This may or may not be relevant in this specific discussion, but I do think there is a serious problem in the US where an unbalanced tax code (with a capital gains tax much lower then the income tax) creates incentives for more intelligent people to go into investments as a career (instead of science, engineering, ect) then might be optimal for us as a society.
I think that on the whole, investment probably does have more societal benefits then societal costs, but I also think that we’re spending disproportionately too many resources on that section of our economy that could have greater benefits elsewhere because of the distortion effects of the current tax code.
I think that on the whole, investment probably does have more societal benefits then societal costs
That’s a rather amazing statement.
Question: what would a society without investment look like? Say, some society decides that investment has more social costs than benefits and bans it. What then?
There was a time in the earlier part of the industrial revolution when most factories were privately owned without much outside investment; someone paid for them basically out of pocket, with the money either coming from themselves or from family members, possibly with some bank loans. Stocks have been around for a while, but they didn’t really become a major part of the economy until the mid 1800′s, when they became necessary for large railroad construction. (Which did lead to a railroad bubble and then a massive stock market crash that badly hurt the economy, but was still probably an overall positive thing.)
The economy would certainly be less efficient without a stock market. Very large projects would probably either not happen at all or would require govenrment backing. (To be fair, most large projects require some govenrment backing anyway, but it would be true to an even larger extent). And small companies would have a much harder time getting off the ground unless the person starting the company was already rich, or had personal connections with people who were. Banks would be much more important for businesses as both a source of capital and as a place to get interest on profits then they are today.
I would suspect that the economy would probably still function as a capitalist country with a reasonable standard of living without it, but it would be much less dynamic and less efficient in its use of capital, and would probably have a significantly lower growth rate.
To start, we seem to be having some terminology issues.
I understand “investment” as a general term: it describes the process of forgoing (or delaying) consumption and committing available resources towards some project which you expect to bring you benefits (usually monetary) in the future. A village blacksmith who saves money and then uses it to buy bigger and better bellows for his forge is making an investment.
You seem to understand “investment” as stock market—the public’s capability to freely buy shares in some limited-liability vehicles, typically corporations. Is that so?
Ah, yes, of course. Clearly you can’t do away with “investment” in the broad sense, since every farmer has to save seeds for next year’s crop.
I was just talking about “investment” in terms of the stock market, the bond market, and financial experts, since that was the subject of the thread; if it’s altruistically optimal to become a financial expert/ professional investment manager. That is, “investment” as a specialized profession, not “investment” the concept.
My stance was that “investment” as a specialized profession is probably a net positive to our society, but that we probably already have more people going into that field then are strictly optimal, so the marginal benefit to our society of having one more professional investor are probably smaller then the marginal benefit of having one more engineer or scientist or doctor or educator.
That is, “investment” as a specialized profession, not “investment” the concept.
Makes much more sense :-) Still. People who professionally deal with investment are usually called “bankers”. They’ve been around for a long time and the banking system (which you obviously can’t have if you don’t have any bankers) is usually held to fulfill some very useful functions in the society.
A counterfactual world without “investment” in the meaning of without bankers and, so, without banks and other similar financial intermediaries would look to me to be severely stunted. Finance develops very early in the history of civilizations, if it were made impossible it’s doubtful to what degree civilization could develop.
probably already have more people going into that field then are strictly optimal
What does “optimal” mean in this context and how do you determine what’s optimal and what’s not?
What does “optimal” mean in this context and how do you determine what’s optimal and what’s not?
Basically, I would expect adding more investment specialists (and yes, you are right, that should include both stockbrokers and bankers) to have diminishing returns as you have more of them relative to the size of the economy as a whole. If you have only a small number of stockbrokers and investment specialists, then any one of them would be able to find any number of very profitable investment opportunities every day that no one else had noticed, and each one individually would add a great deal to the efficiency of the economy as a whole. As you get more and more investment specialists, more and more of the obvious opportunities for investment are taken, and the additional stockbrokers are now looking for narrower margins, are looking at investments with either lower potential payoff or higher potential risk, are looking for arbitrage opportunities with lower profit margins, ect. At some point, you would expect diminishing returns; each additional professional investor would be adding a smaller and smaller degree of efficiency to the market. Having too many people in the investment sector might also force individual investors to take greater and greater risks in order to make a reasonable profit, which creates potential risks to the economy as a whole (especially if those investment specialists are investing other people’s money and not their own).
