Before presenting what is to follow, I have to apologize for neglecting this journal. My bad. I do have an excuse, mainly that I've been devoting my writing energy to fiction. I've finished the second novel in the Star Mages series and am getting it together pre-publication at this point. So that's good, but my feeling is that although it might seem like a decent excuse, I made a commitment here, I failed to keep it, and there is no excuse apart from physical or mental incapacity neither of which applies. (Yet. Knock wood.) :)
So I'll try to make up for that failure. To start with, I ran across an editorial in the LA Times by venture capitalist Garrett Gruener, who said some important things in it that people need to understand and, thanks to trickle-down propaganda, often don't. Here's the link to his article:
tax me more
Some excerpts that are particularly important:
"I'm a venture capitalist and an entrepreneur. Over the past three decades, I've made both good and bad investments. I've created successful companies and ones that didn't do so well. Overall, I'm proud that my investments have created jobs and led to some interesting innovations. And I've done well financially; I'm one of the fortunate few who are in the top echelon of American earners.
"For nearly the last decade, I've paid income taxes at the lowest rates of my professional career. Before that, I paid at higher rates. And if you want the simple, honest truth, from my perspective as an entrepreneur, the fluctuation didn't affect what I did with my money. None of my investments has ever been motivated by the rate at which I would have to pay personal income tax. . . .
"When inequality gets too far out of balance, as it did over the course of the last decade, the wealthy end up saving too much while members of the middle class can't afford to spend much unless they borrow excessively. Eventually, the economy stalls for lack of demand, and we see the kind of deflationary spiral we find ourselves in now. I believe it is no coincidence that the two highest peaks in American income inequality came in 1929 and 2008, and that the following years were marked by low economic activity and significant unemployment.
"What American businesspeople know, and have known since Henry Ford insisted that his employees be able to afford to buy the cars they made, is that a thriving economy doesn't just need investors; it needs people who can buy the goods and services businesses create. For the overall economy to do well, everyday Americans have to do well. . . .
"Remember, paying slightly more in personal income taxes won't change my investment choices at all, and I don't think a higher tax rate will change the investment decisions of most other high earners.
"What will change my investment decisions is if I see an economy doing better, one in which there is demand for the goods and services my investments produce. I am far more likely to invest if I see a country laying the foundation for future growth. In order to get there, we first need to let the Bush-era tax cuts for the upper 2% lapse. It is time to tax me more."
It's not surprising that a venture capitalist "gets it" about what limits investment in job-creating ventures: not availability of capital (i.e., not how much money rich investors have lying around), but expected return. What's more, the main thing that drives expected return is not how much the investor can expect to keep after taxes, but rather how much demand exists for the goods and services the investment is supposed to produce. As I said, it's not surprising a venture capitalist gets this; if he didn't know why he invests in one area rather than another, say in business rather than in financial instruments, he would not likely be successful at what he does. We ought to listen to him when he says things like this. I mean, when someone says, "Raise MY taxes," we can be pretty certain he's not speaking out of duplicitous self-interest. Unless he's a masochist or something.
But I'm going to take this argument one step further. Mr. Gruener says that small changes in his tax rate have no effect on his investment decisions. But what about big ones? What about the effect of the original Reagan tax cuts that dropped top marginal rates from the 60-70 percent range down into the 30s? On the other hand, what would be the effect of creating new tax brackets with very high taxes applied to very high incomes? What about a 95% tax on personal income over a million dollars a year?
Before continuing with this, maybe an explanation is in order about how "marginal" tax rates work. Right now, the top tax rate is 35% on incomes above $373,650. Does that mean that if someone makes $400k a year, he'll pay 35% of his income in federal income tax? No, it's a bit more complex than that. He'll pay that 35% only on taxable income above $373,650, which is to say, on $400,000 - $373,650, or $26,350. (That's if the $400k represents taxable income not total income, of course.) He pays at a lower rate on all the rest of his income. On the first part of what he earns for the year, he pays no taxes, just like everyone else.
So a 95% tax on income above a million dollars doesn't work to impoverish millionaires. What it does is to impose a personal income ceiling. Nobody is going to bother making over a million dollars in taxable income when Uncle Sweetie is going to make off with almost all of it. It won't hurt you to make more than a million (remember, all the income below a million is still taxed at the lower rates), but it won't help you much, either. So investors will stop investing in anything that would push their income above that point, and that will hurt the economy, right?
Well, not so fast. To begin with, most investments, and all of the ones we really want, are tax-deductible and so don't count as taxable income. If you start a business, most of the start-up costs are not taxed. (There are some exceptions involving heavy-equipment purchases, where the tax deduction is split over a number of years.) Wages you pay to employees are never taxed as your income. (As the employee's income, yes.) So what a confiscatory tax on really high income actually does is to give the person making that kind of scratch a really strong incentive to find places to invest that money where it will eventually pay off, but won't be taxable in the meantime. So -- provided we choose which investments to encourage through tax write-offs wisely -- this could actually spur investment rather than discouraging it.
Another consideration besides tax deduction is how quickly an investment pays off. The thing about investing in real business (that is, making stuff or providing services) is that it's a long-term project. You don't expect a quick payoff in the first year. Ask anyone who's ever started a business. You expect to lose money the first year, maybe the second year, maybe even longer depending on exactly what business you're in. Down the road, though, you do expect things to pick up to the point where you've recouped all those losses and made a profit. (It doesn't always happen that way, but you do expect it or you wouldn't have made the investment to begin with.) There are other kinds of investments, though, that can pay off very quickly. A good example is short-term trading on the stock market, where you're not trying to acquire stock for the long haul but rather to buy low and sell high, conceivably in a single day. Even better examples are the kinds of financial trading that resulted recently in the near-collapse of our financial system. To be sure, those particular investments went bad, but the point is that when they pay off they pay off quickly. That makes them preferable to investments in real business if you want a quick gain that can be reinvested for a multiplier effect.
What a confiscatory tax rate on very high income would discourage is this sort of investment. Why seek a quick payoff -- that is, a payoff this year -- if 95% of it goes to the federal government? Under that regimen, it makes a lot more sense to defer financial gains.
To illustrate, consider this. Let's say someone is making half a million normally. The person has another half million to invest. For sake of simplicity, he has two choices, either of which will return that half million and another million dollars on top of it. He can invest it in short-term financial manipulation that will give him the whole million and a half by year's-end. Or he can invest it instead in a start-up company making widgets, take a loss the first year, and recoup his investment plus another million over the next ten years.
If he chooses the latter route, he gets back an average of $150k a year, and in no year does the net return exceed $300k (let's say). Now: if he's going to see that investment return taxed at 35% no matter which way he goes, then he's better off investing in the short-term instrument. His net profit after taxes is $650k, and if he does the quick-return bit, he'll have all that to reinvest next year for more return still. But with the confiscatory tax in place, he'll be much better off investing in the slow road, because his net return with the short-term financial investment is only $50,000, while the return with the long-term investment is much higher, since none of it crosses that million-dollar line and so all of it avoids the confiscatory tax.
Bear in mind he's going to invest the money anyway. The only question is in what. Since investment in making things and providing services is what we want (that's what creates jobs), we want to encourage that and discourage the kind of investment that just plays with money.