Lion of the Blogosphere

Apex’s comment (risk, taxes and entrepreneurship)

Apex wrote the following:


You presume a level of risk calculation that almost no entrepreneur ever makes. There are two general kinds of entrepreneurs. One is the kind that simply wants to be in charge of his own business. he is not dreaming of vast riches, just making his own money his own way. If he does well he assumes he will do better than if he works for someone else but either way he will run things his way and make enough and that is why he does it. This by the way is most entrepreneurs. As time goes on if things go well they may try to expand and get bigger but they just want to get away from “the man.” These are restaurant owners, insurance agents, real estate agents, independent electricians, plumbers, handymen, beauty shop owners, wedding photographers (or any photographers), etc, etc, etc. There are 10s of millions of these people and very few of them are going to get rich and they aren’t thinking about it in those terms either.

The second kind of entrepreneur is the one who starts his own new business venture to create the next great product or service with visions of making it big. There are far less of these entrepreneurs but there are still quite a lot of them. These are the innovators 1% of whom will create new and amazing things and the rest will go broke. This is the risk you are talking about. But here is where you go wrong. Exactly 0% of these people ever do the risk analysis you are talking about. These people are high rollers, big talkers and even bigger believers. They see themselves as better than everyone else, smarter than everyone else, and destined for greatness. They would not do an analysis that determined their mathematical expectation based on a 100 million dollar payout and a 1% success rate. That kind of silly math experiment would never enter their mind. They are the kind to jump first and ask questions later. They would never even consider a risk analysis because that would presume some reasonable chance of failure for which they see almost none. If by some chance they were to do such an analysis their expected gain would be more like 1 billion and their chance of failure would be something like 1 in 2. Entrepreneurs in this category have a level of excessive optimism that defies all logic. They are also nearly clueless about tax law at the time they are even thinking about starting this business, so the idea that they would need to discount their gains by tax law would never enter their minds. This excessive optimism is actually critical to their success. Studies of successful businesses shows that those that succeed are the ones that believed they could and were successful in convincing everyone working on the projects of their assured success even in the face of obstacles that should have caused them to become defeated and give up. It doesn’t guarantee success by any means but it is necessary to end up in the 1% who do succeed.

I have been partnered with these second kind of entrepreneurs by the way so while I have read business books about this kind of entrepreneurial optimism, I have also seen it first hand. I know how these people think and they don’t think rationally. Unfortunately that appears to be a necessary trait for the few who will succeed wildly. We all know by know that Steve jobs for famous for it with what everyone around him referred to as his “reality distortion field”

Now as to Venture Capital and getting some wild hair brained idea funded, that’s an entirely different story. I can’t say I have much experience with that side of the equation. I assume that the risk calculations and tax consequences will be considered more heavily there. However the people we have been throwing around here like Gates, Jobs, Brin, Zuckerburg, etc, didn’t have to go get VC on a hair brained idea. They were able to boot strap it until they already had something worth investing in before they had to go get VC. They all did it out of garages or dorm rooms, and they didn’t do any risk analysis based on mathematical expectations of success discounted by tax rates.

Written by Lion of the Blogosphere

October 12, 2015 at 2:30 am

Posted in Economics

77 Responses

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  1. There still will be some that are discouraged to start a business but the real threat of higher taxes to successful new businesses is not those discouraged but those prevented from even starting or those that fail for lack of funds. It’s the salaried person who doesn’t venture out because they fear they don’t have the savings, it’s the business that went bankrupt one month away from getting that sale or that investment. Obviously we need a government that can afford social stability but higher taxes will have a cost and mostly it will be unseen. Have you not noticed the lack of dynamism in Europe? These people are supposedly just as smart as us yet they look stagnant in comparison to the US.


    October 12, 2015 at 10:03 am

    • You totally missed the point.

      caption obvious

      October 12, 2015 at 11:47 am

      • I think he is totally correct.

        “That kind of silly math experiment would never enter their mind. ”

        I dont think that is accurate… but the math calculation certainly *does* enter into the minds of their wives. And their mothers. And other people advising them

        And when it comes time to try to hire away competent engineers/accountants/managers who were their former co-workers, the Expected Value formula is run there too.

        cluster of grapes

        October 12, 2015 at 2:32 pm

      • Unless your wife is a tax accountant or tax lawyer, I doubt she is thinking about how tax would effect anything. She’s probably worried about how her free-spending lifestyle might be impaired by her husband’s attempt at self-actualization. Jeff Bezos is lucky that his wife completely supported him when he quit his high-paying job to start

        Lion of the Blogosphere

        October 12, 2015 at 2:39 pm

      • So, Lion, are you saying that entrepreneurs and business men don’t think about what business does (making money), and they just make businesses for whatever other reasons but making money, so then it’s ok to tax them to death?


        October 12, 2015 at 2:52 pm

      • The point, high taxes on the rich don’t matter because entrepreneurs don’t think about risk. My point, What entrepreneurs think about risk doesn’t matter, higher taxes (and higher taxes best friend onerous regulation) raises that risk. When you have 1 million entrepreneurs, only 20% who are successful, an increase of the risk of failure from 80% to 81% means we lose out on 10,000 successful businesses.


        October 12, 2015 at 7:01 pm

      • “higher taxes (and higher taxes best friend onerous regulation) raises that risk”

        Does not. Income tax is only paid if the business is profitable. And income tax is paid regardless of whether you make money at a job or make money at a business. No additional risk from taxes.

        Lion of the Blogosphere

        October 12, 2015 at 7:54 pm

      • “No additional risk from taxes.”

        That is simply not true and I’m a bit shocked to see this rhetoric from you. Maybe you suffer from a lack of imagination. Businesses need money to operate, the more money the business has the less at risk the business will be. A business may have a good year one year, then a down year the next, maybe good times are right around the corner, maybe not, but some will succeed and some will fail based on their cash reserves, which were taxed during their good year. That is not to mention the added cost of labor taxes, sales taxes, and the not insignificant cost of the proper administration for complying with all these tax laws.

