Tax the Risk Takers

It's easy to identity The Rich, The 1%,  after they have achieved their wealth. But how do we identify them before they have achieved that level of disrepute? That's much harder. For every person who has achieved that status, there are lots more who tried and failed. Lots more who risked the time, effort and money necessary to try to achieve that level of success. Why would so many people do that when they know the odds are against them? Because the payoffs to success are large.

Let's say (just to make the math simple) that the payoff for successfully starting a new business is a million dollars, and the probability of success is 5%. Then your "expected payoff" is .05x1,000,000=$50,000. If it costs you $40,000 in capital and opportunity cost (what you could have earned working at your current job), then you should be willing to start this business (unless you are a risk averse person).

Now imagine that government decides that the 5% of triers who are successful should be taxed even more to support those who weren't successful or haven't tried. Suppose the payoff for success drops to $800,000. That's still a lot of dough. They don't need it. It's only fair, isn't it? Well, if you look at everything on a post trial basis, it sort of does. But let's look at what happens to the risk equation. Your expected payoff now drops to .05x80,000=$40,000. Investing $40,000 to start that business no longer makes economic sense. Now imagine that government passes a lot of legislation that makes success less likely. Or it subsidizes your established competitors who have sent campaign contributions to Congress. Now the expected payoff will drop to even less than $40,000. In this simplified example, nobody would start a business.

The real world equation isn't quite this simple, but the principles and the math are the same. The more you tax the payoff for success and the more impediments to success you throw up, the fewer people you will have taking the risks in the first place. Is that what we all want? That is why you have to focus not only on how government affects those who are successful, but also on how it affects those who might be trying to be successful.