Taxing Entrepreneurship

The government pays a lot of lip service risk-taking, entrepreneurship and small business. In fact, many believe that it can be advantageous for tax purposes to be an entrepreneur (write-offs, SBA loans, hiring family members, etc.). In a fascinating blog post titled Should We Worry about the Rising Inequality in Income and Wealth?, Judge Richard Posner considers how a high marginal taxes effects entrepreneurs and other risk takers:

What are the causes, and what are the effects, of this trend in the income (and of course wealth) of the highest-earning segment of the distribution? Part of it is reduced marginal tax rates, because high marginal tax rates discourage risk-taking. Consider two individuals: one is a salaried worker with an annual income of $100,000 and good job security, and the other is an entrepreneur with a 10 percent chance of earning $1 million in a given year and a 90 percent chance of earning nothing that year. Their average annual incomes are the same, but a highly progressive tax will make the entrepreneur's expected after-tax income much lower than the salaried worker's.