        Taxes will always add risk to business operation, the outright risk of discouragement is minor compared to the real risk of failure, and the invisible marginal effects of tax increases. In a country of 300+ million people someone will always be sitting on the margin.


        October 12, 2015 at 8:49 pm

      • “then a down year the next,”

        The down year generates NOL carryforwards that reduce taxes in the future.

        Lion of the Blogosphere

        October 12, 2015 at 11:52 pm

      • “The down year generates NOL carryforwards that reduce taxes in the future.”

        …a future which may not exist


        October 13, 2015 at 12:16 am

  2. On your first kind of entrepreneur that you mention, they do compare their options. It’s not just about the freedom. There are lots of jobs where you get plenty of freedom. (usually the jobs that come with lots of money also come with freedom, btw) I know a lot of these people. Simply put, that was a better option for them, and yes, money was a big part of the equation. A wedding photographer will have very few skills useful for a corporation, so his worth there would be minimal. This implicitly gives a risk/reward computation. Maybe it’s not right away for some, but after a few months as a wedding photographer, you do realize your income is very volatile on your own.

    On your second kind of entrepreneurs that you mention, I also know a quite few of these, from close friends with new start-up to a few established billionaires (yes, you read that right). From what I can see the billionaires always keep a very positive attitude. But, here’s the thing, when you get to know them better, it’s all about business and risk/reward computation. Everything is about that. They may start in a garage, naive about business and all that, but if they are to survive they learn business, and that is all about taking and managing risk.

    There is also a thing group of people, which is very entrepreneurial. They may not start new companies, but they are the skilled workers and rock start new graduates that work in a start-up scene. If you finish with top quantitative and computing skills, you will have offers from tech start-ups, academia, banking, maybe hedge funds, consulting and big established corporations. All these will offer competing offers, with different risk and reward profiles. Every single graduate will decide based on his aspirations and expected pay-off. If you increase the taxes at the top, the risky options will be much less attractive, and they will all chose the safe option, and work for corporations. I don’t want a world like that. This is the reason why you have fewer start-ups in say, France. That 75% tax is not great.

    Then, there’s the VC world, that you touched about. Well, increasing the taxes at the top will decrease the returns. A regular start-up exists in 5 to 10 years, and this is when you get taxed. For really high taxes, the money will flow into really long holding assets, because the tax is applied only when you sell. I don’t think it’s a danger of that (requires too high taxes for that to happen). The danger comes from different assets being taxed differently. You see all sorts of taxes being proposed, but some don’t want to pay that claiming there will be less money flowing to them. For example, you don’t pay taxes on municipal bonds. This sounds like crony capitalism and to some degree we have that. (pharma is given monopoly power within US, ie, you can’t buy drugs from outside)

    There’s also a big difference between “tax the rich” and “getting rid of loopholes”. First is really banking on the envy of some people, while the second moves towards more fairness, transparency and simplicity. I’m definitely in the camp of getting rid of loopholes (including corporate ones like the pharma monopoly), but not for making the most progressive tax system in the world, even more progressive.


    October 12, 2015 at 10:05 am

    • Yep, I gotta go w/ Zack on this one. The aspiring entrepreneur (be that either type in Apex’ example) will do some kind of minimal cost/benefit or risk/reward analysis, even if it’s on the back of a napkin or fleetingly in her “reality distorted” mind. It may be a faulty, non-objective, or irrational analysis, but it’s done.

      E. Rekshun

      October 12, 2015 at 11:39 am

    • Zack,

      Just to be clear, I am not arguing for a more progressive tax system. I agree with your last paragraph. It is also worth noting that my comment was with respect to budding entrepreneurs. You can bet everyone of the people we mentioned, once they got their billions, taxes became a huge focus of their attention. It just wasn’t a calculation they considered at the beginning. It may very well direct how they expand once they are worth their millions or billions, but the concept that if they make 500K in profit they would actually need to make 1 million to keep 500K is not the calculation people are weighing when deciding if they should take the entrepreneurial plunge.

      Tax law definitely directs capital. However the argument as to what it does with labor is considerably less clear. Once you are making 500K per year perhaps you don’t try to make much more because the government takes too much. However for every person who makes that decision there is likely another one who decides they need to make 2 million so they still have 1 million left after the government takes their cut. Higher taxes can both decrease labor for some and increase it for others.


      October 12, 2015 at 2:49 pm

  3. Ludicrous assumption that the only way information is incorporated into people’s decisions is by rational thought. People respond emotionally. In Europe, the tech scene is small, because there is a sense starting a business is hard and not rewarding. If taxes were dramatically raised on entrepreneurs, this information would be culturally transmitted through a lack of optimism, not through cash flow analysis (although VC’s do require cash flow analysis.)


    October 12, 2015 at 10:37 am

    • “In Europe, the tech scene is small, because there is a sense starting a business is hard and not rewarding.”

      No. The tech scene is much smaller because the govts there didn’t spend as much on the research that made silicon valley possible.


      October 12, 2015 at 2:29 pm

      • “No. The tech scene is much smaller because the govts there didn’t spend as much on the research that made silicon valley possible.”

        That’s bullshit. Again with “you didn’t build that. somebody else made that happen”…

        To begin, it’s never the government that does research, but the people. The government may give grants, or push a lot of resources into a field just because they need it, see WW 2, when they needed weapons. The look at today’s top giants in tech: Apple, Google, Microsoft, Facebook, or some of the new ones like Twitter, Instagram, whatever. Which one was bankrolled by government research? None? And yes, I’m sure you’ll start with stories about how the internet was really the government creation so that private companies can milk it (like Obama said), but the reality is that at the dawn of the internet, there were many competing systems and protocols, and it could have gone many ways. What happened was that the government forced a particular protocol, not so that private companies can milk it, but rather for control — they wanted to dictate how communication is being done. This is why they continues, even thru today, to forcing poor crystallographic solutions that they can break them, and it’s also the reason why the phone company has wires directly watch by the NSA and the same with electronic communication. And yes, in this particular case, they didn’t invent, but rather constrained and controlled.

        But even when money comes from the government, it’s not because government creates stuff (it’s generally too short sighted for that, starting with the politicians which have no life nor industry experience) The money from the government comes from crony-type lobbying efforts from private industries, like biotech, education, oil, green tech, etc.

