Let’s soak the rich. Apparently that’s what most Americans think should happen to reduce the deficit, including Warren Buffett.  A recent CNN poll says that 63 percent of Americans want to raise taxes on the rich.

Everyone knows that our federal deficit is unsustainable.  It’s clear to me that one of the biggest bubbles that we’re building is the government debt bubble. We’ve shifted the consumer, housing, and financial bubble to the government.  The stimulus we’ve put into the economy is nothing short of staggering.

We have to get more efficient and make hard decisions on the federal budget.  Should we follow the public’s outcry to soak the rich?

The President defines the rich as someone who makes over $200,000 a year.  Some interesting stats: “About half of Americans who file tax returns pay almost all the income taxes; the top quarter of filers pay 86 percent of the taxes; 10 percent pay two-thirds of the taxes. A mere 1 percent of Americans earning income pay 38% of the tax revenues—in 2008, that was $392 billion paid by them, out of a total take of $1.03 trillion.” (Thomas Donlan, Dow Jones & Company).

Do the rich need to do more?  I’d argue yes, but not in the traditional sense of more taxes.

Personally, I don’t have any problem providing tax cuts to the poor and the middle class where the need is greatest and where the extra income will be spent right away.  Where I have a problem, is not expecting more from the rich.

This is why I’d argue that it is up to the entrepreneurial community and the “haves” to step up and take risk and invest in a way that drives growth and jobs (something I believe the government cannot efficiently do and shouldn’t do).

Most of my uber-rich friends are in capital preservation mode.  I don’t personally believe in trickle-down economics. Once the uber-rich has enough capital for their family and future generations, they go into capital preservation mode and minimize risk and taxes.

Oftentimes, they’ll buy treasury bonds or other capital preservation investments that do not inherently drive efficient growth.  With limited estate taxes, generational wealth can be passed along to heirs who do not have to work for their money or create sustainable businesses for their employers or themselves.

We should encourage the rich to invest in new businesses and put their creativity and knowledge to work.  Take this crazy idea for example:

Andy Liu

Create jobs and more wealth creation by funding every entrepreneur.  I’m an angel investor and have invested in over 32 companies. But I don’t have the means to invest in every opportunity I see, so why can’t we fund every entrepreneur to give their dream a shot?

Here’s how I would do it:  The entrepreneur needs to put up 50 percent of the cash for the startup and gets matching funds from any “rich” individual for a company to get started up to $50,000.

The investor gets to immediately write-off the entire investment off of ordinary income (very similar to a charity) up to the amount of the increase in taxes that Buffett or Obama proposes.  If the “rich” do not make the investments, they must pay the additional taxes levied.

Here’s where it gets more interesting for the entrepreneurs: The investment reduces risk for the entrepreneur and the investor.

The entrepreneur gets someone who can provide guidance on how they became rich and could be a source of additional capital, advice, mentorship, and networking.  The investor gets to see a return on their investment that should be larger than a muni-bond or treasury.

Even if the venture fails, the entrepreneur and investor gained valuable experience that can be passed onto the next venture.  These days, technology companies and businesses can get their unit economics and business model working on a small scale with a budget less than $100,000.

Every person in America who has a dream can do this, they have to have their own skin in the game (50 percent), they have to marshall resources from friends and family (just like every entrepreneur does), and there is a government subsidy for the rich to invest and to take risks.

Even if just 1 percent of all these businesses succeed, the profits and jobs created will be substantially greater than the tax subsidies provided by the government.  Those who are unemployed get to use their creativity to build businesses and investors get an opportunity to participate in investing in non-traditional companies.

Based on my limited interaction with entrepreneurs, this could create over 10 million new businesses (3 percent of 300 million).  If we find the next Microsoft, Google, Zynga, Facebook, Starbucks — it is highly likely we could create over 10 million new jobs for the economy in the near term (2 percent = 20,000 strong companies with approximately 500 employees).

The cost would be the tax deduction for $50,000 against 10 million businesses or $175 billion (assuming a 35 percent tax rate) if this was all new investment dollars and would be levied as a tax hike only if the “rich” do not make any investments.

We need the rich to invest more, innovate more, be entrepreneurial, and be rewarded for doing well. The rich and the entrepreneurial will help America get the economy and the federal deficit back on track.

I’m sure I’m not the only one with this idea.  What do you think?  Wouldn’t it be great to see more people creating opportunities when jobs are hard to come by?  Perhaps we can find an entrepreneurial way to build a bridge to the prosperous future for everyone, especially those who are unemployed and are struggling.

Andy Liu is a Seattle angel investor and entrepreneur. He’s the current CEO of BuddyTV. You can read his blog, Inspired Startup, where this post originally appeared, here

Comments

  • http://frugalmechanic.com/ Eric Peters

    For the uber rich, doesn’t the scale break down trying to investment (hundreds?) of millions of dollars in $50k increments? (Maybe that’s a good thing) just finding/vetting/coaching enough deals would be nearly impossible.  Say you made $10M/year and there was an additional 10% tax rate, you’d have to do 20 deals/year just to “break even” on the subsidy.

