Are the Rich Just Lucky?

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In the ongoing debate about growing income inequality in America — the top 10 percent of families grabbed 43 percent of income in 2004 vs. 33 percent in 1980 — some have argued that America needs a more progressive tax system, both to share the wealth and to help deal with the government's long-term budget woes. When the Bush tax cuts on income and investments end in 2010, plenty of liberals and budget hawks will surely argue that they should not be extended. (This is going to be a huge issue in the 2008 presidential campaign.)

But those who want a flatter, less-progressive system argue that wealth, to a great extent, reflects productivity, and so more productive people should face lower tax rates as an incentive to produce even more. A more productive economy will grow faster, and that's the best way to deal with fiscal problems.

Consider this: What if it's luck rather than ability that plays the greatest role inof people's success? Some studies have shown that inequality among family members, people who share genetic traits, is not much different from that of the general population. Why should we subsidize the lucky with lower taxes?

But a recent study from Harvard University's Graduate Business School found that skill is indeed an important factor in success. The study looked at entrepreneuers, a third of whom are in the top 1 percent of American earners.

According to the study's authors:

We try to answer the following simple question: Are successful entrepreneurs more likely to succeed in their next ventures than first-time entrepreneurs and entrepreneurs who previously failed? Our answer is yes. ... Entrepreneurs who succeeded in a prior venture (i.e., started a company that went public) have a 30 percent% chance of succeeding in their next venture. By contrast, first-time entrepreneurs have only an 18 percent% chance of succeeding, and entrepreneurs who previously failed have a 20 percent% chance of succeeding. This performance persistence suggests that a component of success in entrepreneurship is attributable to skill. While it may be better to be lucky than smart, the evidence presented here indicates that being smart has value too.