        I personally see the government where all sorts of interests try to get the upper hand by transferring resources to them. For that, you need to tax others more.


        October 12, 2015 at 2:48 pm

      • Jesse

        October 12, 2015 at 3:11 pm

      • I think it is a little more complex than that. One of the key differences I think is that Universities in the Bay Area, particularly Stanford, encouraged engineer faculty to commercialize there innovative engineering ideas. At more traditional universities this is considered unclean. The output of the research faculty is papers. Particularly at Stanford engineering faculty were encouraged to form startup companies to bring their research results to market. Developing a commercially successful new technology was viewed as equally or more important than the citation index of their papers.

        The first Sun workstation was developed at Stanford (with government research money) and then Sun was started to commercialize that idea. Frequently the professors involved are handsomely rewarded by a successful startup with stock options and seats on the board of directors. The research results are technically public, so in principal anyone could start a company using the technology, but the inside startup had the original researchers as advisers and frequently many of his/her graduate students as early employees.

        There are some people at US Universities who look at engineering professors becoming wealthy based on founding startups and consider this to be a perversion of academic research. This has especially been criticized when the research was government funded, but I think this is one of the differences between Silicon Valley and Europe.

        Another big difference I think is the availability of venture capital and the willingness of US investors to fund small startups with inexperienced management. European companies always seem much more bureaucratic. Even the small European companies seem more bureaucratic than small startup US companies. US startups can try a lot more crazy ideas. Most of those ideas will fail and most US startups fail too, but every once in while they hit a home run with a crazy idea.


        October 12, 2015 at 3:44 pm

      • Publicly funded… By the US military.


        October 12, 2015 at 4:00 pm

      • All the major advances that made the iPhone possible were publicly funded, from the touch screen to GPS.

        Often (not always), by the military. A military which the Nation, always clueless even when right (#abortion), wants to cut.

        The Undiscovered Jew

        October 12, 2015 at 5:44 pm

  4. Apex 1 – Zack 0


    October 12, 2015 at 11:10 am

  5. OT: NYT, 10/12/15 – A Defense Lawyer Draws on His Past as a ‘Three-Time Loser’

    …Mr. Haber, 75, is one of the more unlikely criminal defense lawyers in New York. For the last three decades, first as a public defender and then in private practice, Mr. Haber has long represented the kind of hardened criminals who might seem beyond redemption…Mr. Haber was once a drug dealer, selling heroin in Midtown Manhattan, carrying a gun, running a stash house and earning thousands of dollars a day selling bundles of heroin through a network of distributors. He had 10 convictions in his 20s and early 30s, including three drug-related felonies.

    It was not until he was in his 40s that Mr. Haber, fully disclosing his past during the application process, obtained college and law degrees from New York University and admission to the bar…

    While he was on parole, Mr. Haber met Emily Jane Goodman, a lawyer who would later serve for nearly 25 years as a State Supreme Court justice before retiring from the bench in 2012. Ms. Goodman tutored him; his grammar and vocabulary were atrocious, she said. But one day she said he would make a good lawyer. “She said, ‘Nothing is impossible,’ ” Mr. Haber recalled. “She really motivated me.”

    “He kind of became my project,” she recalled, adding, “I didn’t plan to fall in love with him.” They were married in 1983, and had a daughter, Justine, named after justice. (The marriage ended in the mid-1990s; Mr. Haber has been married to Maria Theodoulou, an oncologist at Memorial Sloan-Kettering Cancer Center, for 16 years.)

    With Ms. Goodman’s encouragement and assistance, Mr. Haber was accepted at N.Y.U.’s School of Law, receiving a prestigious Root-Tilden scholarship for students who agreed to pursue public service jobs…Earning a law degree in 1984, Mr. Haber joined the Legal Aid Society, trying murder, robbery and drug cases; in 1993, he opened his own practice…


    E. Rekshun

    October 12, 2015 at 11:24 am

    • Yes… but you might be in the wrong place.


      October 12, 2015 at 12:29 pm

    • Apparently the marriage fizzled when he turned away from a life of crime. After he reformed himself, she found he lacked that something.


      October 12, 2015 at 1:51 pm

  6. If people do start-ups and businesses for the good of society, as Alex says, they would offer a very different paying structure. Google makes 400k per employee in profit. Instead of offering employees salary and some diminutions bonus+stock, they would offer simply a cut of the profits straight up based on their contributions. There would be no need for investors. The company would be private, ran for the benefit of the employees only. Instead, the founders wanted to get rich, period, so this is why they got this scheme of going public, because to capitalize faster it’s easier to sell equity to outsiders.

    And btw, every single person I know in the start-up industry is there to get rich. Every. Single. One. (some may claim they are saving the world LOL, because you know, it’s vulgar to talk about money and it’s much more high status to save the world)


    October 12, 2015 at 12:00 pm

  7. As a self-employed person I agree with Apex. I am the former, a self-employed individual who wants to be his own boss. I make more money in my business than I would have if I was an employee. But the best part is that I am my own boss. I can start my day at 10AM and wrap up by 6PM. I can go for a run or to the gym in the middle of the day. I dress casually and suit up only when I meet clients.

    However one thing I will say is that taxes have an effect. I am saving up to expand but about 35% of my net goes to the government. Lower taxes would allow me to accumulate capital more rapidly and expand more quickly.


    October 12, 2015 at 1:39 pm

    • You need a better accountant

      Copperhead Joe

      October 12, 2015 at 2:24 pm

    • If expansion requires an additional employee, the employee’s salary is tax deductible.

      If expansion requires the purchase of capital assets, the first $25,000 can be expensed the first year (and is thus tax deductible).

      I don’t see how the tax code is, thus, preventing small businesses from expanding. Unless you expect the U.S. taxpayers to give you free money so you can expand your business.

      Lion of the Blogosphere

      October 12, 2015 at 2:37 pm

      • I suspect that it’s more along the lines that the govt should regard jobs as being so valuable that he doesn’t pay taxes on employees (or, to a lesser extent, capital assets) at all.

