The Washington City Paper has a profile of David Alpert, who runs the excellent Greater Greater Washington blog (and has been known to read Bottom-Up on occasion). The City Paper says Alpert has used the GGW blog to become “arguably the District’s most important advocate on issues of planning and development.” By focusing on specific local issues like parking mandates and streetcar lines, Alpert has made Jane Jacobs-style urbanism a force to be reckoned with in the DC area.
As Matt Yglesias points out, Alpert represents a new model of political engagement, using the new tools of the Internet to assemble a local political coalition that would have been hard to create using more traditional tools. But I was also struck by this passage:
In 2007, Alpert’s future wife Stefanie got a job in the D.C. office of law firm Wilmer Hale. The couple decided to move, and Alpert left Google behind. “When I started at Google, if you had an idea, you could run it by Larry or Sergey at lunch,” Alpert says, referring to company founders Larry Page and Sergey Brin. “By the time I left, it was 15,000 people, and there was a lot more process…Getting a product done was more about navigating this process and navigating the bureaucracy or the competing interests, as opposed to spending your time coming up with ideas.”
Of course, it wasn’t quite as scary for Alpert to quit his job as it might be for most people: Though he declined to elaborate on his personal finances, let’s just say that six years at Google left Alpert sufficiently well off that he wouldn’t need to scour the want-ads for a long, long time.
This got me thinking about tax policy. I gather that Alpert started at Google around 2001 and presumably made a ton of money when Google had its IPO in 2004. If we still lived under the tax regime of the 1970s, and his payout was large enough, he’d have paid the top marginal rate of 70 percent on most of it. In the 1950s, it would have been 91 percent. In contrast, the top marginal rate in 2004 was just 35 percent.
One of the perverse things about the confiscatory tax levels that prevailed in the mid-20th century is that it created systematic disincentive to do high-risk, high-reward entrepreneurship. Given a choice between a startup with a 20 percent chance of paying $10 million after 5 years, or working a steady corporate job at $100,000/year for 20 years, there’s a good case for taking the former option. But if the $10 million is going to be taxed at 70 percent (so you’d only get $3 million if the business succeeded), young, smart workaholics are far more likely to take the safe corporate job with the lower marginal tax rate. And of course things look even grimmer if the top rate is 91 percent.
Notice also how hard it would be for someone to do what Alpert is doing without being in his financial position. GGW is incredibly successful as a vehicle for citizen involvement, but I doubt it gets enough traffic to pay anyone’s rent. And it would be incredibly difficult to persuade a third party like a foundation or think tank to pay someone to do a niche blog like GGW. Only when the same person has both the relevant knowledge and interests and the financial resources to focus on it full-time is this kind of work possible.
This is a point I’ve made before about people like Mark Shuttleworth and Jimmy Wales. The effectiveness of philanthropic efforts is a function not only of the amount of money being spent but also of who’s spending it. People tend to be most effective when they’re spending their own money on stuff they’re passionate about. Which means that there are large benefits from the fact that, thanks in part to changes in tax law, millions of Americans are now wealthy enough to pursue their idiosyncratic (and maybe not very profitable) passions full-time.
Hum, so sure, but there is a trade-off to lower marginal taxes. At some functional level, the ability of government to pay for programs that may have large scale success at levels where success isn’t necessarily existent is damaged. Mind you, from what I’ve read on this blog, I imagine this is implicit in your thinking, but it seems that the cost should be taken. 91% marginal taxes are absurd, but I feel that there is a level above our current 35% which needs to occur.
Similarly, for every Alpert and Wales, there are thousands of individuals amassing wealth for the simple ability to do so or to live a particular lifestyle, not to follow hobbies that lead to some public good.
If the goal is to increase public good, there seems to be a tradeoff between dynamism and stability, ie. if we take it as a given that government can’t create something that is as good as wikipedia, but what things could government have done with the money that a hundred Jimmy Wales now no longer pay in taxes (given a 1/100 rate of success return for people with Jimmy Wales’s disposable income to have a Jimmy Wales level of success). From my level, I’m convinced that there are a sufficiently large amount of things sacrificed that we need to balance it towards a better balance of both. Not 35% or 91%. Maybe 63%?
