Capital is Good; the “Buffett Rule” is Not

The Washington Post published my editorial on the “Buffett Rule” — a proposal from President Obama to hike the effective capital gains rate on large payouts. I wrote that over time this would hurt technology startups because it increases the cost of capital and lowers the pool of available funds.

The editorial has provoked some vigorous debate. Reader comments in the Post have been mostly negative, which comes as no surprise given that the publication’s audience likely tends toward left-of-center readers and DC insiders. Here’s a quick roundup of responses:

  • Post columnist Ezra Klein responds to my editorial by ceding that my argument (i.e. the Buffett Rate is a capital gains hike that would diminish the investment pool for tech startups) might be correct, but then asserts we ought to tax the rich more anyway and concludes the logical way to protect tech is via a subsidy.
  • MotherJones’ blogger Kevin Drum covers a lot of ground in 3 paragraphs, saying higher capital gains rates don’t really impact investment, implying that there should be taxes on unrealized gains, and concluding that cap gains rates ought to be “maybe 30% or so” with no explanation offered as to why. Yikes.
  • Over at the Heritage Foundation, Mike Brownfield writes that the experience of California further serves to enhance my point. The Golden State, he notes, has relied heavily on taxation of the wealthy for revenue, and as a result has experienced wild boom-or-bust swings depending on the stock market.

My editorial stands on its own, and I don’t see a reason to amend it other than to point out that it’s a case study of the tax proposal’s unintended consequences on one industry. But a broader macro-economic analysis of Warren Buffett’s idea leads me to the same conclusion. Why? Because of several broad and simple principles:

Capital is good. Our country needs capital. Capital makes the economy grow and allows businesses to start and expand. All the political rhetoric is about taxing “millionaires” and “billionaires,” but the proposal really is about taxing capital. Passing this plan means that more capital will be taken from the (productive) private sector and given to the (unproductive) public sector.

Capital is fluid. National capital gains rates do not exist in a vacuum. If rates go too high, capital will leave our country in search of more fertile ground. Our nation’s 15% federal rate is the 4th highest of G7 countries (according to a 2009 study), and many developing countries have rates around 0%. It’s hard to conclude that our rates are too low when benchmarked globally.

Capital is property. What’s getting lost in the debate is that this discussion centers around seizing private property. Politicians and pundits engaging in “sticking it to the fat cats” rhetoric seem almost gleeful about taking away capital gains. While taxation is obviously legal, it ought not be flippant.

Entrepreneurs: Startup Visa is Great. Now, How About Taxes?

The startup world has been buzzing this week after Sens. John Kerry and Dick Lugar introduced the Startup Visa Act of 2010. According to TechCrunch:

“[The bill] would create a two year visa for immigrant entrepreneurs who are able to raise a minimum of $250,000, with $100,000 coming from a qualified U.S. angel or venture investor. After two years, if the immigrant entrepreneur is able to create five or more jobs (not including their children or spouse), attract an additional $1 million in investment, or produce $1 million in revenues, he or she will become a legal resident.”

Paul Graham of YCombinator hatched the visa concept in April of last year. The cause was picked up by Eric Ries, Dave McClure, and several other tech thought leaders, who launched the blog and recruited many of the best and brightest in the industry (including Reid Hoffman, Mike Maples, Chris Sacca, Josh Kopelman, and Chris Dixon) to support the cause.

And allowing hard-working immigrants to move to America to create jobs is indeed a good cause. I’m not sure that I’d go so far as the TechCrunch guest writer who implied that only xenophobes could oppose it, but overall importing the world’s entrepreneurs into America is a decent idea. Let’s take all the intelligent, hard-working innovators who want to come here legally that we can get.

Fantastic. But once the congratulatory back-slapping ends, I have a question for the entrepreneurial community: what about taxes? I don’t hear a lot of my fellow entrepreneurs talking about tax rates, and their silence is deafening.

The federal capital gains tax rate is set to rise from 15% to 20% next year, and President Obama previously indicated he’d entertain something in the 25%-28% range. Meanwhile, according to the Tax Foundation, America has the second highest corporate tax rate in the world, trailing only Japan, and 24 states actually have higher rates than Japan. (Thanks to Dave McClure for the link.)

According to the Cato Institute, studies in comparative economics suggest that “total government spending (federal plus state plus local) should be no lower than 17 percent, nor larger than about 30 percent of GDP.” They cite an analysis by the Institute for Market Economics in Sofia, Bulgaria, that concluded that “there is a 95 percent probability that the optimal size of government is less than 25 percent of GDP.”  As of last year, the US stood at 36%.

America is comparatively over-taxing its companies and capital. Importing entrepreneurs is great, but it’s also muted when the government’s punitive tax code undermines incentives to invest.

So, entrepreneurs, what are you going to do about it?