        That might be reasonable, as long as he only hires American citizens. And pays them enough so that they never need any kind of govt assistance. Ever – so no one needing it when they’re too old to work, no need for food stamps, no using govt education or healthcare services. In other words, it’s an understandable impulse, but lol no.


        October 12, 2015 at 2:44 pm

      • Many entrepreneurs of the first type also hate doing paperwork, even to the detriment of their income. An example I’ve seen is my mother, who loathes the paperwork related to her part time employee so much that she overpays someone else to do it. In reality the paperwork is not that bad, but mentally a big deal.


        October 12, 2015 at 3:51 pm

    • As I also stated above to Zack, I want to be clear that I was not arguing that taxes don’t have an effect. They just aren’t being used to decide whether to start a business. They become a factor later when making decisions about expansion. But even then the tax code has so many dark corners that there are many different ways to approach that issue. The tax law with its high rates and tons of loop holes gives an advantage to those with more money and more options to use those tax loop holes to their advantage. A lower rate with less or no deductions would level the playing field.


      October 12, 2015 at 3:02 pm

      • “They become a factor later when making decisions about expansion.”

        An adjunct tax law professor at NYU who was a partner at BIGLAW complained that business people never consult tax lawyers until after they’ve already decided what they want to do.

        Lion of the Blogosphere

        October 12, 2015 at 3:15 pm

      • I was on the path of doing a start-up 2 times. For both cases, it was a failure to launch.

        First time, I was in my last year of grad school where I had to take a class outside my field and I took one at Sloan School. With 3 other teammates we participated in the business plan competition, and thru my connections had a tech billionaire on the “advisory board”. It was an ok idea, and we were thinking of doing it. But, one guy had a child, then another (girl this time) was very risk averse and the third one was about to get married. I was broke, with a small student loan from undergrad. It was purely a risk/reward computation for every single one of us.

        The second time I’d been working in tech for 2-3 years, and with 2 friends we were thinking of starting something that had to do with FB and social networks. Anyway, the VC’s put a stop to it quickly: good team, but they didn’t like the vertical because FB wanted to develop that vertical themselves and it would have ran us over. Ok, so we started thinking about other things, but nothing really came thru. One of my friends was really ambitious and really wanted to start something. He said that working in the same time is too much, so he went back to grad school. He was a rock start, tried to start 8 different things in his first year. But his adviser really liked him and gave him responsibilities (other grad students working for him, let him apply for grants, etc) and now he’s in academia. He’s not going to make money, but it’s a nice life, and he knows it. (it’s again a very calculated risk/reward decision)

        Apex, I think you may be right about some 20 year olds with no experience that think: oh, it’s easy and the money part will just work out (by magic). Also they have little to lose. But for most people they have lots to lose. A lot of businesses require some starting capital. A friend of mine lost his 15-year savings by trying to do a company, because he put his money into it. When you put your money into it, I bet every single person will do some form of a risk/reward computation.


        October 12, 2015 at 3:35 pm

      • I don’t doubt that. They don’t start with taxes and they shouldn’t. Business people are going to decide what they think is the best business decision standing on its own. Then they are going to ask their tax advisers about the most tax efficient way to do it. However plenty of business people make stupid business “investments” after the fact to save taxes that are nothing more than wasted spending on things their business doesn’t really need but they get convinced to spend the money because of the taxes it will save. Spend a dollar to save 30 cents. I have seen it repeatedly. It is illogical but lots of business people do it and then convince themselves after the fact that it was a good business investment or that they really needed it. But they didn’t decide they needed it until their CPA told them it would save them on taxes.


        October 12, 2015 at 4:30 pm

      • Zack,

        I have done the startup thing and did it as a 30 year old with wife and kids leaving a good job. You are right that there was a basic risk calculation but it is much different than you have been trying to lay out. We worked 18 months as a side job to get the business to the point that it could sustain myself and my partner on a reduced salary for a few months and then we needed to grow the business. At that point we jumped. The calculation was very simple.

        Can we survive for a few months on a reduced salary? yes
        Do we think we have a decent shot of growing the business to the point of replacing our old income? yes
        Do we think there is potential here for it to be worth much more than our current jobs? yes.
        Do I think I can go back and get full time employment without too much trouble if I have to? yes.

        What we did not consider.

        1. Mathematical expectation of huge payoff times percent of success versus chance of going broke and starting over.
        2. How much more we have to make in the millions to offset the tax rates and the extra risk of going broke as a result of higher taxes.

        The key beef I have with your risk/reward calculation scenario is the idea that it involves a mathematical expectations calculation discounted by tax rates. Most people don’t think about things in those terms. Bean counters might but bean counters don’t take entrepreneurial risk and entrepreneurs don’t count beans to determine if they are going to go for it or not. They might do a few risk assessments but not the detailed analysis you are talking about.

        My partner was the excessive optimist. I was not. I have a mathematics and computer science background and am very capable of doing the type of risk analysis you suggest entrepreneurs do. I have never done one for a business venture and don’t know any entrepreneurs who have. I also know the tax code inside and out. I have explained taxes to countless business partners over the years and have had to correct CPAs from time to time. I know how big of an impact taxes have. But they are not factored into any risk analysis I am doing. My previous startup was a tech/internet based start-up of which I sold my portion off 10 years ago. I now focus on real estate businesses and have been asked countless times by other real estate investors and businessmen how I get out of taxes in my current business. The first few times I was asked this I had to ask them what they were talking about because it seemed like a very strange question to me. They would just repeat the question slightly differently. What do you do to keep from paying so much tax on all your real estate profits. I tell them that I don’t do anything, I pay the tax. They would just look at me incredulously like I must be insane. But the thing is they either don’t have profitable deals or they structure their deals to make the profit go away. Well there you go, no profit, no taxes, but when it comes time for funding big deals, I am the only one of them that can do it. They are all running around broke begging people to fund their deals and giving away 3/4 of the pie to do it. But hey, they don’t pay much in tax. I have a great way to not pay tax. Don’t make money. They are all quite good at it. I make money and I pay tax.

        As to risk calculations they are pretty simple.