    The other big problem I’ve tried to wrap my head around, say the government tomorrow created a $500B matching investment firm tomorrow for startups, there probably isn’t enough qualified talent pool to scale the job creation for the entrepreneurs, in the end it would just further increase the competitiveness for tech talent and be even more “They are totally insane” market conditions as Dave Schappell said early today (re: engineering compensation packages).

    With even Western Washington university threatening to axe their Computer Science program: http://www.geekwire.com/2011/western-washington-university-computer-science-department-faces-ax – it seems like we need to do other things to encourage talent development in demand markets (maybe make all federal grants/loans http://www.grants.gov/ only applicable to more desirable college degrees in the sciences/math/comp sci/engineering programs?

  • Bob

    Love it!! How do we make it happen?

  • Guest

    Do you really see so many good ideas that lack of capital is the main issue? More than incentives for providing money, I’d love to see those successful entrepreneurs offer up various ideas they’ve had but for whatever reason didn’t pursue. Many of them have literally discarded dozens of ideas, any one of which is better than most people’s best idea. That’s part of how they became successful in the first place – their unique way of looking at the world and coming up with new solutions.

  • http://www.facebook.com/people/Devin-Miller/100001051294818 Devin Miller

    Great concept Andy.  We do so much in this country to encourage home ownership, this might help move more attention to small businesses.   

    It would definitely require more “lead” investors though for sure to help with the deal flow as well as a willingness to fund some really far out there entrepreneurs and concepts.  Further, most companies are not scalable startups so a focus on separating the scalable vs traditional small business startups might be helpful.

    The next hard part is breaking the concept into a roadmap and small goals to move it forward.  Count me in to helping move the cause forward though.

  • Chirag P

    Great Idea Andy, let’s get some politicians moving on this…Let’s get the help of Matt Mcilwain from Madrona on this one since he is good at mobilizing…

  • http://www.wac6.typepad.com William Carleton

    Good idea! It needs a good name to get traction. Something that taps into the “matching” concept. Of course, if Congress gets around to overhauling the tax code so that it is no longer the primary vehicle for driving national policy, this may go against that grain . . . but then again, there’s probably little risk of that happening any time soon!

  • D Miller

    The 60,000 page tax code itself is the issue, not another tweak or incentive in the way of credits, deductions, or what not. The uber rich (including Warren B and Bill G) pay VERY LITTLE as it stands now because of how the code protects those who have concentrated or sudden wealth. Just set up a qualified multigenerational family foundation, put a big chunk of appreciated stock in it, and you avoid the majority of capital gains, income, and even estate tax – forever. The only real answer to spur the economy and solve the deficit at the same time is a true flat tax with no or extremely limited deductions, with the first $40K (or whatever a living wage is) non-taxable for everyone. Not sure Warren would like that as it would actually touch him – raising the top bracket to 50% or so still wouldn’t really affect him, since his ‘income’ is for the most part sheltered and never shows. Do the math with me – WB’s $6.7M tax bill last year divided by his liquid net worth works out to about .1%. Most of his net worth has not been and will not ever be taxed under the current code. His statements yesterday were intellectually dishonest in my opinion. Read the classic “Flat Tax” by Robert Hall – they’ve covered all the objections you can think of and more. Anything that Jerry Brown and Ronald Reagan agreed on might be worth a look.

  • D Miller

    Put another way, all of the well meaning deductions, credits, and other tax code provisions meant to affect behavior, incent people, etc. have made our tax code the most inefficient, manipulatable, and complex systems ever known.  The way out of this mess is SIMPLIFICATION, not yet another piece of code, however well intentioned it is at the time.

  • Joe the Coder

    Another way to look at the stats is that the top 3% of taxpayers  (200K and up) pay 51% of all tax revenues.   I don’t know but that sure seems like they are carrying the government.  It’s so fashionable to say the “rich” aren’t paying their fair share but I’ve never heard anyone say what is fair.  I’m pretty jaded about this whole thing – it’s so easy to be free with other people’s money. 

    I agree with D Miller – let’s fix the tax code.

  • Anonymous

    It still has a whiff of interventionalism. Wouldn’t it be better in the long run, for it to become social expected that the rich re-invest their money in this way (along with charity et al) rather than financially beneficial to do so.

    Hoarding extraordinary wealth should have the same level of social stigma attached as it does do to be homeless. Forcing people hands makes this a political debate – changing a nations attitude makes it a moral debate.

  • http://twitter.com/chrisamccoy Chris McCoy

    I LOVE the idea of this Andy. Been thinking a lot about how strategic tax incentives drive economic growth and your plan is the best thought yet. Sign me up (hypothetically)!

    Big issue with startups is talent. The most talented aren’t starting up. They’re in the motherships.

    If access to a lead investor i.e. a yearly salary is democratized like this, I think we’ll see a lot of talent jump in the game. 

    In a data-driven economy, there are many big businesses to be built. Just need sharp, driven, and fairly technical people to build them. 

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