Let’s soak the rich – apparently that’s what most Americans think should happen to reduce the deficit including Warren Buffett. A recent CNN poll says that 63% of Americans wants to raise taxes on the rich. Everyone knows that our federal deficit is unsustainable. It’s clear to me that one of the biggest bubbles that we’re building is the government debt bubble – we’ve shifted the consumer, housing, and financial bubble to the government. The stimulus we’ve put into the economy is nothing short of staggering. We have to get more efficient and make hard decisions on the federal budget. Should we follow the public’s outcry to soak the rich?
The President defines the rich as someone who makes over $200,000 a year. Some interesting stats – “About half of Americans who file tax returns pay almost all the income taxes; the top quarter of filers pay 86% of the taxes; 10% pay two-thirds of the taxes. A mere 1% of Americans earning income pay 38% of the tax revenues—in 2008, that was $392 billion paid by them, out of a total take of $1.03 trillion.” (Thomas Donlan, Dow Jones & Company). Do the rich need to do more? I’d argue yes, but not in the traditional sense of more taxes.
Personally, I don’t have any problem providing tax cuts to the poor and the middle class where the need is greatest and where the extra income will be spent right away. Where I have a problem is not expecting more from the rich. This is why I’d argue that it is up to the entrepreneurial community and the “haves” to step up and take risk and invest – in a way that drives growth and jobs something I believe the government cannot efficiently do and shouldn’t do.
Most of my uber-rich friends are in capital preservation mode. I don’t personally believe in trickle-down economics, once the uber-rich has enough capital for their family and future generations they go into capital preservation mode and minimize risk and taxes. Often times, they’ll buy treasury bonds or other capital preservation investments that do not inherently drive efficient growth. With limited estate taxes, generational wealth can be passed along to heirs who do not have to work for their money or create sustainable businesses for their employers or themselves. We should encourage the rich to invest in new businesses and put their creativity and knowledge to work. Take this crazy idea for example:
Create jobs and more wealth creation: Fund every entrepreneur. I’m an angel investor that has invested in over 32 companies and I don’t have the means to invest in every opportunity I see, but why can’t we fund every entrepreneur to give their dream a shot. Here’s how I would do it. The entrepreneur needs to put up 50% of the cash for the startup and gets matching funds from any “rich” individual for a company to get started up to $50K. The investor gets to immediately write-off the entire investment off of ordinary income (very similar to a charity) up to the amount of the increase in taxes that Buffett or Obama proposes. If the “rich” do not make the investments, they must pay the additional taxes levied.
Here’s where it gets more interesting for the entrepreneurs: The investment reduces risk for the entrepreneur and the investor. The entrepreneur gets someone who can provide guidance on how they became rich and could be a source of additional capital, advice, mentorship, and networking. The investor gets to see a return on their investment that should be larger than a muni-bond or treasury. Even if the venture fails, the entrepreneur and investor gained valuable experience that can be passed onto the next venture. These days, technology companies and businesses can get their unit economics and business model working on a small scale with a budget less than $100K.
Every person in America who has a dream can do this, they have to have their own skin in the game (50%), they have to marshall resources from friends and family (just like every entrepreneur does), and there is a government subsidy for the rich to invest and to take risks. Even if just 1% of all these businesses succeed, the profits and jobs created will be substantially greater than the tax subsidies provided by the government. Those who are unemployed get to use their creativity to build businesses and investors get an opportunity to participate in investing in non-traditional companies.
Based on my limited interaction with entrepreneurs, this could create over 10MM new businesses (3% of 300M). If we find the next Microsoft, Google, Zynga, Facebook, Starbucks – which is highly likely we could create over 10MM new jobs for the economy in the near term (2% = 20,000 strong companies with ~500employees). The cost would be the tax deduction for $50,000 against 10MMbusinesses or $175B (assuming a 35% tax rate) if this was all new investment dollars and would be levied as a tax hike only if the “rich” do not make any investments. We need the rich to invest more, innovate more, be entrepreneurial, and be rewarded for doing well – the rich and the entrepreneurial will help America get the economy and the federal deficit back on track.
I’m sure I’m not the only one with this idea. What do you think? Wouldn’t it be great to see more people creating opportunities when jobs are hard to come by? Perhaps we can find an entrepreneurial way to build a bridge to the prosperous future for everyone especially those who are unemployed and are struggling.