It’s hard to say exactally what is optimal, of course. However, the fact that mutual funds (stock funds carefully managed by investment professionals) generally have lower payouts then index funds implies to me that we’ve reached a point where having additional investment professionals playing the markets is no longer adding a value equal to their wages.
It’s also worth pointing out that the financial sector is a much larger percentage of the US economy as a whole then in previous years (about 8.5% of the economy now, compared to about 3% in 1950 and about 6% in 1990).
Edit: for a related example, I would make the same argument about lawyers; it’s a vital profession that’s necessary for our society to function properly, but we currently have more lawyers then is probably optimal, so you end up with more and more lawyers chasing more and more marginal opportunities, adding to the problem of a lot of unnecessary and mostly pointless lawsuits; and a lot of people who spend a huge amount of time and money getting the education to become a lawyer who end up never getting a good job in the field.
I’m not sure if that’s true of engineers or scientists. Perhaps the rate of invention and advancement in science increases lineally with the number of people working in those fields instead of having diminishing returns? Perhaps not, but that seems much less clear to me.
Anyway, I was just explaining what “optimal number of investors” looks like; there comes a point when adding another professional investor to the economy adds less to the economy then adding a professional of another type. Almost by definition, investors only have value in as much as they direct capital to other people doing other things of value; there comes a point when you have too many investors compared to the number of people doing things worth investing in for additional investors to have any value.
The question of if we’re at that point or not is a valid one; but I will say that it doesn’t appear obvious to me that the increase in the percent of resources going into the financial sector in the US from 1990 to today has made our markets more efficient or more stable then they were in 1990.
I’m not sure if that’s true of engineers or scientists.
I think it’s arguable for scientists as the set of things-to-be-discovered is really vast. But engineers—they don’t discover things, they make things and the demand for them is not unlimited. For the sake of argument, imagine half the population being civil engineers—does that look useful?
there comes a point when adding another professional investor to the economy adds less to the economy then adding a professional of another type.
Yep, you’re basically measuring things in terms of opportunity costs. But there are a couple of important questions here: (1) What do you want to measure in? Dollars? and (2) How could you possibly know/observe/calculate that particular point? You either need to trust the markets or believe is successful central planning.
I think it’s arguable for scientists as the set of things-to-be-discovered is really vast. But engineers—they don’t discover things, they make things and the demand for them is not unlimited. For the sake of argument, imagine half the population being civil engineers—does that look useful?
For civil engineers, probably not, no. But I would say that most people who actually invent physical things and develop new technology would also fall under the category of engineers, and that the set of useful-things-that-could-be-invented-or-improved-with-our-current-knowlege-base is also pretty vast. (Not as big as the set of “things to be discovered”, perhaps, but still quite large.)
But, as for your general point, sure; there comes a point where you get diminishing returns from most professions.
You either need to trust the markets or believe is successful central planning.
Well, trusting the markets is one thing, but like I said a few posts ago, I think current govenrment policy is warping the market here towards too much investment in the financial sector. For one thing, when you have capital gains tax at only about half of income tax, you are going to tend to skew the market towards finance and away from working in other fields.
For one thing, when you have capital gains tax at only about half of income tax, you are going to tend to skew the market towards finance and away from working in other fields.
I think it’s a bit trickier than you make it out to be. Keep in mind the difference between investors—people with the money—and investment professionals—people who help the investors use their money.
Your argument is that low capital gains tax rates make people invest more than they would do otherwise. And this creates demand for services of investment professionals and a corresponding job market.
However this is pure market satisfaction of an existing demand. I don’t see anything wrong with that—unless you want to make the argument that the society needs fewer investors or that they need to invest less. Do you?
What I would say is that it creates a bias towards the type of investment covered by capital gains tax (investment in the stock market, for example) and away the type of investment where you would still be paying income tax (investing in your own education, starting your own small business and paying yourself a salary, ect). Neither of those kinds of investment is necessarily better or worse then the other, but when you create a bias for one over the other, it makes the economy less efficient.
What I would say is that it creates a bias towards the type of investment covered by capital gains tax (investment in the stock market, for example) and away the type of investment where you would still be paying income tax (investing in your own education, starting your own small business and paying yourself a salary, ect).
