Mr.
Telephone Man
There's something wrong with my line
When I dial my baby's number
I get a 'click' every time
- New Edition
This week, Democratic leaders in Congress expect to pass a $190 billion
"jobs" bill that includes an increase in the tax paid by venture and
private equity investors. The bill as it stands would tax as ordinary
income 75 percent of carried interest, essentially doubling taxation on
such partnerships. This is projected to garner $18.7 billion in
additional revenues for Uncle Sam at a time every dollar is desperately
needed.
However, consider the tax revenue lost by nipping future industries,
profit and tax revenue streams in their infancy. Higher tax rates mean
higher hurdles for investment, which necessarily restricts the amount of
capital to be allocated to the entrepreneurial community. By limiting
investment today, and therefore growth tomorrow, we are accepting far
lower tax revenues in the long run than would be had if we were to
encourage greater investment in tomorrow's Intels, Googles and
Microsofts.
In addition, the jobs created by this industry are nothing to sneeze at.
According to a study produced by Global Insights, originally
venture-backed companies have created companies that account for 10.4
million jobs and over $2.3 trillion in revenue. Think of the taxes:
income, payroll, sales, etc.!
But the fact is we have no idea where the venture and private equity
investments of today will lead us tomorrow. The one thing we can be
assured of is that America thrives because of such entrepreneurship and
our economy surely will recover due in large part to the future success
of entrepreneurs.
Creating obstacles like the one contained in this potential legislation
in order to gain a paltry sum of revenue today is a foolish way to pay
our ever-increasing government bills. Instead, we should foster growth
at the infancy level by encouraging investment in new IP across all
industries.
It is crucial that we maintain a thriving culture of small business and
support for entrepreneurs. It is within the bureaucracies of large
companies that it becomes most difficult to innovate, though many have
improved in this area.
As just one example where smaller was better, consider that when
Alexander Graham Bell offered to sell his telephone invention to Western
Union, the committee that reviewed his proposal responded:
"{Bell} believes that one day they will be installed in every residence
and place of business... He claims to have discovered an instrument of
great practical value in communication which has been overlooked by
thousands of workers who have spent years in the field. Bell's proposal
to place his instrument in almost every home and business is fantastic.
The central exchange alone would represent a huge outlay in real estate
and buildings, to say nothing of electrical equipment. In conclusion,
the committee feels that it must advise against any investment in Bell's
scheme... any developments of the kind and scale which Bell so fondly
imagines is utterly out of the question."
Whoops!
Key Developments
Consumer prices fell 0.1 percent in April after a 0.1 percent gain in
March. For the year, overall CPI rose 2.2 percent and the core measure,
which strips away volatile food and energy prices, was up just 0.9
percent. This was the smallest annual gain since January 1966. Any talk
of building price pressures leading the Fed to raise rates seems quite
premature at this stage.
Housing starts rose 5.8 percent, even as building permits dropped 11.5
percent in April. Economists' expectations were for a mere 3.8 percent
growth in starts and no change in permits. With the housing sector
treading water at such low levels, only consistent up-side surprises
will imply true recovery.
The FDIC's first quarter 2010 banking profile continued the ever-growing
list of so-called "problem institutions" from 702 at the end of 2009 to
775. In addition, as of May 21, 73 banks have failed so far this year
as compared to 140 in all of 2009. The troubles in the banking sector
are focused on smaller, regional banks that tend to have high levels of
commercial real estate exposure.
The views expressed in this column are solely
those of the author and do not reflect the views of SVB Financial Group,
or SVB Asset Management, or any of its affiliates. This material,
including without limitation the statistical information herein, is
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