        Do I think I can manage the risk? Is there a good enough reward to make it something I am interested in taking a shot at?

        Trying to come up with a formula that will tell me what I can expect to make if there is a 1% chance of success with a huge payout is simply a fools errand anyway. Who cares if the mathematical expectation is 1 million. No one gets that 1 million. 99 people get zero and 1 gets 100 million. I frankly am not interested in those kinds of bets anyway. Mathematical expectation is useful only for theoreticians. They can tell you if its a “good bet.” For the 99 who go broke I guess they can take solace in knowing that at least it was a good bet even though they are broke now. How is that kind of analysis supposed to help anyone make a go/no-go decision? The decision is as I stated: Can I survive the worst, are the good outcomes within a reasonable grasp, and are they lucrative enough to make it worth trying. I can’t imagine anything in the beginning needing to be more complex than that.


        October 12, 2015 at 10:58 pm

      • Apex, in tech people have been benefiting from the lack of good engineers, in the sense that if something doesn’t work out, they can literally find a reasonable job overnight. (Google for example has a no ask policy and accepts back every engineer who left, at the position that he left) But this is not true in general, which really complicates things. I can give as examples 2 of my friends, small entrepreneurs who are outside tech. One (with another 2 friends) jumped ship from an advertising company and set up shop themselves. It’s been 2 years now, they still basically have 1 big client (which was brought originally by one of the founders) and a bunch of small clients that really don’t matter. The first year, they had a desk (!) in a start-up space. Now they have a room. LOL. Consciously, they took a hit in the pay, they are working a lot longer hours, and they have an upside which hasn’t and probably will not materialize (I’ve been doing some research on these advertising start-ups, and it’s really tough) Another friend quit her job of over 10 years from Deloitte to start a … gallery. Ok, so her family is in arts, she had a top mentor on the gallery and the art world in NY. Still, her life is tough. She works more now and her business barely survives. She has a very good gallery in NY, but the environment is very hostile.

        Tech people have it easy. They can try stuff almost for free, even join Y-combinator or an incubator, bootstrap by working for others in the incubator until they get ideas, partners and money. A friend paid his dues 2 years at one of these incubators, just because he really wanted to do a start-up but couldn’t find partners. After 2 failed ideas, he found some rich partners and joined their idea. Now he’s a co-founder, and they raised the last VC round at 90 million valuation. I’ve got plenty of other examples from my friends or ex-colleagues, and mostly in tech. But even in tech there’s a rough computation about risk/reward, generally in the form of “are we going to make it / is the product going to be successful”. If people don’t care about money, they can join Google where a rock start engineer gets a lot of freedom and can start his own thing, but with the Google resources which turbo-charges the way to success. Ofc, you won’t get the upside when it comes to money. Yet, I see more people trying to start something with the exit of being bought by Google, which is a rougher path, but will get them upside. Top companies, like Google, Apple, Facebook, etc, will give plenty of freedom to rock stars to try their own thing. Yet, there’s a vibrant start-up industry which can only be explained by 1 thing: people want the upside, they want the money too!


        October 13, 2015 at 12:44 am

      • Zack,

        Don’t disagree with any of that. People definitely want the upside too. And they think about the risk of it not working too. I think we are just disagreeing about what that calculation looks like.

        The mathematical expectation calculation is more like a lottery ticket calculation. Pot is $200 Million, odds of winning is 1 in 500 million so my mathematical expectation is 40 cents on a $1 ticket. Lottery ticket buyers don’t think about it like that, and I am arguing that most entrepreneurs don’t either.


        October 13, 2015 at 3:46 pm

      • Lottery ticket buyers don’t think about it like that, and I am arguing that most entrepreneurs don’t either.

        So you’re saying there is no causal relationship between tax rates and startup behavior?

        The Undiscovered Jew

        October 13, 2015 at 6:38 pm

  8. Lion,

    You can call this another version of the Apex fallacy, pun intended.

    What may operate for a venture like Microsoft or Facebook does not for much smaller enterprises. Most businesses are started by people who already work in that same industry in some capacity. They may break off from an existing company to start their own shop. Such enterprises do take risk calculation into account. Even Jeff Bezos did such a calculation when he asked “what could be sold easily and quickly online?” Books are exempted from the kind of shipping costs that affect heavy items.

    Basically, Apex’s argument is another version of the super rich guy who doesn’t value money because the marginal value of money goes down the more you have, so high taxes are not a big deal. Such a calculation does not exist for inferior levels of wealth.

    Basically, the only reason why supporting higher taxes is necessary is because the vast majority of rich people use their money to back leftist causes.


    October 12, 2015 at 2:56 pm

    • What does my argument have to do with the super rich guy? I am talking about the budding entrepreneur. By definition they are anything but rich at this point. That is another reason why they don’t make these calculations. If they are already rich then that is a different calculation. As I mentioned a couple times above, once you have money tax calculation starts to matter. When you don’t have any that is the last thing you are worried about planning for.


      October 12, 2015 at 4:05 pm

      • The average business is typically started by a person estimating risks/rewards, of which taxes always affect the outcome.


        October 13, 2015 at 3:12 am

    • Basically, the only reason why supporting higher taxes is necessary is because the vast majority of rich people use their money to back leftist causes.

      And even this still hasn’t been demonstrated – 80% of Goldman political donations went to Romney over Obama.

      The Undiscovered Jew

      October 12, 2015 at 6:10 pm


        Look at the entire donation history of Goldman Sachs.


        October 13, 2015 at 3:14 am

      • Look at the entire donation history of Goldman Sachs.

        Goldman donations since 1990 are 50% Democrat, 44% Republican, and swung to the GOP after 2008. Wall Street is RINO Republican, exactly what I’ve said for years much to the opprobrium of a feline blogger. My position is backed up by Andrew Gellman’s research.

        The Undiscovered Jew

        October 13, 2015 at 6:28 pm

      • RINO Repubs are just as bad as Democrats


        October 13, 2015 at 11:31 pm

      • RINO Repubs are just as bad as Democrats

        I’m late to responding, because I just now saw your response, but I disagree. RINOs of today would be conservative if the coast were clear of liberals.