I’m having trouble coming up with significant (on the whole economy scale) examples of investments that you pay income tax on. Education is one exception, true, but it’s heavily subsidized. Your own small business is not such an example as the investment is the cost of the business assets. You realize the investment gains when you sell that business and then you pay the capital gains tax. The salary that you pay yourself is not investment return, it’s part of business costs (and so tax deductible, of course).
The salary that you pay yourself is not investment return, it’s part of business costs (and so tax deductible, of course).
Yes, you’re correct. I worded that poorly, what I was thinking of is small single-ownership businesses that just take their business profits as income that they report on their regular tax forms.
Anyway, that’s not the only example; I think there’s a lot of things that the govenrment does that supports finance, either directly or by reducing the risk.
-FDIC insurance (protects banks to a great extent by basically eliminating the need for bank runs)
-The fact that the Federal Reserve loans banks money to banks (and not to anyone else) at an extremely low interest rate
-Emergency measure like the bank bailouts and QE
-The loophole that allows hedge fund managers can classify their income as “capital gains tax” instead of income tax even though they’re not risking their own money
ect.
To be clear, I think that several of those policies are very good ideas; FDIC insurance makes the whole economic system more stable, and the emergency bail outs and QE makes sense to me as an emergency responses to a once-per-century level financial crisis. However, the net effect of that is going to be a distortion of the market.
Anyway, back to the original point, I don’t think you can just look at how much someone is paid and use that to estimate how valuable their service is to society. For one thing, people are very commonly willing to accept a lower pay in order to do a job that they believe is altruistic, good for society, “important”, “personally satisfying” ect; everything from scientists to doctors to social workers. The net effect of that is probably to lower the wages of those “altruistic” fields compared to what they would earn in a hypothetical world where every worker is just trying to maximize personal profits; and, by making those wages somewhat lower then they “should” be, lowering the cost of things like science, medicine, and education and thus increasing how much of those things get done. That’s probably a good thing for society as a whole.
I think there’s a lot of things that the govenrment does that supports finance, either directly or by reducing the risk.
That is certainly true. However it is also true for e.g. agriculture.
I don’t think you can just look at how much someone is paid and use that to estimate how valuable their service is to society.
Does anyone claim that? Looks strawmannish to me, not to mention that I have no idea what “valuable to society” means and how to measure it.
For one thing, people are very commonly willing to accept a lower pay in order to do a job that they believe is altruistic, good for society, “important”, “personally satisfying”
Notice the rather important “personally satisfying” thing—it has nothing to do with being good for the society. I might find lying in the sun and composing appallingly bad poetry to be personally satisfying and yes, I will be paid less for it (e.g. zero) than if I were doing something other people want to pay money for.
That is certainly true. However it is also true for e.g. agriculture.
Sure, and you could argue that the US also spends more resources on agriculture then is strictly optimal because of that. (There may be arguments for that, if it lowers the chances of an unlikely but catastrophic food shortage, but that’s a different discussion.)
Does anyone claim that? Looks strawmannish to me, not to mention that I have no idea what “valuable to society” means and how to measure it.
I don’t think that I’m straw-manning here. I’m just saying that from an altruistic standpoint, the utility created for other people (and perhaps for society as a whole) by you doing your job might be as or more important as the utility created by you earning money at your job and then donating 10% of it or whatever to charity, so that’s probably something worth considering as well.
Your response seemed to be that we should just let the market figure that out, but if a large percentage of people are willing to do what they view as “altruistic work” for less then market price then that itself changes the market, preventing you from judging the utility created by someone’s work just from their income.
If the fact that people are willing to do altruistic work for less money lowers the cost of that altruistic work, then charity money spent on that altruistic work should go farther; for example, if the fact that people are willing to do science for $40,000 a year when they could be doing finance for $100,000 makes science much cheaper to do, that might be more important in the long run then having more people earning $100,000 and donating 20% of that to science.
Notice the rather important “personally satisfying” thing—it has nothing to do with being good for the society.
It very often does, though. People very often choose professions because they want to “help people”, or they want to “advance science”, or they want to “protect people”, ect. I think altruistic intentions do very frequently come into play here.
