Brad DeLong Thinks Taxing An Activity Doesn't Discourage It: I'm Not Sure Why

I made the argument last week that the Obama tax plan would serve to discourage entrepreneurs from founding companies by reducing the expected size of the take-home payday that would result from the creation of a successful company. As an entrepreneur, this seems like a pretty common-sense point to me: if you raise the taxes that I expect to pay when and if I successfully start, build-up and sell a company, then, all else equal, I am less likely to do go about the attempt of starting, building-up and selling a company.

Justin Fox, the Time Magazine economics blogger, offered what appeared to me to be pretty bounded praise when he called this post “non-bogus”. Apparently, though, this was enough to set off prominent liberal economics blogger Brad DeLong.

What surprised me, given that DeLong has always struck me as very smart and lucid, was that hat his attack was so trivial. Among other things, I said in the post that Obama’s tax proposals would mean that a hypothetical entrepreneur (Anne) who starts, builds up and sells a company “loses an additional 10% of her payout when she sells the company or goes public, due to the higher capital gains tax rate…”

Yesterday, DeLong’s summary reaction to the post was:

I think we can stop there. I am a progressive-consumption-tax guy myself—I don’t like to see capital income taxed unless that tax is linked to high consumption spending in some way. But the claim that Anne’s entire stake is subject to the capital gains tax on the day of the IPO is so false as to be totally bonkers.

No, Justin, keep looking.

There are some problems with this critique.

DeLong includes a long quote from my post, but he cuts out a pretty important sentence:

I’ll work through a typical, somewhat simplified, example for a venture-backed technology company. [Bold added]

Normally when you use an ellipsis (…), as DeLong did, to snip out part of a quote that you are criticizing, you shouldn’t cut out something that obviously addresses your criticism.

Hyper-technically, it would have been more complete had I written something like “when she sells the company or goes public and subsequently sells her stock” instead of just “when she sells the company or goes public”. But even this would not have made the post absolutely complete. All real tax law is so complicated that it requires hundreds of pages of law and clarifying opinions, rather than a roughly 1,700 word blog post. This is why I was very careful to put in the disclaimer that this was a “somewhat simplified” example.

But does the simplification that DeLong highlights impact the point of the post? No. He doesn’t bother to explain how it might. It would be hard for him to do this. Under either version of this statement, whenever an entrepreneur actually realizes the monetary gains that are the typical economic motivation of starting the company in the first place, he or she would expect to take home less money due to higher taxes under the proposed Obama tax plan. DeLong’s point has no material effect on any qualitative or quantitative argument made in the post.

It is a totally irrelevant point that is meant to imply that I am a novice who doesn’t know anything about taxation of Founder’s Equity. I’m pretty comfortable with the mechanics of the IPO and company sale process. It seems to me that the way that I stated this point satisfies what I believe should be the key criterion for appropriate concision in such a circumstance: it should neither mislead those who are not expert in the subject, nor confuse those who are.

In the end, is DeLong seriously arguing that Obama’s proposals would not increase taxes on entrepreneurs who accumulate capital? Or is he an economist arguing that increasing taxes on an activity will not result in less of it than you would otherwise have?