Back in 2012, I had the opportunity to speak to Gary Becker. I asked him about the real effects of higher taxes on human capital acquisition in the modern Internet economy. In particular I asked him, "Would Mark Zuckerberg have invested an equal amount of time and effort in creating Facebook if he had to pay European tax rates on his earnings and stock options? " I pose this now because Paul Krugman has written a NY Times opinion piece recently arguing that President Trump's tax cut will have little effect on increasing Apple's investments in real activity in the United States. Dr. Krugman tells a tale of accounting balance sheets rather than a story about optimal investment and the after tax rate of return on capital investment.
Again my question to Gary Becker was; "If Silicon Valley is the engine of the modern economy, could this golden goose be taxed more without destroying it?" Dr. Krugman appears to be saying "yes" but I would like to see some empirical evidence.
Gary agreed with me that at the intensive margin that Zuckerberg's hours worked at Facebook is not sensitive to his real after tax wage. My logic is that the Zuck loves his job so his hourly real wage does not play a key role in determining his effort.
But, Becker argued that if young brilliant people in the U.S face such progressive European tax rates that fewer of them would invest in skills to become computer science majors. So, he focused on the extensive margin (the choice of sector) not the intensive margin (hours worked conditional that you are a computer programmer). He implicitly was saying that more Zuckerbergs would become poets if the young face European tax rates. By a law of large numbers, this exodus of talent from computer science to poetry would slow down Silicon Valley in the future (i.e we would have fewer Future Facebook startups).
Still, we return to Krugman's conjecture. For firms who already exist, is their productivity growth and their investment slowed by taxes? A key question here would be their bidding for talent. If workers earn a lower after tax earnings in Silicon Valley, due to a tax increase, would these workers still choose to work in this sector? Who would bear the economic incidence of higher taxes? The firm or the skilled workers?
As I think about Krugman's column, I wonder if Apple is a special company in Silicon Valley or whether his logic extends from Apple to the other major firms such as Google and Facebook?