I’m just saying that from an altruistic standpoint
I’m not an altruist and I don’t see any reasons to approach issues in this framework.
the utility created for other people
So, how do you want to measure it if you don’t trust the market? The market is all about revealed preferences, if you don’t think it’s adequate, tell me how to evaluate the “value to society” or “the utility created for other people” by, say, Alice standing over there.
People very often choose professions because they want to “help people”, or they want to “advance science”, or they want to “protect people”, ect.
People say that they do. I think they quite often they are deluding themselves.
And, of course, aren’t you assuming the automatic fulfillment of basic needs? Will you still want to “help people” if it means your own kids will go hungry?
I’m not an altruist and I don’t see any reasons to approach issues in this framework.
Ah. Well, the context of this thread was:
Because some Less Wrongers are planning on earning to give and finance is a commonly considered career option for those who are earning to give, I thought that it might be of interest to the Less Wrong community.
So, how do you want to measure it if you don’t trust the market?
I think that a significant issues of bias comes from people who are trying to be rationalist over-valuing things that are easy to measure just because they are easy to measure. I agree with you that it’s harder to measure, but that doesn’t mean it’s not just as important.
Let me give a quick thought experiment about my thinking of the subject. Let’s say that you really want to advance science as quickly as possible. Right now, your options are you can either work as a scientist for $40,000 a year, or you can work in finance, earn $100,000 a year, and then donate $20,000 a year to scientific research. If most people choose the better paying job, then the people hiring scientists will be forced to pay them more and more in order to hire them. Eventually, the price of a scientist would go up to $80,000 or $90,000 a year. So even though science is getting somewhat better funding from the extra charity money coming in, it’s likely not enough to cover the higher cost of hiring scientists.
That’s obviously an over-simplified example, and there’s really not enough information to say one way or the other, but that’s the way I’m thinking about the subject.
People say that they do. I think they quite often they are deluding themselves.
Perhaps. Human motivation is a very complicated thing, obviously.
I think, very often, “a job where I help people” and “a job I find personally satisfying” are very deeply linked concepts, at least for a lot of people. So, maybe people help people because they want to help people; maybe people help people because it makes them feel good when they help people; maybe people just want to think that they’re the kind of people who feel good when they help people, or maybe (most likely, even) it’s some combination of all three. So what?
And, of course, aren’t you assuming the automatic fulfillment of basic needs?
I’m assuming that the education job or science job or whatever does at least pay enough to fill basic needs, yes. If there aren’t any jobs at all in field X, then you probably shouldn’t go in that direction.
Let’s say that you really want to advance science as quickly as possible.
OK. The first question is, can you advance science? You get gold stars for participation only in the kindergarten. Any reason you think you will actually produce value as a scientist instead of being a burden to be dragged along?
Right now, your options are you can either work as a scientist for $40,000 a year, or you can work in finance, earn $100,000 a year, and then donate $20,000 a year to scientific research.
A funny comparison you’re setting up. For equivalent situations, don’t you want to donate $60,000?
So even though science is getting somewhat better funding from the extra charity money coming in, it’s likely not enough to cover the higher cost of hiring scientists.
That may or may not be true—you will have to make strong assumptions about several things to argue any side of this case.
So what?
The point is that altruism is rare. Not that many people are willing to make personal sacrifices purely for the good of others.
OK. The first question is, can you advance science? You get gold stars for participation only in the kindergarten. Any reason you think you will actually produce value as a scientist instead of being a burden to be dragged along?
You could just as easily ask “can you succeed in finance”? Obviously, if you don’t actually have the ability to do a certain job, then you probably shouldn’t make that your career path.
For equivalent situations, don’t you want to donate $60,000?
I would say that if you are working in finance, living in a financial center (say, New York City), and most people you know are also working in finance, it would be very difficult to live on $40,000 a year. You would be expected by your social acquaintances to own expensive suits, to drive a nice car, to go on expensive social outings, ect.
Giving 20% of your income, the way I’m suggesting, is itself a really, really hard thing to do. Most people don’t manage to give 10%.
The point is that altruism is rare. Not that many people are willing to make personal sacrifices purely for the good of others.
Interesting. What makes you think that? My impression is that most people tend to be at least somewhat altruistic, and that “altruistic emotional rewards” (like “the joy you get from helping someone else”) tend to be a major driving factor in many people’s decision making processes.
creates incentives for more intelligent people to go into investments as a career (instead of science, engineering, ect) then might be optimal for us as a society.
