income tax rates and the bailout

http://yglesias.thinkprogress.org/archives/2008/09/a_thought_experiment_on_incentives.php

I thought this deserved its own thread. This guy's basic thesis is that there's probably nothing wrong with confiscatory income rates on the very rich (8 figure annual incomes) because that'll steer the best'n'brightest away from finance, which doesn't really benefit the economy.

I'm sympathetic to the argument. The median American citizen, I believe, would benefit more from a breakthrough in pedagogy or clean energy or computer hardware than from creating the next hot investment vehicle.

OTOH, this might be an emotional reaction to this week's news.

Thoughts?

Superdave,

I dont ever agree with you, but the article makes an interesting point. Something obviously has to be done. Furthermore, I wish this angle was covered by the media. How come the best and brightest schools in America produced such idiots? Is an Ivy league business education really worth anything other than learning how to screw average americans. I would love to know how many people who worked at these firms came from these schools. Of course, I probably will never get an answer or a study will never be done. The sad reality is many of the media elites, political elites and business elites have will never turn on each other.

What is most galling about this financial meltdown is the number of professors from these academic institutions who are on TV telling us why this happened. Hey professor, why dont you go back in the classroom and teach ethics!

I never ever want to hear from anybody that people are worth 1,000 times more than the average worker.

If the best and the brightest go into finance, wouldnt you think that somebody will cry wolf when the company is milions of Dlls. in red ink, my grasp of high economics is minimal, but if I find that I HAVE to use my credit cards, thats a good indication that I should spend less.

Personally, I dont think the rich should be over taxed, but -this being a democracy- I believe that if we have the same rights under the law, we should carry the same obligations, so if 8% of my income goes to Uncle Sam in income Taxes, Bill Gates should pay the same.

Finance doesn't benefit the economy? The ability to quantify, value and shift risk to those willing to bear it is part of the very foundation of western civilization.



Oh, and I'd like to add that about as many grads from top schools go into Consulting, making their services freely available to solve the worlds problems.

Crying wolf after you're bleeding is just a little too late. Companies are incentivized to use as lots of debt. However, banks are little different.

I don't think a super tax on people who make over $10 million per year will make people not enter the financial industry. It might make people not want to be professional baseball players.

The financial industry does benefit the economy and society. Not necessarily individual people in the industry....

There isn't anything inherently wrong, in my opinion, with being very rich. If a person makes such a breakthrough or innovation that you believe benefits you or society in general, what is wrong with them getting rich in the process?

"Bad" behavior in the financial industry should be constrained with appropriate regulation and criminal penalties. Income tax rates won't address the heart of the problem.

I would like to know how many grads. It is time we started looking at the cold hard facts. If these investment banks were being run by the good old ivy league network, then that says something about these universitities.

You can't just look at the banks. You have to look at their customers, too.

If the income tax on income over $10M was 99%, then there'd be very little point in making that much money. Which would de-incentivize careers in finance. I mean, I'll bet that a hefty percentage of Matt's Harvard '03 classmates who work in finance aren't there because they love the work. They love the income and lifestyle.

The post, I thought, wasn't a serious policy proposal so much as a "what if cancer researchers and teachers made more than ballplayers?" type statement. I'm not arguing that high finance isn't worthwhile, I'm just arguing that its benefits to society is way out of whack with the money to be made. Especially because, as we've seen, alot of the money that guys make in the industry, ultimately, comes from taxpayers every half-generation or so. Maybe instead of a confiscatory income tax rate, tax them at the normal rate, but then take 3/4 of the rest of their money and put it in T-bills for 10 years. If Johnny Wall Street had $2m put into T-bills through this plan in 2003, he gets to keep it if Wall Street doesn't need a bailout by 2013. If it does, well, we know where Uncle Sam is getting some of the money.

Loves the lifestyle?

Who loves regular 100-120 hour work weeks?

A large part of Harvard (insert whatever upper crust school you please hear)'s best may go to Wall Street, but you don't stay there.

You do your time at a bank, then go to private equity or a hedge fund. Equal compensation, MUCH better lifestyle. If you don't make it, as an undergrad, go to MBA school and try again.

Part of the problem is that much of the actual I-bank talent is second-rate when compared to the best of private equity and hedge funds.

You want an absurd tax structure, look at how hedge fund and private equity guys get paid.

No there wouldn't. More people would do it overseas.

This actually isn't true. My wife works in finance, and as you know, I'm studying it myself. Her coworkers love their jobs, and she loves her job. Granted, they work with bonds, and I suspect that persons whose hours are dictated by the opening and closing bells of the markets likely enjoy their work much more than I-bankers, who work 100+ hours a week.

I'll also note that, as a U of Chicago student, I am duty-bound to take delight in all of the trash being said about people who studied finance at the Ivies.

I meant the lifestyle that that level of income provides. Not the insane hours.

The insane hours ARE the lifestyle.

If you work 120 hours a week, what the hell does it matter that you have a nice sailboat?

You wouldn't be taking away the incentive to go into finance. You would be taking away the incentive to make it rich in the US.

That may affect some finance people (finance does not guarantee an 8, 7, or even 6 figure salary), but it would affect the US as a whole much more. It would mean no more incentives for scientific breakthroughs, engineering inventions, groundbreaking technology (of which we are in significant need, due to the energy problems of the US), new innovations of all types...

First of all, some cancer researchers DO make more money than ballplayers. In fact, I know of one who helped to create an organic molecule that could fully contain a chemotherapy molecule, and then release it when exposed to radiation. (This means they can localize the effects of chemotherapy instead of having it "treat" the whole body). His innovation was bought out by a major pharmaceutical in Spain. And yes, he made incredible money for it (My guess is 9 figures, maybe high 8 figures...based on his current lifestyle).

The problem with what you are thinking is that your average cancer researcher is no more effective in solving the problem than your average finance guy is at solving a financial crisis. It is the good finance guys that make good money, the good cancer researchers that make good money, and yes, good ballplayers that make good money.

You suffer way too much from availability heuristics. http://en.wikipedia.org/wiki/Availability_heuristic

You don't get the same benefits from government, however. Not even close. Gates clobbers you.

While I agree with you on the core of the principle, I disagree with the quantification.

Which is the trade-off. Its not especially easy to get into these positions and they work you really ********ing hard. The assumption that we need to discourage people is pretty silly - its pretty self selecting and a lot of people who don't feel like doing it leave very quickly. The burn-out rate for people to work in finance is huge.

The initial thought implies that its all insanely high gains for minimal effort which is so easy. Its not.

That's exactly my point, I dont get any benefits from the government, while people with high income get all sort of breaks.

Have you ever heard of the Government coming to the rescue of any of the poor folks who lost their houses ?

Well, that's not exactly true. However, I'm not sure how cutting the taxes of rich folks is the logical conclusion here.

What, they all made their millions, and now they are getting the american taxpayer to give them more trillions?

Who's the idiots?

The American taxpayer isn't "giving" them millions. The American taxpayer is buying the companies in question. It's not ideal, but it's (a) better than a total financial collapse, and (b) better than just giving money away.

I wonder how McCain is going to explain this one, the republican mantra is "hands off" big business, and as far as I can recall, this is the biggest government "hands on" since FDR, and in doing so, the debt escalates big time.

The republicans are screwing us.

I'm almost positive that we're not buying the companies. We're buying their toxic assets. If we were buying the companies, that would suck. But buying their shitpiles sucks a whole lot worse.

No, we're buying the companies.