[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
> yourself, that explains more in depth what's wrong with his proposed
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
> 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
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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