Tax cuts - First, why are tax cuts not the answer? Small businesses are the Job Creators, and the Bush tax cuts did not go to small businesses. If the top two marginal tax rates went back to pre-2001 levels, only 2.5% of small business owners would be affected, according to the Treasury Department.
The real job creators are not just small businesses, but young businesses – start-ups. Yes, it’s the entrepreneurs who create the jobs. That’s the conclusion of a recent NBER study. Start-ups typically lose money at the start, when they are hiring up. And since businesses pay taxes on profits, not revenue, start-ups already pay no taxes during their early loss-making and job-creating stage.
Most important, entrepreneurs aren’t motivated by changes in marginal tax rates. We are motivated by a desire to build something new, and perhaps to put our mark on the world. In my twenty years in Silicon Valley, I’ve started numerous companies, and my friends have started many more. And in all the discussions I’ve ever had about starting, funding and growing a new business, I have never once heard the issue of tax rates come up as an important consideration.
If you think a change in marginal tax rates is going to change the mind of an entrepreneur, you simply don’t understand the mind of an entrepreneur. We are driven by far more elemental desires.
A call for sanity - So, what do we need? Fiscal responsibility. We need an economy that people have confidence in – confidence so that lenders will lend, buyers will buy, and employers will employ.
To get there, we need get the federal deficit under control. That takes both spending cuts and tax increases. Something like the Bowles-Simpson compromise that nearly made it until hyper-partisan bickering sent it down.
A recent study by the Congressional Research Service suggests there is little correlation between marginal tax rates and economic growth, saving, investment, or productivity growth. We don’t need tax cuts, but we do need an end to tax uncertainty. More important than whether tax rates are 35 percent or 39.5 percent, is knowing what they will be. So we can plan. And the economy needs certainty. The never-ending parade of last-minute brinksmanship over taxes, the deficit, and the debt ceiling is a sure-fire way to destroy confidence in our economy.
What do we need from Washington? We need the two sides to get together and compromise on a long-term plan to right the ship. We borrowed to fund two wars, then borrowed even more to avert a financial collapse. So now let’s pay the piper. Cut spending and increase taxes with a comprehensive compromise, so that the Job Creators and everyone else in the economy can know what’s coming and can get on with their lives.
Mission Impossible? Does this sound like a pipe dream? Here’s my scenario of how it can happen:
In the partisan atmosphere of the election and its aftermath, no bi-partisan agreements will be reached. Therefore, the Bush tax cuts will expire at the end of the year. At that point, the political dynamics will turn upside-down. Rather than the tax-raisers being the supplicants fighting for new legislation, the tax-cutters will then be the supplicants.
And Republicans who have sworn pledges of no new taxes will no longer be frozen from making compromise. Because once the Bush tax cuts have expired, the bipartisan compromise will be a tax decrease, not a tax increase. They can vote for a tax decrease.
Finally the ingredients necessary for passing legislation to balance our country’s books will be there. That’s no guarantee it will happen. But at least, after the pugilism of the election cycle has dissipated, it will be possible.
So, give us fiscal responsibility. Give us certainty. And yes, give us tax increases. Let the job creators create jobs.
Harris is the former CEO of Intuit and of PayPal, and is currently CEO and founder of Personal Capital, a new digital wealth management firm dragging investment management into the electronic age.