Amen Brother Cuban
Great quote from Mark Cuban today:
Entrepreneurs who create something out of nothing don’t care what tax rates are. Bill Gates didn’t monitor the marginal tax rate when he dropped out of Harvard and started MicroSoft (btw, it was a ton higher than it is today). Michael Dell didn’t wonder what the capital gains tax was when he started PC’s Limited, and then grew it into Dell Computer. I doubt that any great business or invention started with a discussion or even a consideration of what the current or projected income or capital gains tax was or would be.
The impact of tax rates on productivity and development is something economists masterbate about, enterpreneurs don’t waste their time thinking about it. We have business to do.
Exactly. When I started my first company I’d never even heard of capital gains taxes, and had no clue what I’d be paying even at the personal rate. All I knew was that I had an idea for a web site that I thought would be pretty successful (and it was) and I wanted the corporate veil for protection.
Which is not to say that I think taxes are irrelevant. Taking more from companies and entrepreneurs in good times gives them less to work with in bad. Taking a higher percentage for the government when an entrepreneur has a successful exit narrows his options for future startups, and we have a higher rate of recidivism than crack fiends.
Unfortunately the capital gains tax does little about this. For one, most entrepreneurs pay taxes at the personal rate. Even many successful corporations, whose owners may pay at the reduced rate, started out as LLCs or some other pass-through entity.
And for another, what capital gains taxes really do is favor the ultra-wealthy who live off of their investments, rather than those generating wealth directly. The man with $5 million in investments earning him 10% (or $500k per year) pays taxes at a rate of 15%. The brain surgeon or restaurateur making $500k per year the old-fashioned way is paying more than twice that.
As Paul Krugman points out:
In reality, only a few middle-class families received a significant tax cut under Bush. But every wealthy American — especially those who live off of stock earnings or their inheritance — got a big tax cut. To picture who gained the most, imagine the son of a very wealthy man, who expects to inherit $50 million in stock and live off the dividends. Before the Bush tax cuts, our lucky heir-to-be would have paid about $27 million in estate taxes and contributed 39.6 percent of his dividend income in taxes. Once Bush’s cuts go into effect, he could inherit the whole estate tax-free and pay a tax rate of only fifteen percent on his stock earnings. Truly, this is a very good time to be one of the have mores.
If anything, that’s the opposite of what we as a society desire. While I won’t say that the ultra-wealthy aren’t valuable to society (they’ve certainly created a large financial services industry) I think we all wouldn’t mind replacing them with brain surgeons and restaurateurs. If we were truly worried about stimulating the economy and furthering America’s entrepreneurial spirit, we would focus more on cutting the top tax rates and taxes on businesses directly than on saving the ultra-wealthy from estate taxes.
It’s for that reason that I support increasing capital gains taxes beyond $250k. What I’d really like to see is capital gains taxes tiered up to the point where they match income taxes, which can then be lowered as a result. Of course, it’s possible that no politician could get elected on that platform but maybe we can hope for it in Obama’s second term. We certainly won’t get it from McCain or any other Republican at any point.
October 24, 2008 at 4:51 pm
I couldn't agree with you more. Many may argue capital gains shouldn't be taxed as high because the money has already been taxed once, however for the super rich, investing is their main way of generating cash. Managing that money is their job, just like anybody else's, and they should pay taxes on it just like any other working person does.
It's difficult for politicians to bring this up because it raises the taxes of middle class older people who are pulling their money out of their investments, and they flock to the polling booths. I wish for a candidate who would pledge to slowly faze out the capital gains tax breaks so the older generation who invested their money wouldn't get as much of a tax burden so that we could slowly move to a place where capital gains are taxed the same as ordinary income.
October 24, 2008 at 8:55 pm
Would you agree that it would be desireable to bring investors back to the stock market?
So your elevator pitch would be that while it is risky to enter now prices are low and if you guess right you may see a huge profit. Course if you overcome the risks and do profit we will double the tax when you sell.
Somehow I don't think you will be successful with that pitch. Can you see why?
October 24, 2008 at 10:23 pm
But one could argue that an entrepreneur DOES care about how likely they are to be bought out by MicroGoogleHoo and reducing the capital gains tax increases the pool of money available for purchasing startups.
October 25, 2008 at 3:02 am
Yey a second obama post this week, shame I can't vote more then once!
Hope you'll still have what to write about next month.
October 25, 2008 at 3:33 am
Interesting thought. I'm not sure how big that effect is in tech, and I suspect it's much smaller in the rest of the economy, but it certainly can't help.
I would think that is also more affected by the overall market than taxes too, since companies often acquire with their own stock.
October 25, 2008 at 3:35 am
I think normal people who buy stock view taxes as a sunk cost and largely ignore them, just like entrepreneurs. People bought plenty of stock before Bushy took over.
