Thoughts on taxing the rich

There is constant debate about the optimum levels of taxation for different individuals and companies. Everyone has a different opinion about what activities the government should and shouldn't spend money on, but most people tend to agree that very wealthy people should probably give back more to the system that they have disproportionately benefited from. To any rich person who thinks that the legal framework; patent, copyright and trademark laws; physical infrastructure; military and police who keep peace and order; and so on, have nothing to do with their wealth and ability to create more of it, I would ask that person to go restart their life in, say, the New Guinea highlands and then tell me how rich and wealthy they think they would get in a tribal society that calculates wealth by the number of pigs that you own (these groups really still exist, by the way).

Wealthy people/companies will often state that higher taxes stifle their ability to innovate, and therefore lower taxes are better for everyone. There is no doubt some degree of truth to this, and it's a question of finding the optimum levels of taxation that encourage innovation but do not contribute to unreasonable wealth inequality and allow some people to take unfair advantage of society. And we should also keep in mind that rich people, on average, have much more ability to influence laws and political policies, so in general we should probably err on the side of being 'unfair' to rich people, knowing that their own unfair advantages in social influence will generally push laws back in the other direction to some degree no matter what we choose.

Innovation

One thing that I think is worth pointing out about the innovation argument is a simple fact that I've heard many, many times: Creative, passionate people would probably still do what they do even if they didn't make lots of money doing it.

This, I think, is a quite simple and profound observation. Some people who are passionate about what they do and care about being creative and innovative will get lucky and make good money off of that passion. They will make something that others want to pay a lot of money for, and they will get quite wealthy as a result. Generally a certain amount of talent and perseverance is necessary for this, but generally a lot of luck is also involved. In the games industry, I think of people like Doom programmer John Carmack or the creator of Minecraft, Markus Persson. Both are people who are very passionate, smart, and talented, and have made millions of dollars from their creative endeavours, but both were also quite lucky to be at the right place at the right time when they launched their products.

Would John Carmack and Markus Persson have stopped programming games and done something else if they didn't make millions though? I would bet that as long as they were able to pay the bills, they would have kept doing what they were doing. And this is true for the millions of struggling artists, writers, musicians, games developers, scientists, and everyone else who is passionate about creating things.

So, when we tax the very rich, are we really stopping innovation? Obviously, we would like the John Carmacks and Markus Perssons of the world to get some degree of reward for what they do, even if it's just for the selfish reason that they will be in a position to keep on innovating, and we all benefit from that. But if you reduce the monetary incentives to some degree, the people you tend to discourage are not these guys, but rather the ones who are in it purely for the money. Again, in the gaming world, I think of people like Activision CEO Bobby Kotick, or Zynga CEO Mark Pincus.

If we reduce the ability to become super rich by having higher taxes on the wealthy, and this has an end result that we keep people like John Carmack and Markus Persson, but soulless money hounds like Bobby Kotick and Mark Pincus take off to find easy money somewhere else, would that be a bad thing for anyone other than Kotick and Pincus?

High Profits

Another big argument of the very wealthy is that free markets encourage competition, which in turn results in innovation. Successful companies are supposedly good at innovating and finding ways to cut costs, and this is often given as a reason why private industry is more efficient than government.

If this is true, then what does it mean when a company posts really large profits? I won't bother defining exactly what 'really large' is here, since it's not really the point, but let's say that if you look at a company's overall revenue and then look at its profit after expenses, then there is some percentage value we could define where we can say that if company X earned a profit greater than Y% of its total revenue, then it's making a large profit.

If a company makes a large profit, it seems to me that it is likely due to one of two reasons:

• They've just made some major innovation which allows them to provide a good or service that there is no other competition for yet.
• The market is inefficient in some way which has stopped the company from having any real competition.

Think about that second case. In a true, properly working free market, companies generally shouldn't be able to have large profit margins because there should be competing companies offering the same goods and/or services cheaper. If you're gouging your customers, someone else should step in and offer the same or better service at a lower price and take your customers. The exception to this is the first case, where you've just done something that the competition has not caught up with yet.

So, when the first case is not occurring and a company reports large profits, it basically means that they are gouging their customers in one way or another. Maybe they have a monopoly and can charge whatever they want, or there are a small number of competitors who all have an 'understanding' not to compete on price, or barriers to entry make it hard for new competition to enter the market, or some other explanation. But the very fact that the company can afford to charge customers so much more than what is necessary to break even indicates that the free market is not working in this case.

One possible solution here would be to make taxes on company profits have a very large jump once profit exceeds a certain proportion of revenue. I don't know how practical this would actually be to enforce, but it seems to me that the results would be beneficial. You would still be incentivising companies to be efficient, but it would reduce the tendency to cut corners on their products, reduce salary and benefits of their workers, and unnecessarily send jobs offshore, since this extra profit would not make its way into the pockets of the key stakeholders of the company.

You would still need to find a way to allow exceptions for large profits due to genuine innovation, and you'd also have to find a way to tell the difference between necessary expenses of a company and reasonable salaries, and overblown salaries and giant bonuses, otherwise a company could claim a lower profit margin by simply increasing the salaries of the top executives, and you wouldn't have solved the problem.

I'm sure there are various issues with these ideas, but I think they create interesting possibilities.