Of course the tax dollars raised matters. But also remember that we’ve got deadweight loss to factor in as well. The general public perception is that you can raise taxes on rich people without any negative effect beyond the dollars they lose, which is what I assume Tim is trying to address.
“but what things could government have done with the money that a hundred Jimmy Wales now no longer pay in taxes ”
What kind of things? Kill more Afghanis, Pakistanis and Iraqis? Subsidize more agriculture or “Made in America” goods? Bail out more well connected companies? Bribe powerful lobbies and unions more? Buy more assault vehicles and automatic weapons for SWAT teams to go on pot raids? Buy hardware for more wiretapping? Purchase more useless aircraft the military doesn’t even want? Buy more drugs to do with BP employees? Can you see why some people might consider “having more money in government coffers” to not necessarily be a “benefit” that is being shamefully ignored?
“From my level, I’m convinced that there are a sufficiently large amount of things sacrificed that we need to balance it towards a better balance of both. Not 35% or 91%. Maybe 63%?”
If you are angry that if we don’t raise tax rates to 63% on the wealthy we’ll have to “sacrifice” a sufficiently large amount of public services, then perhaps you should direct your ire at the people who, for the last 10 years, increased public spending more to previously unheard of heights, yet couldn’t manage to find the cash to fund those “necessary” projects out the trillions in new spending. Those who chose to spend that money on things other than what you want are just as guilty (if not more so) of “sacrificing” those things as those who don’t want to pay new taxes for them.
there are thousands of individuals amassing wealth for the simple ability to do so or to live a particular lifestyle, not to follow hobbies that lead to some public good.
It’s my impression that generally the ultra-rich don’t simply stash all their money in a savings account. Even rich people who aren’t being actively philanthropic tend to do things like invest their money in business. How many high-quality jobs are provided by Google these days, and how would that change if initial investors had to consider a very high marginal tax rate at the outset?
I’m not insensitive to the arguments centering around “inequality”, but most of them seem to be short-sighted, overly simplistic “nobody needs that much money” sorts of things. It’s not a zero-sum game; we all benefit when more people are able to vigorously participate in the economy.
‘I’m not insensitive to the arguments centering around “inequality”, but most of them seem to be short-sighted, overly simplistic “nobody needs that much money” sorts of things. It’s not a zero-sum game; we all benefit when more people are able to vigorously participate in the economy.”
Agreed. It would be one thing if A) the poor were getting worse off on average or B) the rich were creating inequality by stealing from the poor, but neither of these things seem to be true in our case. (Yes, I know they are true in some specific circumstances, but there is not the general perception that it is the case) Will Wilkinson has a bunch of posts about how injustice seems to be a lot more important to people than inequality.
Hear, hear, Brian! We’d all be better off without the spending you describe. Even worse, now that we’re spending all that money on those awful things, we will be forever plagued by the odious lobbying, marketing, and media interference of the people who produce all those awful things for the government to buy. It’s little wonder why Americans today are more afraid than ever of crime, immigrants, drug use, and terrorism, even though all the rates of all of those are at historic lows.
Not that I really want anyone to follow this advice, Ferny, but fear-mongering is the obvious way to ensure spending on your favored programs. It doesn’t matter if most Americans will never be affected by the issues that are important to you, if you can somehow make them afraid that they will be. Follow the example of those who have succeeded at fleecing the American taxpayer!
I’m not sure, but there may be an interesting top-down/bottom-up dynamic at work here. If a large enough group of brainwashed voters support an awful spending program, does it matter that their “consent” is “manufactured”? This is still bottom-up, right?
“I’m not sure, but there may be an interesting top-down/bottom-up dynamic at work here. If a large enough group of brainwashed voters support an awful spending program, does it matter that their “consent” is “manufactured”? This is still bottom-up, right?”
Well, I think maybe there are 2 contexts there — the support for the policy could be decentralized, in that genuinely many people might support it, but the actual implementation of it could be centralized or decentralized, though obviously things run by the federal government tend towards the former. 🙂
The centralization I’m talking about is the astroturfing/marketing/media-buying/push-polling/etc. that generates the support in the first place. (I don’t dispute that some widely-held political preferences are the natural result of widely-held beliefs and interests, but there are also such political preferences that require regular care and feeding from large vested interests.) Does this nullify the bottom-upness of the political preference? Or maybe bottom-upness as a category applies to programs but not the politics behind them? (Sorry, just thinking out loud here.)
