Don’t Punish Entrepreneurs Because They’re Richer Than You

January 5, 2016, 7:25 PM UTC
Y Combinator Co-Founders Paul Graham And Jessica Livingston Interview
Paul Graham, co-founder of Y Combinator, speaks during a Studio 1.0 interview on Bloomberg Television in San Francisco, California, U.S., on Wednesday, July 23, 2014. Y Combinator provides investment services offering financial assistance, analysis and advice to startup companies. Photographer: David Paul Morris/Bloomberg via Getty Images
Photograph by David Paul Morris — Bloomberg via Getty Images

It’s difficult to talk openly about income inequality without raising the ire of the Internet, a fact that Paul Graham, co-founder of Y-Combinator, learned this week.

In an essay published on his blog, venture capitalist Graham argued that income inequality, which has been increasing so much of late that representatives of both political parties are now decrying it, is actually a good thing. He was roundly lambasted for the logic of his argument, which he tried to clarify in a simplified version of his essay on Tuesday morning. Graham’s simplified version: Not all causes of income inequality are bad. We should attack poverty, he said, but be careful not to go after the people who are creating new companies, jobs, and innovation, just because they are getting rich from doing so.

The problem with this argument is that there are few people in the mainstream who are arguing that the way to attack the problem of economic inequality is to take away the rewards of success. Sure, thinkers like French economist Thomas Piketty have argued that global income and wealth inequality should be fought in part with a tax on wealth. But the other part of this argument is that the revenue should then be used to fund things like education and affordable housing that would count as “attacking poverty.”

Second, Graham implies that the majority of America’s superrich, the 0.1% of earners who have captured most of the gains in income over the past two generations, are founders of companies. But economic studies show that these people are mostly “executives, managers, supervisors, and financial professionals,” and not the sort of risk-taking entrepreneurs that Graham is defending.

In other words, there’s no reason to believe that the proposals on the mainstream left, like higher taxes on wealth, financial transactions, and income, combined with a higher minimum wage, earned-income tax credits, and investment in infrastructure and education would do much to dissuade Silicon Valley entrepreneurs from inventing the next revolutionary product.

But that doesn’t mean that Graham’s fundamental point is incorrect. The possibility of great wealth is a very important motivator for the entrepreneurial class, and economic studies have shown that countries like those in Scandanavia, with its high tax rates and wealth redistribution, have lower levels of technological innovation. As MIT economist Daron Acemoglu has written:

Imagine if the U.S. increased taxation, reduced rewards for entrepreneurship and discouraged risk-taking: It is reasonable to expect that its entrepreneurs—in Silicon Valley, medicine, robotics, and aerospace, to name a few—would become less daring and innovative. This could have negative consequences for growth and prosperity not only in the United States, but throughout the world. There is no other country that could step in as the innovation engine of the world economy.

This is not to say that the United States couldn’t benefit from a bit more wealth redistribution or more investment in public goods like education, but there is a point at which increased equality is paid for with slower growth and less efficiency. For a more eloquent defense of this important point, however, Graham may have checked out the writing of a fellow tech entrepreneur Bill Gates, who in a 2014 blog post, recognized that we need to reduce income inequality in order to create social stability and faster economic growth. And he did so while proposing policies, like a progressive consumption tax, that wouldn’t curtail entrepreneurship.

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