Tech companies (and I think startups of all kinds) routinely give large stock options to employees. It’s not obvious that the tax preference for capital gains actually helps investment bankers more than it helps engineers.
That is very true. In practice, however, there are so many exceptions and loopholes in corporate income tax that corporations end up paying on average only something around 12% of income as tax.
So even with the “double taxation”, if $100 of profit is taxed through 12% corporate income tax and then taxed again through a 15% capital gains tax (let’s say the company pays their profit out as a dividend), the investor gets (100.88.85) $74.8, so it’s an effective tax rate of only about 25.2%. (And, yeah, the investor doesn’t directly get corporate profits unless it’s a dividend, but in theory a corporation that isn’t paying a dividend should instead be using profits to re-invest in the business in a way that makes the stock price go up, so the end result is roughly the same for the investor.)
A small business that is filing it’s profits through the as normal income tax may be paying a 39.6% tax rate, so it’s still much higher.
That is very true. In practice, however, there are so many exceptions and loopholes in corporate income tax that corporations end up paying on average only something around 12% of income as tax.
That doesn’t take into account the deadweight loss involved in jumping through hoops to get all those exceptions and loopholes. And in any case the fundamental problem is the existence of the exceptions and loopholes in corporate income tax, not the low capital gains tax.
This may or may not be relevant in this specific discussion, but I do think there is a serious problem in the US where an unbalanced tax code (with a capital gains tax much lower then the income tax) creates incentives for more intelligent people to go into investments as a career (instead of science, engineering, ect) then might be optimal for us as a society.
I think that on the whole, investment probably does have more societal benefits then societal costs, but I also think that we’re spending disproportionately too many resources on that section of our economy that could have greater benefits elsewhere because of the distortion effects of the current tax code.
That’s a rather amazing statement.
Question: what would a society without investment look like? Say, some society decides that investment has more social costs than benefits and bans it. What then?
There was a time in the earlier part of the industrial revolution when most factories were privately owned without much outside investment; someone paid for them basically out of pocket, with the money either coming from themselves or from family members, possibly with some bank loans. Stocks have been around for a while, but they didn’t really become a major part of the economy until the mid 1800′s, when they became necessary for large railroad construction. (Which did lead to a railroad bubble and then a massive stock market crash that badly hurt the economy, but was still probably an overall positive thing.)
The economy would certainly be less efficient without a stock market. Very large projects would probably either not happen at all or would require govenrment backing. (To be fair, most large projects require some govenrment backing anyway, but it would be true to an even larger extent). And small companies would have a much harder time getting off the ground unless the person starting the company was already rich, or had personal connections with people who were. Banks would be much more important for businesses as both a source of capital and as a place to get interest on profits then they are today.
I would suspect that the economy would probably still function as a capitalist country with a reasonable standard of living without it, but it would be much less dynamic and less efficient in its use of capital, and would probably have a significantly lower growth rate.
To start, we seem to be having some terminology issues.
I understand “investment” as a general term: it describes the process of forgoing (or delaying) consumption and committing available resources towards some project which you expect to bring you benefits (usually monetary) in the future. A village blacksmith who saves money and then uses it to buy bigger and better bellows for his forge is making an investment.
You seem to understand “investment” as stock market—the public’s capability to freely buy shares in some limited-liability vehicles, typically corporations. Is that so?
Ah, yes, of course. Clearly you can’t do away with “investment” in the broad sense, since every farmer has to save seeds for next year’s crop.
I was just talking about “investment” in terms of the stock market, the bond market, and financial experts, since that was the subject of the thread; if it’s altruistically optimal to become a financial expert/ professional investment manager. That is, “investment” as a specialized profession, not “investment” the concept.
My stance was that “investment” as a specialized profession is probably a net positive to our society, but that we probably already have more people going into that field then are strictly optimal, so the marginal benefit to our society of having one more professional investor are probably smaller then the marginal benefit of having one more engineer or scientist or doctor or educator.
Makes much more sense :-) Still. People who professionally deal with investment are usually called “bankers”. They’ve been around for a long time and the banking system (which you obviously can’t have if you don’t have any bankers) is usually held to fulfill some very useful functions in the society.
