Innovation, taxation and economic reality

This week, personal finance site WalletHub released a ranking of all US states for innovation. New Hampshire is a very respectable No. 9. Neighboring Massachusetts is No. 2.

Some may ask, what does this have to do with me, with pressing issues from all directions? In fact, we are the beneficiaries of a system that encourages innovation for the value and opportunities it offers. Capital pool innovation is and will continue to be the engine of our modern economic development. As Democratic President John F. Kennedy once said of economic expansion, a rising tide lifts all boats. I see all kinds of people around me on the Seacoast whose boats are rising quite well with the prosperity generated by innovative businesses and successful entrepreneurs.

Think technology. Most of us have incorporated modern technology into our daily lives. People are tethered to their smartphones and connected to the world. Our cars are becoming computers on wheels. We can work and shop online. In the medical field, advanced pharmaceuticals have replaced more expensive surgeries and enabled longer lifespans. Medical devices have revolutionized surgical procedures and our ability to diagnose serious conditions and diseases. The genomics revolution is about to kick start all of this.

Innovation drove it all. Our innovative entrepreneurs are a national treasure, but many people seem to take it for granted.

When you add up all the companies that have grown through innovation, we’re looking at many millions of good jobs nationwide, and many more concentrated in the most innovative states like ours. Innovation fuels innovation, and the growth of these jobs gives us a very strong economic foundation on which to build for the future.

But I fear that the politics of division threatens this engine of prosperity. Leading innovators (think Elon Musk) are in the crosshairs of “progressive leadership”. In 2019, Bernie Sanders said, “I don’t think billionaires should exist.” This kind of thinking pervades his wing of the Democratic Party and shows a staggering level of economic illiteracy and detachment from reality.

The largest companies in the country by market capitalization are Apple, Microsoft, Google, Amazon and Tesla. They also represent five of the six largest in the world. All were started by visionary innovators backed by venture capital. If there is a single reader who does not regularly use the services of these companies, I would be shocked. They literally reshaped the world we live in. Their founders invested billions in philanthropy and continue to do so. As their businesses have grown, they have also redirected huge amounts of capital into space exploration, green energy development, artificial intelligence, and many other areas critical to our future.

So who do we need more as a society, people like these founders or aging socialists who have never met pay or created anything tangible and think we would be better off with government ( i.e. them) assuming even more control over our economy and our lives?

We now see the Biden administration rolling out its latest proposed tax increases, as always, entirely focused on very high-income individuals and corporations. I am not initiating a debate about who should pay what here. Instead, my concern is about the impact of the latest Biden plan on the economic engine of innovation.

His 20% “billionaire minimum income tax” rate will appeal to his “progressive” supporters, but it includes a provision aimed more at siphoning needed capital out of the economy and into the voracious maw of big government. That is, the 20% rate applies to unearned income, that is, the appreciated value of stocks and other investments that have not been sold.

Some will say “but they’re not paying their fair share!” But imagine that you bought shares in an innovative start-up. The business grew and grew over time, and you didn’t sell the stock. So you have big paper gains that don’t translate directly into revenue. You have complied with the law by filing your annual tax returns. The government comes in and says, “Sorry, you have too much money, so we’re going to take 20% of your paper profits.” To me, that’s neither fair nor productive. It will create paperwork and reporting nightmares, and if levied successively over the years, it can amount to confiscating huge amounts of capital that we all need to invest in our economy.

Again, this is not an argument against tax reform or the rich paying more. It’s about taxing the unearned gains often made from critical investments that we all depend on to support innovation, new business development and strong future economic growth.

It’s the same with socialists and “progressives” who appeal to people’s emotions while regularly demonstrating their misunderstanding of economic reality. But for the rest of us, it risks undermining long-term economic growth. Government will spend more as government revenue increases, people with lots of money will still have lots of money, but critical investment capital will be affected. Then we will all lose and the government will come up with a “solution” to this.

Hopefully responsible members of Congress will throw this aspect of the tax review on the garbage heap where it belongs.

Ken McCord of New Castle is a retired small business owner with a keen interest in contemporary business.

Comments are closed.