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Tax Cuts Will Not Stall Entrepreneurship, Says Entrepreneur

The Bush tax cuts are the next-level fight for the Administration and Congress. Many Democrats want to extend the tax cuts for the middle class for an indeterminate period of time. Republicans and some Democrats would rather extend all the tax cuts, including those for multi-millionaires. The Administration is coming down on the side of the middle class on this one, holding strong for allowing the cuts for the rich to expire.

One thing you’re going to be hearing a lot is that the economy is too weak to engage in any tax increases. This is the rationale used by the likes of Kent Conrad to justify extending all the tax cuts. But a testimonial from an entrepreneur shows that there would be no change in business investment from the change in top marginal tax rates whatsoever.

Never ones to miss an opportunity to lie about taxes, however, Republican chicken-littles are using the slow-growth in job creation–while far ahead of Ronald Reagan’s at this stage in the recovery–to push rightwing claptrap that the pending rise of 4.6% in ordinary income tax and of 5% in capital gains tax rates is a sword of Damocles ready to fall on January 1, 2010 to choke off new investment […]

Entrepreneurs invest in (what they hope are) exciting new enterprises, or those in early-stages of growth. Once companies become profitable, their needs for risky investments recede.

An entrepreneur wants to start these new businesses because he/she has an awesome, amazing, neat, cool, nifty, revolutionary, game-changing idea, concept, invention or approach to a market. These people do not care about tax rates, they want to see their ideas flower.

What were the tax rates when Bill Gates started Microsoft, or Steve Jobs created Apple? There are two answers to that question. One is the rates — 70% on ordinary income, 28% on capital gains, both far higher than what they will rise to when the Bush cuts expire. The other, more important answer — neither Gates nor Jobs likely knew, and certainly did not care.

Investors, for their part, invest because they think the returns on that investment will be many multiples of their initial stake and because they like what the company is doing. The uncertainty of those future predictions dwarfs to the point of irrelevancy the tax changes’ impacts on their ultimate return. These tax effects are, at most, “rounding error”. In fact, the economic climate on the day the investment becomes liquid (either by doing a public offering or selling the company) is a much more important variable than tax rates.

Several conference attendees at Netroots Nation agreed that the tax cuts on the wealthy, the largest explanation for the increase in the federal deficit, should expire and as soon as possible. This can become the ammunition against the claim that the government shouldn’t go raising taxes (actually they’d just be following current law) at this juncture.

UPDATE: The tax cut debate has become a political one. Democrats may be happy to see Republicans filibuster the extended cuts for the middle class to point the finger during the elections. I’m pleased to see some tough votes laid for Republicans, though they seem to be plenty happy to take them.

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David Dayen

David Dayen