A counterfactual world without “investment” in the meaning of without bankers and, so, without banks and other similar financial intermediaries would look to me to be severely stunted. Finance develops very early in the history of civilizations, if it were made impossible it’s doubtful to what degree civilization could develop.
What does “optimal” mean in this context and how do you determine what’s optimal and what’s not?
Basically, I would expect adding more investment specialists (and yes, you are right, that should include both stockbrokers and bankers) to have diminishing returns as you have more of them relative to the size of the economy as a whole. If you have only a small number of stockbrokers and investment specialists, then any one of them would be able to find any number of very profitable investment opportunities every day that no one else had noticed, and each one individually would add a great deal to the efficiency of the economy as a whole. As you get more and more investment specialists, more and more of the obvious opportunities for investment are taken, and the additional stockbrokers are now looking for narrower margins, are looking at investments with either lower potential payoff or higher potential risk, are looking for arbitrage opportunities with lower profit margins, ect. At some point, you would expect diminishing returns; each additional professional investor would be adding a smaller and smaller degree of efficiency to the market. Having too many people in the investment sector might also force individual investors to take greater and greater risks in order to make a reasonable profit, which creates potential risks to the economy as a whole (especially if those investment specialists are investing other people’s money and not their own).
It’s hard to say exactally what is optimal, of course. However, the fact that mutual funds (stock funds carefully managed by investment professionals) generally have lower payouts then index funds implies to me that we’ve reached a point where having additional investment professionals playing the markets is no longer adding a value equal to their wages.
It’s also worth pointing out that the financial sector is a much larger percentage of the US economy as a whole then in previous years (about 8.5% of the economy now, compared to about 3% in 1950 and about 6% in 1990).
Edit: for a related example, I would make the same argument about lawyers; it’s a vital profession that’s necessary for our society to function properly, but we currently have more lawyers then is probably optimal, so you end up with more and more lawyers chasing more and more marginal opportunities, adding to the problem of a lot of unnecessary and mostly pointless lawsuits; and a lot of people who spend a huge amount of time and money getting the education to become a lawyer who end up never getting a good job in the field.
That’s a fully general argument, isn’t it? You can apply it to, say, engineers in exactly the same way.
I’m not sure if that’s true of engineers or scientists. Perhaps the rate of invention and advancement in science increases lineally with the number of people working in those fields instead of having diminishing returns? Perhaps not, but that seems much less clear to me.
Anyway, I was just explaining what “optimal number of investors” looks like; there comes a point when adding another professional investor to the economy adds less to the economy then adding a professional of another type. Almost by definition, investors only have value in as much as they direct capital to other people doing other things of value; there comes a point when you have too many investors compared to the number of people doing things worth investing in for additional investors to have any value.
The question of if we’re at that point or not is a valid one; but I will say that it doesn’t appear obvious to me that the increase in the percent of resources going into the financial sector in the US from 1990 to today has made our markets more efficient or more stable then they were in 1990.
I think it’s arguable for scientists as the set of things-to-be-discovered is really vast. But engineers—they don’t discover things, they make things and the demand for them is not unlimited. For the sake of argument, imagine half the population being civil engineers—does that look useful?
Yep, you’re basically measuring things in terms of opportunity costs. But there are a couple of important questions here: (1) What do you want to measure in? Dollars? and (2) How could you possibly know/observe/calculate that particular point? You either need to trust the markets or believe is successful central planning.
For civil engineers, probably not, no. But I would say that most people who actually invent physical things and develop new technology would also fall under the category of engineers, and that the set of useful-things-that-could-be-invented-or-improved-with-our-current-knowlege-base is also pretty vast. (Not as big as the set of “things to be discovered”, perhaps, but still quite large.)
But, as for your general point, sure; there comes a point where you get diminishing returns from most professions.
Well, trusting the markets is one thing, but like I said a few posts ago, I think current govenrment policy is warping the market here towards too much investment in the financial sector. For one thing, when you have capital gains tax at only about half of income tax, you are going to tend to skew the market towards finance and away from working in other fields.
I think it’s a bit trickier than you make it out to be. Keep in mind the difference between investors—people with the money—and investment professionals—people who help the investors use their money.
Your argument is that low capital gains tax rates make people invest more than they would do otherwise. And this creates demand for services of investment professionals and a corresponding job market.