        The Undiscovered Jew

        October 16, 2015 at 8:02 pm

  9. What is the median salary of a libertarian? I bet it’s 50-60K.


    October 12, 2015 at 3:17 pm

    • libertarians often lack the social skills required to earn a middle class salary. i’m sure a slight majority or at least significant minority are lucky to make 30


      October 12, 2015 at 9:10 pm

      • They’re lucky to earn $50K.

        But all of this is moot, going forward, when this country’s job market is imploding quickly, in our post scarcity world of economics.

        Libertarian types would do significantly better in places, like Europe and French Quebec. One should feel sorry for these chumps for remaining in a country with its outdated (not to mention, prolish) mode of life.


        October 17, 2015 at 11:01 am

    • No way. It is probably whatever a dude in his 20s can make working retail. Let’s assume that one third are not working (still students, unemployed, etc…), a third are successful tech guys, and the other third are smart guys who ended up stuck in retail because they spent too much time discussing libertarian theology and not enough time working on their social skills.


      October 12, 2015 at 11:29 pm

  10. Anyway, Happy Columbus Day!

    E. Rekshun

    October 12, 2015 at 5:04 pm

  11. But here is where you go wrong. Exactly 0% of these people ever do the risk analysis you are talking about. These people are high rollers, big talkers and even bigger believers. They see themselves as better than everyone else, smarter than everyone else, and destined for greatness. They would not do an analysis that determined their mathematical expectation based on a 100 million dollar payout and a 1% success rate. That kind of silly math experiment would never enter their mind. They are the kind to jump first and ask questions later. They would never even consider a risk analysis because that would presume some reasonable chance of failure for which they see almost none. If by some chance they were to do such an analysis their expected gain would be more like 1 billion and their chance of failure would be something like 1 in 2. Entrepreneurs in this category have a level of excessive optimism that defies all logic.

    So many flaws:

    1) You’re quite wrong to suppose self made billionaires, who often have mathematics/stats backgrounds, usually didn’t run the numbers before diving into startups. In management positions they’re famous for being control freaks; you expect us to believe, for example, garage-era Jobs didn’t try to project out in detail his earnings under different scenarios?

    2) Even those, who I’d bet are the minority, that acted impulsively still had a good enough understanding of the business world to know the risk/reward probabilities of startups wildly exceed in both directions those of the stable corporate jobs they turned their backs on.

    3) Profit’s allure to entrepreneurs is at its most potent before they strike gold. It’s after they’ve made billions when diminishing returns kicks in.

    The Undiscovered Jew

    October 12, 2015 at 6:09 pm

    • “You’re quite wrong to suppose self made billionaires, who often have mathematics/stats backgrounds, usually didn’t run the numbers before diving into startups.”

      They think about whether they can turn a profit, not about the tax rates (which really aren’t that high anyway).

      Having to pay income taxes is a good problem to have, it means you’re turning a profit.

      Lion of the Blogosphere

      October 12, 2015 at 7:51 pm

    • They think about whether they can turn a profit, not about the tax rates (which really aren’t that high anyway).

      Tax rates are factored into how enticing or not they view the profit opportunity. Granted, major changes in behavior won’t occur until taxes reach thresholds higher than they are now. But that does not disprove an inverse causal relationship between willingness to take risk and taxes.

      Having to pay income taxes is a good problem to have, it means you’re turning a profit.

      Profit without taxes > Large profit with minimal taxes > Large profit lost to heavy taxes.

      The Undiscovered Jew

      October 12, 2015 at 8:07 pm

    • Whether or not Jobs tried to project out his earnings under different scenarios is irrelevant. I doubt he did such projections but either way the point is not that he was doing some kind of risk reward calculation. He was doing this one way or another. Jobs and Waz begged borrowed and stole to get the funds to do what they did. In fact they got people to put in pre-orders for the Apple II and paid them money in advance so they could buy the parts to build it. They weren’t doing risk/reward of what happens if this doesn’t work out. They were finding any way possible to pull off an expansion. This idea that math geeks are running complex mathematically modelling based on risk/reward to determine if they should do a business venture is laughable.


      October 12, 2015 at 10:23 pm

    • ” You’re quite wrong to suppose self made billionaires, who often have mathematics/stats backgrounds, usually didn’t run the numbers before diving into startups. In management positions they’re famous for being control freaks; you expect us to believe, for example, garage-era Jobs didn’t try to project out in detail his earnings under different scenarios?”

      Of course they thought about it, but you’re ignoring the fact that we’re talking about a logarithmic scale.

      To simplify, let’s say that there are four possible outcomes: failure, thousandaire, millionaire, and billionaire. I am sure that many founders think about their odds of falling into these categories.

      What they aren’t doing is estimating whether their start-ups will result in 1.3b vs 1.4b. If you think that they can do this then you fundamentally misunderstand what a start-up is. To the extent that founders will estimate growth they are going to be talking about exponents, and when you are talking about exponents things like tax rates (within normal ranges) are just a rounding error.


      October 12, 2015 at 11:43 pm

    • He was doing this one way or another. Jobs and Waz begged borrowed and stole to get the funds to do what they did. In fact they got people to put in pre-orders for the Apple II and paid them money in advance so they could buy the parts to build it. They weren’t doing risk/reward of what happens if this doesn’t work out. They were finding any way possible to pull off an expansion.

      They sought out every avenue for success because they knew there was a high risk of failure. If the potential rewards were negated enough by tax policy, they wouldn’t have taken the risk in the first place.

      To the extent that founders will estimate growth they are going to be talking about exponents, and when you are talking about exponents things like tax rates (within normal ranges)

      The discussion is over the impact of taxes on entrepreneurial behavior above normal ranges.

      The Undiscovered Jew

      October 13, 2015 at 6:36 pm

  12. By contrast, I have a handful of friends who have been entrepreneurs of the second kind (not together), and have seen them carefully save millions of dollars in personal taxes by setting up their companies correctly from the beginning. Of course, they were experienced guys rather than emotion-bursting 20-year olds and spent some money on good tax advice.