October 26, 2008 at 9:19 am
I recall Obama saying in a Business Week article last year that he'd put the capital gains tax in the 20 to 25% range.
I don't really have a problem with that. Estates are post-tax money, however. How do you rationalize double-taxing those?
The top 10% of earners contribute over 70% of the tax revenue–you might want to mention that in your analysis of wealthy people's value to society.
Also, what do you think about Hauser's law? (That tax revenue as a % of GDP remains constant.) Maybe the key is not raising taxes–but working to increase economic growth and reduce spending.
October 26, 2008 at 9:57 am
Where do you get those numbers from? Are you speaking of personal income taxes, or all? What percentage of our nation's total income do they make? The fact that 10% of people pay 70% of taxes (whatever that means) is irrelevant. If they make over 70% of the money, it's clearly wrong.
And the Bush tax cuts don't benefit much of the productive wealthy, they benefit the ones who merely live off of their investments. Their value to society, as a whole, is much less than those who are paying the top personal tax rate.
Hauser's law has a number of well-known flaws. Here's the best:
http://time-blog.com/curious_capitalist/2008/05...
Hauser's chart looks more impressive than it is due to being zoomed out so much, and when you zoom in you see that while 70% tax rates are absurd, reasonable (i.e. Clinton years) raises in income tax do increase revenues.
October 26, 2008 at 11:11 am
The government publishes the raw data and you can find summaries anywhere with a search for “tax burden by earners” or similar. As far as I know it's in regards to income tax.
Here's one such summary: http://www.ntu.org/main/page.php?PageID=6
The last available year is 2006, in which:
- The top 1% of earners paid 39% of income tax revenue
- The top 5% of earners paid 60%
- The top 10% of earners paid 70%
How can you dismiss this as any less relevant than the statistics that Krugman quotes? I'm trying to keep an open mind with regards to all these stats and theories–I would hope you are too.
As best I can tell from this graph on income/GDP ratio, the bottom 90% of earners represent 31% of the GDP … so that puts the top 10% at 69%. Is it still wrong? (btw, that includes capital gains income)
http://www.visualizingeconomics.com/2006/10/17/...
October 26, 2008 at 11:27 am
I said the statistic was irrelevant because it doesn't mean anything on its own, it has to be taken in context. Note that by the two data charts you just gave, the wealthiest 1% (the true beneficiaries of the Bush tax cuts) get 47% of GDP but only pay 39% of the taxes. Does that seem right?
The top 10% look to get about 70% of both the tax burden and the GDP, which is arguably fair. But percentile 1 gets 47% while only paying 39% That means percentile 2-10 are getting raped, forced to make up the extra 8. They're making 23% of GDP but paying 31% of the taxes.
That is exactly what Krugman talks about. The working wealthy are being short changed in favor of the ultra-wealthy who live off of their investments.
October 26, 2008 at 12:00 pm
That's a fair assessment. As an entrepreneur who's worked hard and is now in that top 5% (if only barely), I have no problem contributing an appropriate share in taxes–in principle. But the bottom 50% of earners have been paying less each year … why should I keep paying more (it's an honest question–I'm not trying to be snide or rhetorical)?
I suppose it's never going to be even. Just as the top 1% don't pay enough (by these standards), the bottom 1% contribute nothing–possibly even negatively. Maybe these edge cases shouldn't even be considered.
Also, to make the top 1% of earners, you only need to make $389K per year. I wouldn't exactly call that “ultra-rich” and its definitely not just people living off their investments.
October 26, 2008 at 12:08 pm
Well, I don't know the data, but my guess is that if you broke the percentiles down by tenths, you'd see that effect even more exaggerated among the top 1/10th of 1% when compared to the next 0.9.
Also, it's not completely accurate to rank people solely by income. The surgeon who earns $400k a year in income is nowhere near as wealthy as the guy with 8 million in the bank earning 5% interest, though they'd both show up in the same percentile. The surgeon, who had to go through many years of expensive med school, followed by a few brutal years of residency, and is now providing an immensely valuable service to society, is paying 40% in taxes and the trust-fund guy who inherited his money is paying 15%.
It's clearly a broken system.
October 26, 2008 at 12:26 pm
Agreed on the broken part.
Out of curiosity, what are your thoughts on estate taxes? If the surgeon or myself is smart enough to put money away and leave it for his/her children, should they have to pay taxes on it? After all, it's not impossible for a $400k earner to reap the benefits of compounding interest and have $1M+ at retirement or death.
BTW, if you know of a bank offering 5% on a savings or CD account, please let me know
October 26, 2008 at 6:05 pm
I hadn't thought much about estate taxes, but I guess I'd have to be opposed at least to high ones. From what I understand most wealthy people just find ways around them anyway (like life insurance) which would seem to make them a bad idea. I really don't know much about it to be honest.
February 8, 2009 at 9:18 am
thanks!