However this is pure market satisfaction of an existing demand. I don’t see anything wrong with that—unless you want to make the argument that the society needs fewer investors or that they need to invest less. Do you?
What I would say is that it creates a bias towards the type of investment covered by capital gains tax (investment in the stock market, for example) and away the type of investment where you would still be paying income tax (investing in your own education, starting your own small business and paying yourself a salary, ect). Neither of those kinds of investment is necessarily better or worse then the other, but when you create a bias for one over the other, it makes the economy less efficient.
I’m having trouble coming up with significant (on the whole economy scale) examples of investments that you pay income tax on. Education is one exception, true, but it’s heavily subsidized. Your own small business is not such an example as the investment is the cost of the business assets. You realize the investment gains when you sell that business and then you pay the capital gains tax. The salary that you pay yourself is not investment return, it’s part of business costs (and so tax deductible, of course).
Yes, you’re correct. I worded that poorly, what I was thinking of is small single-ownership businesses that just take their business profits as income that they report on their regular tax forms.
Anyway, that’s not the only example; I think there’s a lot of things that the govenrment does that supports finance, either directly or by reducing the risk.
-FDIC insurance (protects banks to a great extent by basically eliminating the need for bank runs)
-The fact that the Federal Reserve loans banks money to banks (and not to anyone else) at an extremely low interest rate
-Emergency measure like the bank bailouts and QE
-The loophole that allows hedge fund managers can classify their income as “capital gains tax” instead of income tax even though they’re not risking their own money
ect.
To be clear, I think that several of those policies are very good ideas; FDIC insurance makes the whole economic system more stable, and the emergency bail outs and QE makes sense to me as an emergency responses to a once-per-century level financial crisis. However, the net effect of that is going to be a distortion of the market.
Anyway, back to the original point, I don’t think you can just look at how much someone is paid and use that to estimate how valuable their service is to society. For one thing, people are very commonly willing to accept a lower pay in order to do a job that they believe is altruistic, good for society, “important”, “personally satisfying” ect; everything from scientists to doctors to social workers. The net effect of that is probably to lower the wages of those “altruistic” fields compared to what they would earn in a hypothetical world where every worker is just trying to maximize personal profits; and, by making those wages somewhat lower then they “should” be, lowering the cost of things like science, medicine, and education and thus increasing how much of those things get done. That’s probably a good thing for society as a whole.
That is certainly true. However it is also true for e.g. agriculture.
Does anyone claim that? Looks strawmannish to me, not to mention that I have no idea what “valuable to society” means and how to measure it.
Notice the rather important “personally satisfying” thing—it has nothing to do with being good for the society. I might find lying in the sun and composing appallingly bad poetry to be personally satisfying and yes, I will be paid less for it (e.g. zero) than if I were doing something other people want to pay money for.
Sure, and you could argue that the US also spends more resources on agriculture then is strictly optimal because of that. (There may be arguments for that, if it lowers the chances of an unlikely but catastrophic food shortage, but that’s a different discussion.)
I don’t think that I’m straw-manning here. I’m just saying that from an altruistic standpoint, the utility created for other people (and perhaps for society as a whole) by you doing your job might be as or more important as the utility created by you earning money at your job and then donating 10% of it or whatever to charity, so that’s probably something worth considering as well.
Your response seemed to be that we should just let the market figure that out, but if a large percentage of people are willing to do what they view as “altruistic work” for less then market price then that itself changes the market, preventing you from judging the utility created by someone’s work just from their income.
If the fact that people are willing to do altruistic work for less money lowers the cost of that altruistic work, then charity money spent on that altruistic work should go farther; for example, if the fact that people are willing to do science for $40,000 a year when they could be doing finance for $100,000 makes science much cheaper to do, that might be more important in the long run then having more people earning $100,000 and donating 20% of that to science.
It very often does, though. People very often choose professions because they want to “help people”, or they want to “advance science”, or they want to “protect people”, ect. I think altruistic intentions do very frequently come into play here.
I’m not an altruist and I don’t see any reasons to approach issues in this framework.
So, how do you want to measure it if you don’t trust the market? The market is all about revealed preferences, if you don’t think it’s adequate, tell me how to evaluate the “value to society” or “the utility created for other people” by, say, Alice standing over there.
People say that they do. I think they quite often they are deluding themselves.
