GOP tax plan now raises taxes on entrepreneurs
Tax time note

GOP tax plan now raises taxes on entrepreneurs

Posted November 07, 2017 02:58 PM by Daniel Horowitz Tax time note
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One hundred years ago today, the evil empire was born. November 7, 1917, was a day that indeed lived on in infamy. And the economic and social principles of the Bolshevik revolution prevail today, even in the land of the free. We now have both parties believing the federal government should redistribute wealth, take over health care, and empower a handful of rich cronies — all under the guise of helping the poor and punishing the rich.

Among the many changes Ways and Means Chairman Kevin Brady made to the tax bill in his amendment, which was adopted by the committee today, was a provision that will raise taxes on venture capitalists — those who invest in startups and serve as the engine of our economy. At the same time, he rebuffed requests from conservatives that repeal of the Obamacare individual mandate be placed in the bill.

The juxtaposition of these two provisions powerfully demonstrates how even the supposedly more conservative party in America has adopted socialist dogma and is championing the garbage of the Bolshevik revolution. The message to America is that venture capitalism — risking one’s own capital to invest in America’s future — is evil and must be taxed at a confiscatory rate, while venture socialism — using taxpayer funds and statuary mandates to lock consumers into one’s impotent product — is the highest order of humanity and must be mandated by government.

The truth about “carried interest” and venture capitalist partnerships

While the top income tax brackets are 35 and 39.6 percent, liberals like to complain that investment partnerships of hedge funds and venture capital firms get away with “tax murder” by paying the lower capital gains rate of 20 percent (plus the 3.8 percent Obamacare surcharge). However, anyone who understands how an economy works would recognize that both out of fairness and regard for economic growth, it makes no sense to tax capital gains from private investments at the same rate as steady income.

Let’s compare two wealthy individuals — one is a CEO of a major company and another is a partner in a venture capital firm. Let’s say in the same year, the CEO earned $2 million in compensation from his company, while the venture capitalist earned $2 million from an investment in a startup or real estate property that he successfully sold and earned as a capital gain. While they both earned the same amount that year, the venture capitalist risked several million of his own funds that could have been flushed down the drain, whereas the CEO, although a hard worker, was never going to lose money and was guaranteed a flat salary from the corporation.

Thus, the fact that a partner in venture capital gets taxed at a lower rate than regular income at that level makes perfect sense. It is not a loophole, as the politicians deride it.

Any attempt to tax such investments at a higher rate will necessarily hamper economic growth and, together with the bad provisions on upper-middle-income families, make this entire plan counterintuitive. Yet, Republicans did just that today by adding an amendment that would require general partners in hedge funds and venture capital to hold the investment for three years in order to be taxed at the lower rate; otherwise they would be subjected to the higher income tax rates. And under this bill, which creates a 45.6 percent tax bracket on income over $1.2 million, that will be even higher than under current law.

Do both parties now believe that it is fair to tax capital gains at the same rate as income, even though investors risk their life earnings in order to make that money? Investments represent the lifeblood of our economy, and if we told investors that we will confiscate 46 percent of their earnings if they succeed, why would they invest?

Moreover, think of the absurd dynamic that will result from this bill and its distorting market effects. Rather than good business practices dictating tax policy, now the tail of tax policy will wag the dog of the marketplace. Investors will structure their business models in a way that will ensure they don’t hold properties for three years just because of this arbitrary policy.

GOP uses conservative principles to lie to us over and over

And therein lies the problem with Republicans. Everything they do is random and arbitrary. They have no guiding principles. They speak of “tax reform” and “a health care bill” but never define what that means. We have now reached a point where they are simply passing bills just to say they passed them. Random liberal policies dictate random levels of revenue, which dictate the nature of the tax changes. The market effects and political outcomes are not factored in at all. They randomly cut some taxes and randomly raise others simply based on a revenue score they boxed themselves into because they refuse to cut spending.

Leadership aides have flatly rejected a proposal from the Freedom Caucus and Sens. Cruz, Paul, and Cotton to repeal the individual mandate and use the extra $400 billion in revenue to ensure that everyone gets a tax cut. Hence, we will be stuck with every aspect of Obamacare, engendering a need to pass a tax bill that, by definition, can’t cut taxes.

There is no right way to do “tax reform” when we adopt the principles of the Bolsheviks — the same way there was no right way to do health care when we adopt the nationalized health care approach of the 1917 revolution.


 

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Daniel Horowitz is a senior editor of Conservative Review. Follow him on Twitter @RMConservative.