    If your company is badly set up but doing well, which seems to be the situation envisioned, you can often choose to take a tax hit at a point before it gets really valuable too. This is easier if you already have some money available for that sort of thing. It’s also a risk, but hey.

    I also seem to recall some people (owners as well as workers) having problems with huge tax bills to be paid with worthless stock options. Not sure what the laws are at the moment, but if you have only worked in a bull market it might seem unlikely, but big liabilities to be settled with what is a risky, illiquid asset in the first place can be a pretty painful affair.


    October 12, 2015 at 6:23 pm

    • PS. If you are or are about to become a pro athlete, don’t let your cousin the ghetto accountant manage your affairs.


      October 12, 2015 at 6:31 pm

  13. The idea that no one does research or risk assessment before starting a business is absurd. Of course, there are certain situations in which there is just no way to know what the risks are in advance. But most people have experience in an industry before branching off on their own. So they have a pretty good idea of what to expect and what to do going in. People starting a service company often don’t have a whole lot invested. If they fail the only thing they’ve lost is the salary during the time they could have been working for someone else. It’s capital intensive companies where the real number crunching and risk assessment comes into play. And you either already have the money which means you’ve already got a good head for such things or the people lending you the money will have done it for you before giving it to you. Either way, it’s the person who takes that into consideration whose better able to manage it and succeed. That’s why so many new businesses go under — they failed to account for risks, taxes, etc. There are lot of businesses that would have made it if only they’d considered it.

    I sort of agree with your comment about there being two general kinds of entrepreneurs. It’s not always true. There are people who worked in an industry and have the knowledge, skills and experience to know that starting their own company will be successful. Otherwise, you’re probably right about them either wanting to be in charge or having irrational optimism. Of course, wanting to be in charge isn’t enough. Instead of optimism the first type often has determination and mental toughness.


    October 12, 2015 at 6:44 pm

    • “…That’s why so many new businesses go under — they failed to account for risks, taxes, etc. There are lot of businesses that would have made it if only they’d considered it.”

      There are many restaurants that go out of business in NYC every year. 90% of restaurants every 5 years. Yes, those owners don’t do their math and sometimes don’t even keep track of their own p&l, not even risk adjusted. But it doesn’t mean that they didn’t do a risk/reward analysis their own stupid way. Here’s what they think: “my neighbor had a restaurant and I can do better than him, so if it’s worth for my neighbor it’ll be worth for me.” Ofc, their problem is that it’s hard to compare your skills with your neighbor’s skills. Same with the 20 year olds: oh, Steve Jobs started in a garage, so I’ll follow him, or I know somebody who made 10m by doing an iPhone app and all you need is an idea (haha, right LOL) So now you have 300k iPhone apps and only 100 of them made money. The iPhone app people did their analysis as well as they could. The problem is that they just couldn’t, but it doesn’t mean they didn’t think about it and did it their own way.

      To believe people start a business for any other reason than making money, or rather without any money concerns at all is ridiculous. I find that this idea is usually pushed by the left wing to justify taxing them.

      Also, btw, at some age, life happens and you have responsibilities. You’ll have to support a wife, pay a mortgage, pay for day care. Good luck trying to bootstrap with all that. Without bootstrapping, VC money comes only if you have some serious business plans to make money.


      October 12, 2015 at 8:29 pm

      • Restaurants and startups are very, very, very different businesses. A restaurateur sells food every day and can predict how much he will be able to sell it for. A founder sells his business once, and he doesn’t even know how many digits the price tag will have.


        October 13, 2015 at 12:24 am

      • Again, Zack’s got it right. He’s not saying the budding entrepreneur sits down with an Excel spreadsheet running a bunch of projections, scenarios, and analyses before he gets going. I think he’s saying, as I did above, the risk analysis might simply be on the back of a napkin or in her head, and if so it’s likely faulty and non-objective. This kind of dreamer probably doesn’t even know she’s evaluating the risk of the endeavor.

        @Zack: There are many restaurants that go out of business in NYC every year. 90% of restaurants every 5 years

        Many restaurants go out of business because they failed to pay sales tax and FICA tax, and the IRS is breathing down their back.

        @T: Restaurants and startups are very, very, very different businesses

        I would say that a restaurant (the kind started by an owner/operator or even a franchisee; not the corporate chain) is the ultimate (small biz) start-up.

        E. Rekshun

        October 13, 2015 at 11:38 am

      • The real reason restaurants go out of business is that there are zillions of restaurants. Competition means low profits. No doubt, this competitiveness causes some restaurant owners to cheat in order to make more money.

        If taxes were lower, restaurants would still go out of business at the same rates because this benefit would accrue equally to the competition, so it wouldn’t give any one restaurant a competitive advantage.

        Lion of the Blogosphere

        October 13, 2015 at 11:43 am

      • Zack and E. Rekshun,

        I agree with this. A rough back of the envelop analysis is likely done. In their head or however they do it. It is far from scientific most of the time and likely far from accurate because it is influenced by their excessive optimism. Exactly as Zack said above, “my neighbor had a restaurant and I am better than him…” If this qualifies as risk assessment then of course everyone is doing this. Many are doing even better analysis than this. And it is still biased by their excessive optimism and belief in themselves (we all think we are better than we are for the most part and entrepreneurs do so even more). In addition it is just a crap shoot because the numbers they might think about have no way to be verified.

        To bring this back to the original point by Lion to which I originally responded, this kind of analysis does not lead to the idea that higher taxes will reduce business startups. The level of risk analysis being done is so basic, high level, and flawed that any idea that the difference between a top tax rate of 35% and 39.6% is going to change the outcome of the risk assessment for any of these entrepreneurs really doesn’t add up.


        October 13, 2015 at 3:55 pm

      • @Apex: Yes, that makes sense.

        E. Rekshun

        October 13, 2015 at 5:57 pm

  14. Although I generally favor supply side economics I can only hope that new tax treatments will heavily discourage new tech entrepreneurs and their wares. The last thing this world needs is another smartass sperg who will ruin the lives of their friends and family on their way to being a nouveau riche bust out humanitarian with a messiah complex. I am not willing to tolerate any more of these types..not even for a car that drives itself or a robot who will wipe by ass. I despise all new media and their makers.

