'Isn't Anybody Back There Listening?'

Tweet

Now about half of all small businesses pay taxes either as Subchapter S corporations or as sole proprietorships. And they pay at the same rate as unmarried individuals. Consequently, outfits earning more than $115,000 -- think of that in terms of a business now: a small auto-repair shop, a family farm -- outfits earning more than $115,000, the level at which individuals become "the rich" in the administration's eyes, will likely see their marginal tax rates rising from 31% to 36%. And on earnings over $250,000, to 39.6%. Their ability to fund growth out of their earnings will shrink proportionately....

I've talked about excessive regulation killing job growth. I've talked about excessive taxation killing job growth. What's left? I said there were three areas where people didn't fully understand the impact on small business. Three proposals that have passed this body in the six months I've been here that have hurt job growth.

Well, the third one has to do with the availability of capital for small business. And we're talking about the increase in the capital-gains tax rate passed in this body....

Some years ago my brother-in-law came to me with an idea. He was in his fifties and had been laid off from a big corporation. If you will, he was prototypical of the kind of thing that's going on in the economy right now every day. The big corporation was downsizing; there had been a change in direction, all of the other reasons. But he was on the street, and because of his age he was not hirable. He was looking at really difficult times. But he had an idea. He had an idea, and he also had a house. And in the real estate boom of the '70s, he had pretty good equity in his house. He said, "I want to start a business. And I'm willing to take out a second mortgage on my house and raise money for the down payment on the business. Will you help me?"

I said, "Yes, I'll be happy to help you."

He went to an investor and asked him for some money. The investor said, "I'll be happy to match the amount you're putting up as the result of mortgaging your house."

That was enough to get the business started. It was not enough to lease the equipment we needed to make the business go. That's when my brother-in-law came to me. I put a mortgage on my house to guarantee the equipment that had to be leased.

It's one of these success stories. We came out with that business. We got it started. We sold the stock to the venture capitalists for a dollar a share. A few years later the business was valued at $30 a share. We had made it. The great American success story repeated once again. I was able to get the lien off my house and pledged it for a down payment on another business I was involved in.

The venture capitalist came to us and said, "Well, we've had the ride in this business. It's been really good. I've gone from $1 a share to $30 a share. The time has come for me to get my money out and put it in something else. And I've got a venture right here that I think I can make a 25%-a-year return on. With your business now, the main growth is over; it's going to flatten out a little. It will increase only at about 10% a year. I want my money out of the 10%-a-year deal and into a 25%-a-year deal."

We said, "Fine, we can find people who will buy your stock and be satisfied with the 10% return because the risk is now pretty well over. We've gotten over the hump. But let us explain to you what you're doing." We said, "With the present capital-gains-tax rates, by the time you've paid capital-gains tax at the federal level and your state-tax burden, you're not going to have $100,000." For the sake of keeping the numbers simple, let's say he put in about $3,000 and it grew to $100,000 as the stock went from $1 to $30. "You now have equity of $100,000. You're not going to have $100,000 after you pay your capital-gains tax if you take the money out of our business. You're going to have $65,000, because you're going to pay 28% to the feds, and you're going to pay 7% to the state, and you're going to end up with $65,000.

"Now, you say our venture will continue to earn 10% a year, and the new venture will earn 25%. Here are the numbers: The first year (we have not compounded these) on $100,000, your investment with us would go up to $110,000. The first year, $65,000 at 25% would go to $81,250, and so on. At the end of four years if you sit here, your investment will be worth $140,000. If you invest in the new venture, even at a 25% return for four years you're at only $130,000. You can't afford to take your money out of our business and put it into somebody else's, even though we could find someone willing to invest in our business because of our track record."

What have we done in this body? We have increased the capital-gains-tax rate, so that now he couldn't get even $65,000 out of that business if he tried. Things would have changed dramatically if President Bush's proposal to lower the federal capital-gains-tax rate to 15% had passed. Under those circumstances, the $100,000 at 10% numbers stay the same. But if he had gone, now that he had $80,000 left over instead of $65,000 after he had paid his capital-gains tax, and put it in the same new venture, at the end of four years he would have $160,000 instead of $140,000, and you can see how it goes up.

It is a lack of understanding of the impact of the capital-gains-tax rate that has caused this body to increase the capital-gains-tax rate and lock up investment capital in existing businesses, starving the new businesses from the opportunity to get the capital they need. A higher capital-gains-tax rate passed in this body will add to the credit crunch for small business.

As a summary, in the six months I've been in the Senate, I have watched this body increase, not cut, the regulatory burden on small business and thereby discourage job creation. In the six months I've been in the Senate, I have watched this body increase, not cut, the tax burden on small business and thus discourage job creation. In the six months I've been in the Senate, I've watched this body increase, not cut, the pressures on investment capital and thus discourage job creation....

In the six months I've been here, I've seen us do in the three key areas that I've described -- regulation, taxation, and capital formation -- great damage to the portion of the economy that has proved its track record in job creation. For that reason, I think the only way out is for us to repeal or reject the work of the Senate for the last six months and see if we can't start all over again.

 PREV  1 | 2