People often view debates over economic policy as debates between selfish libertarians, who seek to keep what they earn, and generous communitarians seeking to help the poor.
Communitarians recognize that talent is randomly distributed among mankind and that humanity and not individuals are the rightful owners of that talent. Talented individuals have a moral obligation to the community to utilize their talents fully to improve mankind’s standard of living. They have an obligation to get the training necessary to fully utilize their abilities for society’s best interest, not their own. And they have an obligation to take the entrepreneurial risks necessary to produce innovation that raises standards of living. Anything less than making the effort and taking the risks necessary to fully utilize one’s talent on behalf of mankind is immoral.
Despite this obligation, we see a world filled with talent that’s unwilling to get the training necessary to fully utilize its potential—art history majors instead of MBAs—and a world of trained talent unwilling to take the risks necessary to produce innovation—“salarymen” instead of entrepreneurs. The high and growing price for successful risk-taking indicates a shortage of entrepreneurial risk-takers relative to a growing world of unrealized opportunities. Payoffs rise to induce more talent to get the training and for trained talent to take the risk necessary to produce innovation. The high price of talent also better allocates scarce resources to the most valuable opportunities. Ironically, it’s the art history majors, the ones who create the shortage of talented risk-takers, who complain the loudest about the growing payoffs for successful innovators.
On the other side of the coin, society’s goal should be to extract maximum value on behalf of society from its talent—i.e. the value capture by the rest of society. Toward that end, we should recognize that most of this value is created by buyer’s surplus—the value of goods and services over and above their cost. Nowhere is this value captured by GDP, which measures the price of goods. Nor is this unquantified value taxable. Nevertheless, innovation has produced steady growth in value relative to cost over the last several centuries. This growth has vastly improved standards of living.
From this perspective, it’s shortsighted for society to maximize taxes paid by its talent. Rather it should maximize value produced by its talent less its cost—i.e. the value captured by the rest of society. The true cost of talent to society is its consumption not the after-tax income it earns, much of which is invested and produces buyer’s surplus, which is mostly captured by non-investors. Taxes are a relative small portion of the value talent produces when buyer’s surplus is included. And taxes are an even smaller portion of the value underutilized talent fails to produce. The goal of tax policy should be to maximize the total value the rest of society captures from its talent.