    Take a look around..does any of this supposed technology even make our lives better? We have a generation of children that do not even know how to speak to each other. We have twelve year old boys that have never thrown a ball except over the computer screen. These companies like Facebook, Twitter, etc create nothing of intrinsic value…it’s all bullshit.


    October 12, 2015 at 6:57 pm

    • Sorry, BTDT, but my life is much better with the new tech, from facebook, to big flat TVs to iPhones, small portable computers, electronic library (wiki), electronic books, Uber, AirBnB, Amazon, portable music, etc, etc. And btw, it’s not just tech, but also bio tech and pharma. Hep C treatment was at 30%, but now with a new drug it’s at 99.9%. Yes, they do rip you off (for now) as it costs 70-80k, but I’d take it the option of having it.


      October 12, 2015 at 8:34 pm

  15. “Clockmaker aims to invent device that generates free electricity”

    C’mon American media, why don’t you report this? Because it would show that Ahmed is a bozo who has very little going on upstairs… someone who evidently doesn’t know the first thing about physics and doesn’t even know that he can’t get energy from nothing.

    Maybe Ahmad really is the one to is to save us all and I am just a fool for not seeing his greatness.


    October 12, 2015 at 11:35 pm

  16. I am starting a business. I have no idea how much money I am going to make, if any. I did no calculations. I sort of budgeted out how much I am spending on equipment and materials.

    My goals are to: feel a sense of accomplishment, pay off the equipment so that my children can use it to start their businesses, and finally to generate income without having to have a boss. So far I’ve achieved the first goal, the second looks inevitable, and the third? We’ll we’ll see.


    October 13, 2015 at 12:08 am

  17. I have worked at three different startup companies, two of which went public. I didn’t strike it rich, but i made good money off the stock options, enough to buy a nice house here in Silicon Valley.

    All VC funded startups have written business plans, and those plans are not worth the paper they are written on. I think VC firms require those written plans as a test to evaluate the business skills of the founders of companies they are considering funding. They must know that the information in the plan and certainly the financial data is all wishful thinking. All the plans will change as the company tries to develop a product and starts to try to sell it to customers.

    Anybody who thinks that people at startups have enough data to do a meaningful risk/reward calculation is full of it. It all depends on how successful the company is. Most startups fail. Some just shut down. Some sell the company or the technology in a fire sale to some bigger company. If that happens the employees stock options are worth zero. A small percentage of startups go public or are sold at a price where the stock is worth something. A tiny percentage of startups make their founders billionaires.

    Many people that start companies are eternal optimists, but I always had enough confidence in my own ability to find another job if the company went under. The most scary period for many was 2008-9. Many startups shut down, even though they still had lots of VC funds on hand. Many of my friends were out of work and no one was hiring. I was working at a medium size company with a very strong financial position so I was lucky and didn’t have to worry much.

    If you are good at what you do and have a good network of people you have worked with that know your skills, in normal times you can quickly find a job to pay your bills.


    October 13, 2015 at 8:09 pm

    • sure, tech start-ups are hard to evaluate (it’s easier to figure out they will go down, based on the team, market, or stupid idea, but from a bunch of potential winners it’s hard to say who will succeed). some democrats like to point out that at some point (1945) there was a 94% marginal income tax. now, under a 94% top tax, do you believe people will have the same behavior when deciding to start a tech start-up?


      October 13, 2015 at 9:49 pm

      • Straw man argument, there isn’t a 94% marginal tax and there will never be a 94% tax. Although yes, people will want to start businesses for self-actualization.

        Lion of the Blogosphere

        October 13, 2015 at 11:07 pm

      • It’s not a straw man argument, but a beginning of one.

        Let’s put “fairness”, since I really never understood what it means to pay your “fair” progressive taxes, LOL

        Let’s consider only incentives. It’s pretty clear that at 94%, a lot of entrepreneurs will disappear, or better yet, move to Singapore. Now, there’s a continuum from 94% down to about 50%, which is the current rate if you include the state/city taxes of the developed states. For each rate, there’s a response in entrepreneurial activity. (some high start-up cost businesses may be affected disproportionately, btw) All you have to do is analyze this activity (and it’s benefits to society at large) based on the top rate. I’m sure you can find some economists out there that looked at this problem. This is a very complex problem. For example, it does include the effect of highly skilled immigration (like Elon Musk, Sergey Brin, etc) America has been and is currently attracting the brain drain from other countries because here’s where the innovation happens, and that’s in big part because of lower taxes overall. Who wants to go to France to do a start-up? (75% top marginal income tax, plus 20% vat, plus at times wealth taxes) Not even the French! Nowadays, the big tech companies, like Google in particular, have offices all over the world, to hedge their bets and get the talent from all over the world. I wouldn’t be surprised if their location shifts with taxes on the workforce. A lot of the start-ups are really started by industry people from the big companies.


        October 13, 2015 at 11:31 pm

      • Winsor & Newton recently moved it’s paint production from the U.K. to France, so someone wants to go there.

        Lion of the Blogosphere

        October 13, 2015 at 11:36 pm

  18. Isn’t the main point the difference in tax rates between an entrepreneur and and employee? I don’t know about the US but in Germany (comparably high taxes and also forced contributions for health insurance etc.) you usually have it “worst” (in taxes etc.) as a well paid employee whereas even a small entrepreneur (like a carpenter or electrician) has lots of possibilities to (legally) avoid taxes or get all kinds of tax benefits from his entrepreneurial status (e.g. the sports car for the wife runs on company books etc.) and usually pays de facto considerably less tax, I believe.
    I don’t think absolute tax rates are all that important. It’s the differences that matter.

    nomen nescio

    October 16, 2015 at 12:30 pm

    • As a business owner in the U.S., there are lots of opportunities to reduce your taxes which are not available to an employee. As an employee, you receive a statement saying what your income is, and that’s your income on which you pay the ordinary personal income tax rate which is the highest tax rate.

      Lion of the Blogosphere

      October 16, 2015 at 12:39 pm

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