Guest Post: Why Taxing The Rich Is Bad For Business – Especially My Business

My grandfather was about as blue-collar as they come. He made his living digging holes in the ground. Utility mains. Basements. Sewer lines snakingbeneath a new sub-division. If the job required moving dirt from one place toanother, he was your man.

 

He had a habit of cussing at his front-loader like the CAT was a sworn enemy.He was deeply suspicious of any man who didn’t earn his day’s wages from thesweat of his own brow. And he distrusted bankers—probably because nearlyevery penny he earned went to pay down the loans on his excavation equipment.

 

 

I’ve watched with interest the debate that has begun over Initiative 1098 and Ican’t tell you how flabbergasted I am by the number of entrepreneurs who jumpon the “tax the rich” bandwagon every time it comes through town. I simply don’tget it. Sure, I’ve heard all of the arguments—funding for basic services is in thetoilet; the children need a good education; the state will have to release hardenedcriminals onto the streets; its simply the fair thing to do—and still, I simply don’tget it. But more than that, I don’t like it.

 

Forget the arguments about progressiveness, fairness, and any other feel-goodmantras you may have cued. Taxing “the rich” (whatever that pejorative issupposed to mean) is simply bad for business. It’s bad for your business and it’sbad for mine. Let me explain why:

 

Cash on Hand is a Finite Object

The people at the top of the tax bracket who are in the cross-hairs of theseinitiatives are the same people whom we go to—hat in hand—asking that theywrite us a large check based upon little more than our good name and thepromise of our company’s vision. When this group of people is forced to send alarger portion of their cash on hand to the government, they simply have less topersonally invest in my business and yours. So when I hear entrepreneurs saythat they’re quite comfortable taxing the hell out of the very people that help fundour companies I can’t help but think that we are, in a very real sense, biting thehand that feeds us.

 

Cash Flows In The Direction Of Least Resistance

New York state has seen a steady stream of well-heeled individuals and familiespack up their bags and move. In an eerily prescient move, George Soros’ long-time partner, Jim Rogers, famously liquidated all of his real-estate holdingsand moved his entire family to Singapore just before the economy took a nose-dive. Maryland’s populist millionaire tax scheme has backfired in a stunningand significant way, with nearly a third of all the state’s millionaires moving out ofstate before the tax bill comes due.

 

Seattle doesn’t have a large investment community. We can count on one handthe firms that fund 90% of the start-ups in this town. When we throw the Angelsinto the mix, the numbers seem larger, sure. But I’d be hard-pressed to name20 people who would take a meeting with me if I called. The number of thosewho have any experience in my company’s industry is much, much smaller.

 

Four people. Maybe.

If even one of these people decided to pack up their bags and move to amore “favorable” climate the potential negative impact on our company’sfinancing options would be significant.

 

Cash Invested Creates Momentum

As a business owner I’m constantly balancing the checkbook. I make decisionsabout where we spend our money and where we don’t based upon how muchcash we’re projected to have at the end of the period. This includes trying todivine how much we’ll have to spend on taxes and what impact that will have onour cash-flow. In some cases I can directly lower our tax bill by instead spendingthe money on people and/or assets. Giving a developer a cash bonus becausehe spent his vacation developing a widget that increased conversions by 15%has a direct and positive impact on our company. He’s more incented to spendeven more of his time building features. When we buy an espresso machinefor the office we increase productivity (no more skipping out to Gypsy’s for alatte). When we increase productivity, we get more done. Which means weearn more. Which means we have more money to spend on people and assets.We create a feedback loop. And when we hire an outside design firm to do themockups for our new site, we’re further spurring the economy by supporting alocal business that has employees and assets and a feedback loop of their own.Every dollar we invest in our own business creates momentum and keeps theflywheel spinning.

 

The same is true when investors fund start-ups. It is their investment that allowsus to hire that additional development staff we require, or lease that office spacewe are in desperate need of, or do any of the other things that can only bedone as a result of having the opportunity to spend other people’s money. Itdoesn’t create the flywheel, but accelerates it. With it, the cogs of the machinerycontinue to turn, faster and faster. The business keeps running; the economykeeps chugging forward. Employees keep getting hired. They spend theirpaychecks on groceries and rent and concert tickets and car payments. Andnew businesses sprout up to attend to their additional needs and wants.

 

But without this constant flow of capital, the gears gum up. They falter. Theystop.

 

It’s My Money, After All

Lastly, I fully plan on being in this newly defined tax bracket. And I sure as helldon’t want to pay up to 9% of my income to the state when I am. I think this isthe mental leap that many entrepreneurs are unable to make. They look at theinitiative, read the numbers, they see the cut-off, and they think hmmmm—thatdoesn’t affect me. But they never finish the sentence and admit to themselvesbut someday soon it will.

I’ll be the first to admit it: I love what I do for a living. I have done it for next tonothing when cash-flow demanded it. But I have bills to pay. I have kids to putthrough school. And I have other things I would love to do if I had the money todo them.

 

So right now the business needs the money far more than I do. But when it’sfinally chugging along under it’s own volition I fully expect to be compensated forall the time and effort I’ve put in—all of the overtime, weekend and holiday hoursthat I’ve contributed gratis. I’ve some serious back-pay due me. I fully expect tobe paid. And I don’t want the tax cross-hairs trained on me when I am.