If he sticks to his campaign promises, president-elect Joe Biden will soon pursue tax increases on top earners. Unknown is how helpful a near-evenly divided Congress will be when it comes to turning his vow into law.
More certain is what entrepreneurs of the Silicon Valley variety, and who tend to lean Democrat, will tell the new president. Some will undoubtedly encourage the hikes. When told by President Obama in 2011 that he should expect an increased federal income tax burden, Facebook founder Mark Zuckerberg famously replied “I’m cool with that.”
It’s not unreasonable to speculate that Zuckerberg meant what he said. Tax rates, whether high or low, arguably don’t factor into Zuckerberg’s decisions about how much or how little to work. If your goal is to build a global social network, you don’t check the tax rates first.
Just the same, does anyone think the tax increases enacted in 1993 under Bill Clinton factored much into Jeff Bezos’s decision to start Amazon in 1995? It’s unlikely, at which point it’s not unreasonable to suggest that Bezos’s work ethic similarly isn’t altered by tax policy from Washington.
The enterprising quite simply can’t not work. Though taxes are an unfortunate price or penalty placed on work, it’s no reach to say that willingness to put in long hours among the seriously entrepreneurial dwarfs that of the typical person getting out of bed each morning. Entrepreneurs who stare bankruptcy in the face on a daily basis as they bring to life their often-ridiculed visions generally don’t have time to lament reduced encouragement from the tax code. Better yet, income tax rates often don’t matter much to them as is.
Consider Nike co-founder Phil Knight. In his endlessly great 2016 memoir, Shoe Dog, Knight recalls that he didn’t have the means to pay himself a salary for the first five years of Blue Ribbon’s (Nike, before Nike) existence. And once he did? The pay was $18,000 annually.
About what’s been written, none of it should be construed as a call for higher tax rates. Not at all. It’s really meant to show how the enterprising who support Biden might dismiss the negative impact of higher rates of taxation to the new president. They’re “cool” about more taxes either because they’re too manically devoted to their visions to care about how they’re taxed, or their compensation isn’t income-based to begin with.
Of course, their reasoning misses the point. Indeed, it’s what Biden’s well-to-do supporters won’t tell him that matters most. Tax cuts aren’t just about work incentives.
Specifically, entrepreneurs can’t innovate without capital. No economic school of thought can evade this simple truth. Entrepreneurial concepts are just concepts without investment. Which is why tax rates matter a great deal to innovative endeavor. Knight’s experience is instructive in this regard.
Working capital in Nike’s early days was always incredibly difficult to access. In Knight’s words, “I spent most of every day thinking about liquidity, talking about liquidity, looking into the heavens and pleading for liquidity.” Entrepreneurs, by virtue of being entrepreneurs, are in a constant – and often fruitless – battle for always limited capital.
No doubt it’s true that many in Silicon Valley don’t recoil from higher tax rates, but they’re leaving out how essential access to capital is. This is where the importance of low-income tax rates on the highest earners comes in. Simply stated, capital availability is a direct consequence of reduced taxation on those with the most.
That is so because the rich are most likely to have unspent wealth left over after meeting their individual consumptive needs. When their excess isn’t taxed at exorbitant rates, the well-to-do really have no choice but to save and invest it. A growing capital base is the friend of those with abundant vision, but limited ability to vivify it. As Knight explained it, every “dollar that wasn’t nailed down I was plowing directly into the business.”
The more investment that’s available, the better the odds for the intrepid among us. Conversely, the more that wealth is taxed, the more that what’s left over must be more carefully put to work to the detriment of the pioneers eager to alter the business landscape.
Looking ahead to 2021, the hope is that Congress will prove an insurmountable barrier to Biden’s taxation vision. Barring that, it’s useful to remember that tax increases are much more than a work disincentive. Arguably their worst quality is that they limit altogether the happy process whereby the energetic are matched with capital in the first place.