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Recently the Congressional super committee failed to reach a deal to reduce federal spending primarily because of an impasse centered on tax policy. Earlier in the year, with a downgrade of the U.S. bond rating looming, the same tax policy issue prevented a deal of the magnitude that was needed, and the consequences were dire. The U.S. AAA credit rating was downgraded for the first time in history, and the stock market took a major hit.
So far, this impasse has been framed as an issue that pits the middle class against the wealthiest 1 percent to 2 percent of Americans — whether the middle class gets a tax cut is predicated on whether the president gets his way and gets an increase in taxes for the wealthy or Congressional Republicans get their way and tax rates are held steady for all income levels, wealthy included. There is no middle ground.
In this characterization of the issue, the Republicans are cast as the ones who are standing in the way of a tax break for the middle class, and to some extent, the public seems to be siding with the president’s point of view. Polls consistently show that a majority of Americans favor the idea of raising taxes for the wealthiest in our society. It seems that people have bought into the president’s argument that part of the reason the economy is in rough shape is because tax rates have come down from the levels they were at during the Clinton administration and that higher tax rates were part of the reason the country was in better shape during the Clinton years. The public also seems to believe that the wealthiest Americans aren’t paying their fair share of the tax burden.
Meanwhile, there is an important aspect of this issue that is usually left out of the conversation: How would the money get used if the wealthy were taxed more versus if they got to keep it and use it as they wish?
We have a pretty good idea of what happens to the money when it gets passed on to government to manage, and unfortunately, government has already shown that it is not a great steward of the people’s money.
Before enactment of the $787 billion stimulus package, we heard a lot about infrastructure projects and “shovel-ready projects,” but most people cannot name a single landmark project that was accomplished on the basis of stimulus funds.
Yet, my guess is that most people could probably name a landmark project or two near where they live that could have been addressed using stimulus funds. For example, in Seattle, where I live, there are two major infrastructure projects that have been stalled for years partially due to funding issues — repair or replacement of the Alaskan Way Viaduct and repair of the State Route 520 floating bridge. If the projects are out there, why didn’t they get done?
On the other hand, there are examples such as Solyndra where the money was doled out and it turned out to be a colossal waste. Yes, even in private enterprise you win some and you lose some, but losses are usually not on the order of $500 million.
So this leaves us with the question: What happens to the money if the wealthy get to keep it? It’s easy to imagine that those funds would get consumed on luxuries and lavish excesses that “two-percenters” could easily forgo to give their less fortunate brethren a helping hand. There’s no doubt that some of the spending that ensues would fall into this category. Meanwhile, quite a bit of this money would also get risked to generate even more income.
The wealthiest Americans are the ones who truly have disposable income, money they can risk without jeopardizing their livelihood. These are the folks who seed venture capital funds that in turn finance startups like Facebook, Twitter, Groupon and others that eventually evolve into industry icons and become stable generators of well-paying jobs.
This is one of the phenomena that helped to fuel the ’90s boom. Venture capitalists poured money into startups at an astounding rate. An estimated 6 million jobs were created by about $273 billion in venture capital funding during the 1990s, especially from 1995 to 2000.
The tax impasse comes down to a trade-off between handing over about $1.5 trillion over the next decade to the government to consume on programs or leaving the money to the investment decisions of the people who earned it in the first place.
It’s a trade-off between leaving the money management to people who have already proved that they have a knack for generating wealth versus delegating it to bureaucrats who might not have any practical experience with risking money to generate a return.
Which would you choose?
B.A. Marbue Brown is the author of “The Clinton Economic Boom (and Other Myths of the Clinton Presidency).” He is currently a senior director with a Fortune 50 technology firm.