And, of course, aren’t you assuming the automatic fulfillment of basic needs? Will you still want to “help people” if it means your own kids will go hungry?
Ah. Well, the context of this thread was:
I think that a significant issues of bias comes from people who are trying to be rationalist over-valuing things that are easy to measure just because they are easy to measure. I agree with you that it’s harder to measure, but that doesn’t mean it’s not just as important.
Let me give a quick thought experiment about my thinking of the subject. Let’s say that you really want to advance science as quickly as possible. Right now, your options are you can either work as a scientist for $40,000 a year, or you can work in finance, earn $100,000 a year, and then donate $20,000 a year to scientific research. If most people choose the better paying job, then the people hiring scientists will be forced to pay them more and more in order to hire them. Eventually, the price of a scientist would go up to $80,000 or $90,000 a year. So even though science is getting somewhat better funding from the extra charity money coming in, it’s likely not enough to cover the higher cost of hiring scientists.
That’s obviously an over-simplified example, and there’s really not enough information to say one way or the other, but that’s the way I’m thinking about the subject.
Perhaps. Human motivation is a very complicated thing, obviously.
I think, very often, “a job where I help people” and “a job I find personally satisfying” are very deeply linked concepts, at least for a lot of people. So, maybe people help people because they want to help people; maybe people help people because it makes them feel good when they help people; maybe people just want to think that they’re the kind of people who feel good when they help people, or maybe (most likely, even) it’s some combination of all three. So what?
I’m assuming that the education job or science job or whatever does at least pay enough to fill basic needs, yes. If there aren’t any jobs at all in field X, then you probably shouldn’t go in that direction.
OK. The first question is, can you advance science? You get gold stars for participation only in the kindergarten. Any reason you think you will actually produce value as a scientist instead of being a burden to be dragged along?
A funny comparison you’re setting up. For equivalent situations, don’t you want to donate $60,000?
That may or may not be true—you will have to make strong assumptions about several things to argue any side of this case.
The point is that altruism is rare. Not that many people are willing to make personal sacrifices purely for the good of others.
You could just as easily ask “can you succeed in finance”? Obviously, if you don’t actually have the ability to do a certain job, then you probably shouldn’t make that your career path.
I would say that if you are working in finance, living in a financial center (say, New York City), and most people you know are also working in finance, it would be very difficult to live on $40,000 a year. You would be expected by your social acquaintances to own expensive suits, to drive a nice car, to go on expensive social outings, ect.
Giving 20% of your income, the way I’m suggesting, is itself a really, really hard thing to do. Most people don’t manage to give 10%.
Interesting. What makes you think that? My impression is that most people tend to be at least somewhat altruistic, and that “altruistic emotional rewards” (like “the joy you get from helping someone else”) tend to be a major driving factor in many people’s decision making processes.
I am not quite sure why that is relevant. Expectations of your social acquaintances are a really bad way to run your life.
I look at what people do, not at what they say.
Tech companies (and I think startups of all kinds) routinely give large stock options to employees. It’s not obvious that the tax preference for capital gains actually helps investment bankers more than it helps engineers.
Phrasing it that way is misleading. Capital gains tend to come from things like corporate profits which are themselves subject to income tax.
That is very true. In practice, however, there are so many exceptions and loopholes in corporate income tax that corporations end up paying on average only something around 12% of income as tax.
Source: http://business.time.com/2012/02/06/the-corporate-tax-rate-is-at-its-lowest-in-decades-is-big-business-paying-its-fair-share/
So even with the “double taxation”, if $100 of profit is taxed through 12% corporate income tax and then taxed again through a 15% capital gains tax (let’s say the company pays their profit out as a dividend), the investor gets (100.88.85) $74.8, so it’s an effective tax rate of only about 25.2%. (And, yeah, the investor doesn’t directly get corporate profits unless it’s a dividend, but in theory a corporation that isn’t paying a dividend should instead be using profits to re-invest in the business in a way that makes the stock price go up, so the end result is roughly the same for the investor.)
A small business that is filing it’s profits through the as normal income tax may be paying a 39.6% tax rate, so it’s still much higher.
That doesn’t take into account the deadweight loss involved in jumping through hoops to get all those exceptions and loopholes. And in any case the fundamental problem is the existence of the exceptions and loopholes in corporate income tax, not the low capital gains tax.