‘Buffett Rule’ Tanks in California, Is Bad News for Tech Startups
Mike Brownfield /
President Obama is touting his new mega tax on millionaires–a.k.a. “the Buffett Rule”–as the best thing since sliced bread (or since his plan to spend $447 billion on more stimulus), but not everyone agrees–namely, entrepreneurs and those who have seen the effects of soaking the rich in order to pay for more government spending.
In today’s Washington Post, Eric M. Jackson, formerly of PayPal and now CEO of CapLinked, an online platform for private investing, explains how the President’s plan to set a minimum tax rate for those with annual income above $1 million is bad news for tech startup companies. In short, Jackson says Obama’s increased taxation of capital gains would guarantee that investors have a lower rate of return, would decrease the pool of capital available for early-stage investments, and make the U.S. less competitive on the global stage. And he speaks from experience:
Capital gains are how technology investors make money. Experienced investors in early stage companies—often called “angels”—make extremely risky investments with the hope of having some companies in their portfolio generate extraordinarily high returns. They know that many of their portfolio companies could fail, but the potential payoff from the winners justifies this high risk, high reward strategy.
It’s investments from these kinds of individuals that have been the seed money for popular technology companies such as Facebook, PayPal, YouTube, Yelp, and many others. This is how I funded my Web start-up. In short, tech start-ups depend on angel investing to exist.
Hitting millionaires with an added tax surcharge hasn’t worked well on the state level, let alone federally. California has a Buffett-Rule-esque tax policy where those with income exceeding $1 million pay an extra 10.3 percent in taxes (in addition to federal taxes). George Skelton of the Los Angeles Times explains how the tax works:
According to the state finance department, families with adjusted gross incomes of between $1 million and $2 million, on average, paid an overall state tax rate of 8.4% in 2008, the last year for which data are available. The average rate rose as incomes did to 9.3% for those earning $5 million and up. (There were 3,757 of them.)
Families earning between $200,000 and $300,000 paid, on average, 5.5%. The rate fell sharply as incomes tailed off: 1.4% at $70,000 to $80,000, and only 0.2% at $40,000 to $50,000.
How has that tax rate worked out? Poorly. Skelton paints the picture of a state that has financed its over-spending addiction on the backs of the rich, rather than living within its means:
The revenue stream is unstable and the state budget has been a deficit disaster.
Soaking the rich — relying heavily on them for income taxes — has resulted in a precarious revenue roller coaster ride. It’s either boom or bust in Sacramento, depending on how the wealthy are faring in the stock market and their other investments.
Unfortunately, this is the road President Obama wants to head down. He seeks to increase stimulus spending to fund bigger government, then turn to millionaires and billionaires–read “job creators”–to pay for it. In California, that led to a fiscal nightmare, and as Jackson argues, it also leads to pain for entrepreneurs who use capital to invest in new businesses. And that means fewer jobs for working Americans.
A better direction: get spending under control, reduce the size of government, eliminate unnecessary regulations, and free America’s job creators to get back to business. Read more about it as laid out in Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending and Restore Prosperity.