Should There Be An Extra Tax On Successful Entrepreneurs?


Should we tax successful entrepreneurs? That is one of the recommendations of a new paper about occupational choice and the quality of entrepreneurs.

I show that, for a large class of economies, it might be desirable to tax entrepreneurs and give the proceeds to workers. By doing so, the government can improve entrepreneurial self-selection. The tax converts some of the cross-subsidies in the financial intermediation into tax revenue. This revenue is then used to finance the wage subsidies. The overall effect of the policy is to exchange some rich low-type entrepreneurs with poor high- and low-type entrepreneurs. As a result, the average success probability of the entrepreneurs in the economy increases.

Here is the argument as I understand it. First, let's say there are high quality and low quality entrepreneurs. What is a a low quality entrepreneur? One that destroys value rather than creates it. (In my experience, such people are usually entrepreneurs only because they don't have the skills to cut it in a regular job. They chalk it up to the idea that they are just more creative and innovative than everyone else when really they are scatterbrained and ignorant, but are oblivious to their own shortcomings.)

Now, banks and investors don't know for sure who is high quality and low quality. They can try to figure it out, but can never be 100% sure. By taxing the successful entrepreneurs and subsidizing wages with the money, the thresholds shift. It is less attractive to become an entrepreneur and more attractive to stay at your job (which now pays more). Thus, only the more skilled entrepreneurs will be willing to take the risk.

The author points out that he isn't necessarily advocating that this path be followed.

It is worth mentioning that the policy I propose is a pure efficiency result. That is, in some economies, efficiency requires taxing entrepreneurs and giving the proceeds to workers to improve the welfare. The policy simply changes the threshold levels for wealth classes so as to increase the average quality of active entrepreneurs in the economy. In my view, this pure efficiency result enhances equity as well, since richer low-type entrepreneurs are swapped with poorer high- and low-type workers as a result of the policy.

I didn't investigate all the math in this paper, but I have to question the idea behind it for two reasons. First, entrepreneurship has a large luck component. Knowledge, skill, and hard work can improve the odds, but being at the right place at the right time can make a huge difference too. Secondly, I'm not convinced that people pursue entrepreneurship for money. If that is your main goal, you will most likely fail. Most startups aren't YouTube. Most of them take a long time to yield fruit, and people give up before they hit the payday if they aren't in it for something more. Some love the challenge, some love their work, and some just want to change an industry for the better. The money is the icing on the cake (and anyway, most entrepreneurs don't end up rich).

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The paper didn't factor in either of these things, so I'm unlikely to think the conclusion is significant. Nonetheless, I find it surprising that someone would even suggest such a policy, so I am pointing it out to give you something interesting to mention to your friends at the next social gathering. (Because if you read this blog, I know you are probably the kind of business geek who does that stuff) If you have a different interpretation of the paper, by all means leave a comment and let me know.

  • I say hell no. I am broke college student/ budding entrepreneur, and I don’t want to be taxed in 10 to 15 years when I have my millions.

  • I have to say this paper seems to have been written straight out Ayn Rand’s Atlas Shrugged. If it was up to the leftists and Secular Progressives (Sounds like a S & P advocast wrote it)Then it’s equality for everyone just because it’s their right. (Which I think is crap) Not because they earned it.

    I don’t think you can put a tag on high or low entrepreneurs. We live in America where anyone willing to put themselves on the line, and yes focus on fixing problems for a profit, then why shouldn’t put a tag on it. There are a lot of factors in all of that and I do agree with some of what you say about entrepreneurs. A lot of them DON’T get rich. But you miss 100% of the pitches you don’t swing at too!

    Overall the idea of putting higher taxes on successful entrepreneurs is rediculous s & p propaganda. All of the successful entrepreneurs who create more jobs should go hide in the hills for a couple of years and see what happens to population of “because i’m showing up I deserve a higher standard of living.” I think all the lights would be turned off before the end of the year.

  • Mark

    The paper gives a way to identify the the Gooses that lay the golden eggs (high-ability entrepreneurs) and the Gooses that do not (low-ability entrepreneurs). In that sense, I think it makes a lot of sense.

  • Mark, Read Atlas Shrugged and see if you agree then. The paper is rediculous and just as people are looking for something for nothing today it will create more free loaders tomorrow than we already have i.e. the welfare system which my tax dollars are already paying for. Mean while as an entrepreneur I’m going to start more businesses so I can give more of my profits to people who aren’t willing to take the risk in the 1st place? I’d go hide in the hills for a couple of years and let the world callapse before I’d contribute a better life style to someone like a Homer Simpson. Think it through.