax rate doesn't matter.
@paulg @vkhosla 6/

To be sure, t is an average tax rate. However, for both of these options, the average and marginal tax rates aren't that far apart. So why, you may ask, is Chad Jones (web.stanford.edu/~chadj/toptax.…) finding that a 30% is option to encourage innovation?
@paulg @vkhosla 7/

The reason is that he is looking at social welfare and not individual returns. But driving it is an idea that a higher marginal tax rate will reduce entrepreneurial effort.

Imagine you have already started your venture.
@paulg @vkhosla 8/ It is late at night on the weekend and you don't know if you can do any more. You think about the successful entrepreneur mentor. You realise that you could push a little more and increase your probability of success to p'.
@paulg @vkhosla 9/ If you do so, your return goes up by t(p' - p)u but getting some sleep gets you a benefit of b. At that point, if you compare 0.3(p' - p)u to 0.7(p' - p)u, maybe the tax rate matters.

Now imagine you are a venture capitalist, choosing to fund an entrepreneur.
@paulg @vkhosla 10/ Do you fund the entrepreneur for whom b is so high that the tax rate matters in the middle of the night? Or do you fund the entrepreneur who cares more about u than b per se?
@paulg @vkhosla 11/ Because for this to matter, if p' = 0.2 and p = 0.1, then we are imaging a situation where b is greater than $3 million but less than $7 million.

No, you want entrepreneurs where b doesn't matter and they push through regardless.
@paulg @vkhosla 12/ So I would argue that the Jones' postulated shift away from innovation as a result of taxation is way too high; especially given the low probability of success that amplifies these calculations.

The real barrier to the entrepreneur is the low probability of success.
@paulg @vkhosla 13/ In the end, that weighs more heavily than any changes in the top income tax rate.
Missing some Tweet in this thread?
You can try to force a refresh.

Like this thread? Get email updates or save it to PDF!

Subscribe to Joshua Gans
Profile picture

Get real-time email alerts when new unrolls are available from this author!

This content may be removed anytime!

Twitter may remove this content at anytime, convert it as a PDF, save and print for later use!

Try unrolling a thread yourself!

how to unroll video

1) Follow Thread Reader App on Twitter so you can easily mention us!

2) Go to a Twitter thread (series of Tweets by the same owner) and mention us with a keyword "unroll" @threadreaderapp unroll

You can practice here first or read more on our help page!

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just three indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member and get exclusive features!

Premium member ($3.00/month or $30.00/year)

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!