[FoRK] so is it for real now?

J. Andrew Rogers andrew at ceruleansystems.com
Mon Oct 13 12:00:44 PDT 2008

On Oct 11, 2008, at 11:50 PM, Joe Barrera wrote:
> Is there a previous fork post you can point us at, instead of  
> repeating
> yourself, that explains more in depth what's wrong with his proposed  
> tax
> structure?

No, it is scattered across multiple posts.  But I will try to put it  

Obama is proposing to effectively double capital gains taxes *and*  
close the "loopholes" that have often allowed venture investors to  
avoid the capital gains taxes over the last 25 years.  We experimented  
with Obama's proposal twice in US history ('69 and '76 IIRC), which  
gave us the economic golden years that was the 1970s.  In 1978 people  
had enough, a thorough re-implementation of capital gains tax  
structures was done by Congress, and Reagan was in the right place at  
the right time -- the economy is misattributed to him in many ways --  
to inherit an economy that once again had a reasonably sane capital  
gains tax structure that we still use today.

The "loopholes" introduced way back then are a de facto capital gains  
tax break for investments in small-ish businesses in a very generic  
and unbiased way.  Obama has essentially proposed eliminating the  
current structure and instead letting regulators and Congress pick and  
choose who qualifies for tax breaks, a completely unnecessary and  
incredibly malignant politicization of the small business finance  
process.  If your venture is not anointed by the government, the  
government will impose a 28% tax on investment in your business,  
effectively allowing the government to pick and choose who lives or  
dies on a basis that has nothing to do with venture viability.   
Arguably worse, whereas the old structures used *tax deferrals* as an  
incentive across all small business investment, the new proposal is a  
*tax cut* for politically approved investments.  In every other case  
where such regulatory structures have been put into place, it has  
immediately become deeply corrupt and subject to influence peddling.   
It is not obvious why anyone would want to change something that is  
not broken unless the goal *is* to increase the influence and benefit  
for the political class in the finance process.  The whole "tax breaks  
for startup investment" is a huge red herring that preys on the  
ignorance of the population about the current tax code related to such  
things and the implications.

But more generically, raising the capital gains taxes is stupid in  
pretty much every philosophy of economics, with well-understood  
consequences.  If the taxes are raised to the levels he wants, it  
*will* cause capital to flee US venture finance markets for better  
climes.  Raising income tax or sales tax would be preferable, in terms  
of negative impact; if you want to raise taxes, do it elsewhere. A few  
directly relevant consequences:

- About 5 million US jobs are directly funded by this investment.  A  
major percentage of these jobs will evaporate, like clockwork.  More  
government jobs is a poor substitute.

- Private capital investment in R&D dwarfs public investment in R&D,  
and US investment in R&D is a major percentage of the world total, far  
disproportionate to its population and economy.  If the capital dries  
up, so does the R&D that the world enjoys the product of.

- It will grossly distort the finance market and reduce average  
returns on investment by biasing capital toward inferior long-term  
yields. And then there is the basic loss of liquidity in the markets,  
as though we need more of that.

The talking point about capital gains tax rates under Clinton or  
Reagan is deceptive because it very much ignores relevant structural  
elements that Obama has stated he wants to eliminate but which greatly  
mitigated the negative impact of the tax rate structure at that time.  
Pure bait-and-switch.  The closest historical analogue we have to  
Obama's plan is the 9-year window in the 1970s that proved to be a  
disaster economically.  And historically, it only takes about two  
years for it to show up in the economy in a big way, so the downside  
will be owned by him and (presumably) a Democrat congress -- I can  
guess what the consequences of that might be.

Any policy proposal that doubles capital gains taxes and then replaces  
generic capital gains deferrals for small business and venture  
investment with tax cuts left to the arbitrary and capricious opinion  
of the politicians and regulators is so obviously flawed that I am  
puzzled why more people do not see it, and I have yet to have anyone  
explain to me why this is a good idea that will improve things. Would  
you want Bush and Cheney to have the power to impose a 28% tax penalty  
on investments they disapprove of?  What sane person would want to  
give that power to government given its track record?

All in, it proves that the vast majority of the population cannot be  
trusted with basic matters of economics, since their opinions on such  
matters are about as informed as their opinions of quantum mechanics.  
Except that they are rarely given the opportunity to legislate the  
latter case.

> Is there a reference you can point to regarding Obama and ABM? I  
> know he is
> no fan of SDI. But what comments in particular are you referring to?

He has said a number of things regarding military system spending,  
almost all of it so ignorant that it almost is not wrong.  Apparently  
he does not have a relevant policy wonk on his staff to feed him  
intelligent policy soundbites.  A couple easy ones from his policy ads:

Obama: "I will cut investments in unproven missile defense systems."

There are no unproven missile defense systems, only relatively new  
rocket motors which are now mostly proven.  And you cannot cut  
investments in those rocket motors because a ton of other unrelated  
military systems are being based on the same rocket motors.  The  
terminal kill package was proven over 15 years ago and is widely  
deployed in several different weapon systems for which no one doubts  
efficacy.  If he was a policy wonk, he would understand that "air  
defense" and "missile defense" have converged into the same system in  
the latest generation of US military technology.  The only part that  
is relatively "unproven" (the rocket motor) is also being used in  
tactical Army gear, among other things. His statement is about as lame  
as the media morons who still think the US has "GPS-guided" weapons  
(which the US has never had).

Obama: "I will slow our development of future combat systems."

This is again shows a deep ignorance of the economics that drive  
future combat systems, making it his policy to reduce the price- 
performance of whatever military we keep around.  The investment in  
future combat systems *decreases* the total cost of maintaining the  
military over time, fully amortizing the R&D *and* procurement cost  
within a matter of years relative to maintaining the systems that are  
replaced. This has been well-understood for years, and one of the  
reasons the cost of the US military has been falling as a percentage  
of GDP for ages. For decades, part of the design requirement for  
weapon systems, and particularly the big ones, is that the life-cycle  
cost must be less than what they are replacing such that it would cost  
more to keep the old systems around than to replace them with a brand  
new system, all in.  This has proven to be an extremely effective and  
successful policy in practice with measurable positive results.  Over  
time, this policy of continuous system R&D has proven to be one of the  
most reliable ways of reducing military costs -- it is an investment  
in efficiency.

Just about everything he has said on these matters has been like this.  
I do not know who his policy handlers are, but his policy opinion on  
most things military is embarrassingly wrong, often running contrary  
to his other nominal stated goals.  On the other hand, most of the  
American public does not understand these topics either so it probably  
sounds good to them.

Still, just because he can read off a tele-prompter with all due  
sincerity does not mean that he has the slightest clue about the  
topics he is talking about. His education and understanding of policy  
matters is greatly over-stated.


J. Andrew Rogers

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