Archive for July, 2009

War on Entrepreneurship



When we started our blog, we were concerned about the automatic capital gains tax increase that would occur after 2010 when the Bush era tax cuts expire. If President Obama and congress take no action, tax rates will automatically rise to 20% from the current 15%.

Now, much to our surprise and dismay, Speaker Nancy Pelosi, Ways and Means Chairman Charlie Rangel and other influential lawmakers are talking about a new capital gains tax higher than 25%! (more than a 60% hike) and that’s just Uncle Sam’s take. If one is an investor in many states with a state and local capital gains tax, we’re really in trouble.

This is serious and frightening proposition, but its not a done deal. Fortunately younger Democrat members of Congress, including Jared Polis rebelled indicating that higher taxes on entrepreneurship is the last thing that we need for the U.S. economy. Polis led an effort along with more than 20 of his colleagues in signing a letter to Pelosi saying, “Especially in a recession, we need to make sure not to kill the goose that will lay the golden eggs of our recovery.”

Polis knows of what he speaks as a successful entrepreneur himself. While attending Princeton University he co-founded his first company, American Information Systems. He has since launched several successful business ventures, including: bluemountainarts.com, Proflowers.com and other online start-ups. See our earlier post on Jared Polis here.

Wall Street Journal’s recent editorial highlights the dangers of looming income redistribution including the dramatic increase in capital gains tax rates.

It should also be noted as well that already the current U.S. capital gains tax rate compares unfavorably with that of many other major economies. More than half of the countries surveyed in a study by the ACCF have individual capital gains tax rates lower than that of the U.S. An even higher capital gains tax rate will put us at more of a competitive disadvantage.

In his book, Great Contemporaries, Winston Churchill advised his friend Franklin Delano Roosevelt on the danger of “hunting down rich men as if they were noxious beasts. It is a very attractive sport, and once it gets started quite a lot of people everywhere are found ready to join in the chase. But, the quarry is at once swift and crafty, and therefore elusive. The pursuit is long and exciting, and everyone’s blood is infected with its ardour. … [But] far from depriving ordinary people of their earnings, [the rich man] launches enterprise and carries it through, raises values and he expands that credit without which on a vast scale no fuller economic life can be opened to the millions. To hunt wealth is not to capture commonwealth.”

Gimme Back My Nest Egg

Economic recovery is still sluggish and Americans that have seen their life’s nest eggs wiped out are still reluctant to wade back into the investment pool. Here’s a new idea outlined in my recent op-ed in Weekly Standard for the capital gains tax that could help restore American confidence in saving and investing and rebuild retirement nest eggs.

Rather than applying a reduced capital gains tax rate to the sale of an investment (currently at 15 percent), why not apply the tax break based on the purchase date of the stock? Under this plan, taxpayers who purchase a capital asset within one year of the date Congress initiates the legislation would pay a capital gains tax under a new sliding scale tax rate similar to that proposed by President Franklin Delano Roosevelt. If an asset was held for one year, any gain on the sale would be subject to half the normal capital gains tax rate (a maximum 7.5 percent under current law or 10 percent under President Obama’s proposed top 20 percent tax. If an asset was held more than five years, there would be no tax on the gain. The capital gains tax on equities or other capital assets in tax-preferred accounts (401(k)s and IRAs, for example), would also be less on withdrawal than the ordinary tax rate that would otherwise apply. Remember, Americans’ nest eggs are located in 401ks, IRAs, and similar accounts as well as in banks, insurance companies, brokerage accounts and other forms of ownership.This approach could provide just the incentive needed to motivate Americans to move their dollars from bank accounts, money markets, or under mattresses back to the stock market and other investments. “Gimme Back My Nest Egg” could provide strong encouragement to buy equities again, thereby supporting the stock market and restoring retirement security. An FDR-type sliding scale would also be an incentive for investment stability, rather than short-term speculation. It is not a magic bullet, but it could be a powerful element in economic recovery.