“One of the perverse things about the confiscatory tax levels that prevailed in the mid-20th century is that it created systematic disincentive to do high-risk, high-reward entrepreneurship.” – Yes, but it did get us a higher economic growth rate, big advances in technology and a rising standard of living. I guess that’s the trade off.
I’ll try to avoid addressing the practical case, since I think you and I have fundamental differences of opinion regarding that question that are unlikely to be resolved in a blog comment thread. But I do want to address the question of incentives: I think there’s a real case to be made regarding the tax (dis)incentives surrounding new business ventures. I don’t personally think it holds up empirically, but it’s certainly defensible.
But the idea that it’s wise to accumulate wealth among a very few because this allows those individuals to pursue their idiosyncratic philanthropic impulses — I think you’d probably admit that there’s a lot more work to be done before this is a complete argument. This post and the linked post provide a number of anecdotal appeals, but of course that’s not really sufficient to make the case that this is a socially optimal system for using that wealth (and even among the anecdotes, I think it’s tough to look at the John Gilmore example and conclude that the money is being efficiently spent (except as personal consumption/entertainment) by virtually any measure of utility).
And, if I can respond to those pointing out the systemic problems associated with letting governments spend “surplus” wealth (e.g. governments tend to find excuses to kill non-citizens): there are problems with the private philanthropic model, too, even beyond individuals’ sometimes-flawed ideas about how to spend their money for others’ benefit. For instance, I listened to a quiz show this morning on NPR thanks in part to the generosity of an endowment dedicated to the eradication of nuclear weapons! How this underwriting expense served that goal, I have no idea. But I suspect there’s a sizable endowment somewhere helping provide me with my Sunday morning entertainment, all thanks to the legacy of some dead guy who may or may not have cared a whit about public radio.
Admittedly, wasting money on NPR is substantially less problematic than wasting it on killing foreigners and destroying their property. Still, I think it’s hard to claim that these funds are applied thoughtfully by private philanthropy. Any genuinely large endowment will tend to quickly fall into the hands of managers who face a very different set of incentives than did the person who earned the money.
Hey Tom,
Thanks for commenting. I wasn’t trying to offer a general defense of private philanthropy, which is something that would take more than a single blog post. In particular, my argument doesn’t apply to huge foundations created by guys who died decades ago.
Rather, my point is simply that there are many types of philanthropy that are best accomplished when the individual providing the funds is deeply involved in the use of those funds. I’m not saying that it’s good to “accumulate wealth among a very few.” Quite the contrary, there are actually quite a lot of people—hundreds of thousands at least—who are wealthy enough that they never have to work again and can devote their energies to charitable endeavors, but are not so wealthy that they have trouble keeping track of where all their money is going. These hundreds of thousands of people collectively have a lot of knowledge about opportunities for effective, relatively small-scale, philanthropy that gets lost if their wealth is taxed away and charitable activities are centralized in Congress and a relative handful of federal agencies.
Sort of surprised you didn’t make the obvious historical analogy, Tim- the Carnegie Libraries. Gates’ giving to charter schools may also go down in this vein; we’ll see.
I should note, though, that I don’t think it is sufficient to say ‘the wealthy can do philanthropy.’ There are lots of ways to fund philanthropy; the examples you give here, for example, could likely have been funded through alternative mechanisms like a guaranteed basic income (see, e.g., discussion of that concept here.) And much philanthropy by the wealthy is primarily about vanity and therefore incredibly inefficient and/or ineffective; see, e.g., Yglesias’ dead-on ranting about the wealthy giving to the already-wealthy Ivies.
For your argument to be most persuasive, you have to show (and FWIW I think you can show) that the rich do philanthropy that wouldn’t get done otherwise, because both the concentration of wealth and their eccentricities/lack of need to conform to societal norms/etc. allow them to think outside the box on occasion. It is those bottom-up outliers that make the rest of the inefficiencies probably worth it, in my opinion. But you’re not getting at that point clearly here, I don’t think.
Luis, perhaps the best example of “wouldn’t get done otherwise” is the Gateses’ work in childhood immunization? I mean, we’ve been hearing about that need for decades, and apparently none of the previous players could get it done. Now the Gateses are.