-- James Carville during Bill Clinton's 1992 campaign
I was inspired by Mark Cuban this week. No, not because he's going to buy the Dodgers in 2012 and restore the luster to the franchise that was once the crown jewel of baseball. This is more about Cuban's highly insightful blog post that surfaced on Yahoo! Sports.
http://blogmaverick.com/2010/05/09/what-business-is-wall-street-in/
His write-up is very plainly put. In fact, I'll even admit to being jealous as to how well he talked about how I've always felt about capital gains taxes. As such, I've decided to put my money where my mouth is and put out the 3 things that I think are key to re-strengthening our economy:
- Reform capital gains taxes
- Reform venture fund tax rules
- Promote employee equity ownership
1. Reform Capital Gains Taxes
Cuban covers most of this, especially the part about promoting long term outlays into businesses. I would take it a step further and make Capital Gains a reverse tax. Basically I envision a tax rate that starts at a person's income rate (probably 25-30%) for the first years, and dropping incrementally to 10% as long as they hold the investment for 4-5 years. This promotes people putting their money into companies they believe in, letting that company grow, and then rewarding them for a long-term commitment.
2. Reform Venture Fund Tax Rules
This is kind of similar to point 1, but addresses a MAJOR tax loophole. Basically the way a venture fund works is that an investor (or set of investors) wants to pool some money to be used to start businesses that hopefully mature and payoff within 5-10 years. This pool of money is given to people who run the fund - Fund Mangers - who then vet business plans and decide how to spend the investors' money. The money starts companies, creates jobs, pays salaries, and eventually - hopefully - cashes out gains for the investors (subject to my 5+ year rule above).
So what's the problem? Well, at the top of the totem pole, investors pay a fairly low tax rate. I'm OK with this because they are putting their money on the line. They are paying salaries, they are absorbing the risk, they've (hopefully) paid their fair share climbing the ladder. On the opposite side of the spectrum, the companies that have been invested in are paying employees who are paying regular income taxes. The problem for me comes in the middle - the Fund Managers. They are taking someone else's money, collecting 2% immediately off the top as their fee (remember these fund are millions of dollars), putting the rest into new companies, then taking 20% of all profits. The 2% fee and 20% cut of profits are all treated at capital gains, and therefore taxed at 10%(ish). HUH?!?! It's not their investment - the money came from someone else. This is their JOB. They should have to pay income taxes just like the rest of us. Think about that. If you work for a venture-backed company, the guy paying out your investors' money is paying 15-20+% less of their income to the government than you. How the hell is that fair?
Sorry fund managers. You've sold the government a bill of goods and it needs to stop. You are getting paid - as in payroll, income - to be a fiduciary for someone else's money and sit on a board of directors. Make some money, become an investor yourself, THEN start paying only capital gains. This is true top-5% loophole. 95% of the country should be with me on this.
3. Promote Employee Equity Ownership
This is a personal cause for me. I'm not a fan of venture and their tax loopholes and their "10x!" (their absurd benchmark for a "successful" exit). Employee ownership is an answer to this. Obviously it falls apart if you need a lot of start-up capital (ie: to build a factory), but the high-tech world allows for many new options. I could see myself starting a company where I ask a team to work for 3-6 months for a sizable piece of the company. When we get going and make some sales, the windfall goes directly to the guys who made the company work. The best example of this is SAIC. Their founder - Dr. Beyster - decided to start paying out some of the 80% equity of his company to his employees. Over 10 years, he went from 80% owner of a million-dollar company to 5% owner of a billion-dollar company. Which would you like to have? I thought so.
Government can easily help promote this. Tax breaks, grants, worker programs could all be linked to some employee equity benchmarks. It should come at minimal cost to government (maybe even gain if it keeps people employed). Again, common sense approach that promotes medium- to long-term job opportunities.
Hopefully we (Americans, the people) are learning from this. The "super committee" is garbage. I hope they pull something off, but they probably won't and things will stay ugly for a while. I have full-faith in the American people, and no matter what we will finally put ourselves back to work - most likely in spite of our assclown politicians. The steps above would help. We'll see if anyone has the guts or balls to enact non-self-serving policies.
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