Politics can destroy this achievement. The Democratic Party is proposing to make the tax rate on capital gains the same as that on ordinary income. This increased tax on investment gains will kill the ability for start-up companies to raise capital. And with fewer new businesses, the United States will fall behind. Why are Democrats forever forfeiting business support to the Republican Party? They don’t seem to understand business. If the November election puts them in the position to make this change to tax law, it will guarantee that the change of leadership that the country so desperately needs will be temporary.
As someone who quit high school, joined the Navy, married, had children and worked full-time to afford college, I absolutely know what it means to struggle with minimal opportunity. This is the part of my life that attracts me to the Democratic Party.
But after becoming a professor at Stanford University, co-founding three multi-billion-dollar companies and investing in numerous successful start-ups, I also understand how people get drawn to the other side: Republicans better understand what makes businesses work. Yet they ignore science, deny climate change, treat white skin as superior, spend foolishly, and create tax loopholes for rich people and corporations. Why? It is possible to have sane social and tax policy without ruining the finances of the country, yet the Republican Party has ideologically come off the rails.
Democrats, on the other hand, would ask investors to put money into risky enterprises with no reward. It’s a short-sighted plan that will send smart businesspeople back to the Republicans once the far right segment of the party loses its influence. Democrats don’t seem to understand that getting a higher return is the only reason for taking risk, and without risk capital, companies cannot raise the funds needed to get started. The country cannot survive with either party as their policies stand right now.
When Jim Barksdale was the president of Netscape, he used to quote Stephen Covey saying, “The main thing is to always keep the main thing the main thing.” This wise aphorism applies to everything — politics, business, education, science, finance —everything. Killing capital gains exclusion laws is a perfect way to lose sight of the main thing in the economy: successful businesses.
Creating a business is an inherently risky effort, requiring both investors to put up the money and employees to take a chance on an unknown enterprise. Without a higher return, investors will not put money into an unknown company, which means it cannot develop the product and pay employees.
Also, unlike in the days of Henry Ford, modern start-ups award stock to their employees, treating them as co-owners of the business and spreading the corporate wealth. If they get a stock award and hold it for a suitable period, why should they have to pay ordinary income taxes on it? They are just investors of a different type.
All of our leading companies in the past few decades got started in this way. We might not like their dominance, but that should be dealt with separately. We certainly would not wish that they had been started in another country.
One final, important thing about investing: Eventually, successful start-ups grow up and offer their stock to the investing public. This liquid stock becomes their currency; with it, they buy other companies or technology and reward their best employees. Investment in a start-up and investment in a public company is thus a continuum. Tax policy should likewise be a continuum. And like any currency, stocks need stability, which requires long-term investors. Otherwise, the market is one big casino. Above all, tax policy should induce long-term investment and punish short-term stock transactions.
As Covey and Barksdale would say, the “main thing” here is making businesses succeed. They are the economy. Government should support them. Tax policy should seek to stabilize the stock market by rewarding and incentivizing entrepreneurs, venture investors and long-term investors. This is not an impossible challenge.
One of this country’s political parties has to get its wits about it. Both are on the wrong track. The Republicans have lost practically all sense of rationality, but the Democrats might ruin business creation and investing. There has got to be a better way. We had better find it or we’ll be bypassed by the rest of the world.
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