79.2 F
San Diego
Thursday, Sep 29, 2022
-Advertisement-

Tax Increase No Solution to Alternative Minimum Tax Mess

I was hooked on the now-canceled HBO series, “John From Cincinnati,” so please forgive me for plagiarizing the central character’s tag line as the driver for this piece.

The show featured an odd stranger who tended to say things like, “the end is near,” in a quest to save three generations of supra-typical Imperial Beach surfers and other assorted character assassinations on the verge of social and spiritual collapse.

Just as I couldn’t figure out whether or not this savior arrived in San Diego to avert an apocalypse, or to simply save the few lucky souls who can pull a front-side aerial, I am confused by the compulsions of our elected representatives as they contemplate putting the kaibosh on business by raising taxes on capital formation.

Like the aforementioned John, they walk among us, perceive our failures, and proscribe utterly perplexing solutions.

- Advertisement -


Scapegoat

Take the current drive on Capitol Hill, for example, to scapegoat the investment community following some recent headline about making large-scale business transactions.

Although astronomical sums of money changed hands, setting the rest of us up for the largest tax increase on seed corn capital in the history of the republic is hardly the correct response.

This hits especially close to home for the industries of growth here in San Diego such as biotech, software, telecommunications, defense and, perhaps most importantly, small business.

This attack on private enterprise is outrageous, and yet representative of the apparent mindset of our leaders in Washington.

In the beginning, or at least as far back as circa 2002, politicians understood that entrepreneurs required boot-strapping and risk-taking friends, family, angels and, yes, venture capitalists and private equity firms to make high-stakes bets on back-of-napkin business plans with the vision that one out of 10 might provide a return on their investment.

If asked, I would bet that some of San Diego’s most famous contemporary names, including Irwin Jacobs, Michael Robertson, Ivor Royston and Bob Beyster, would lend credence to this presumption.

Behind them stand thousands of small-business owners in Imperial Beach and beyond who pray every day for access to credit and capital so they can make payroll next week and keep their faith and business going.


Risky Prospect

In the simplest terms, investors must decide that a risky prospect meets two criteria; it must pay off more than the investor puts in, and it must pay off more than an investor would earn by putting the money somewhere else.

There are a number of factors that go into such a calculus, including the return on government bonds, standard deviations of the market, the risk of the venture itself, constraints on future growth opportunities, and tax rates, to name the most common.

If any of these factors rise, then the hurdle required to trigger an investment must also rise.

Just as an increase in the cost of housing prices lower income people out of the real estate market, higher hurdle rates price smaller investors out of the debt and equity market.

According to Senate Finance Committee members Max Baucus and Chuck Grassley, the goal is to provide opportunities for the so-called average American to reap the rewards of saving and investing. Yet, raising taxes on investments results in exactly the opposite outcome.

This is not a matter of opinion, it is a matter of mathematics. An arbitrary limit on wealth generation is an arbitrary limit on the American Dream, and a killer when it comes to the formation of small business , the heart of our economy.

I applaud elected officials who chose a life of public service and the resultant steady and reasonable income and pension plans, but such personal sacrifice for the public good provides no reason to commit economic seppuku over the suspicion that one out of a thousand investors is wealthier than they deem she should be.


AMT Mess

Remember, one of the drivers for this tax increase is a scheme to get the country out of the Alternative Minimum Tax mess, birthed by similar “well meaning” politicians.

Instead, I suggest our elected officials move in exactly the opposite direction. Why not swap this tax increase on investment proposal with tax credits for angel investors? This expands the pool of small investors, friends and family, who might otherwise not invest in a startup at a point when such investment is most crucial.

This proposal democratizes rather than demonizes the capital formation process, and better achieves the senators’ stated goals. Who knows, the result might be the funding of a miracle of an idea being tested right now in a garage in Imperial Beach.

To bad we can’t cancel Congress this fall.


Greg Stein is an executive with a boutique investment bank in San Diego following a career in politics and economics.

-Advertisement-

Featured Articles

-Advertisement-
-Advertisement-

Related Articles

-Advertisement-
-Advertisement-
-Advertisement-