It has become nothing short of a maxim that when given a choice between higher and lower taxes, people will undoubtedly choose lower taxes, and that lower taxes foster greater investment. After all, most of us purport to be rational thinkers who seek to maximize our own personal wealth! Yet I’m quite sure that virtually anyone who has paid taxes can resonate with the notion that there are many follies within the current tax code, even if they are not formally trained a tax accountant. “What were they thinking?” . . . many of us ask as we seek to finish up those forms at an otherwise beautiful time of year!

Dr. Cornwall notes in his recent post entitled “Bad Policy for an Entrepreneurial Economy,” there is increasing empirical evidence that low taxes, simply administered, and clear property rights are a “good” thing where stimulating entrepreneurial activity is concerned. So what are the best and brightest politicians to do with such information? Here’s an idea . . . rather than try to foster entrepreneurism broadly across the country and economy, let’s try to leverage the effects of “tax incentives” in a way that only applies to select groups, overcomplicates an otherwise simple and clearly useful mechanism (i.e., general tax cuts), and even better, roll it into an already overcomplicated tax code. Sounds good, right?
If you haven’t already heard of the “Fat Cat Tax Break” loophole, I’d encourage you to visit the following Library of Congress url: http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.2834: where a new bill was recently introduced and is generating some interesting debate. In short, the debate revolves around a loophole in the current tax code whereby some individuals (e.g., private fund managers) receive compensation for their services, yet under the existing tax code this income is labeled carried interest, as opposed to compensation, and only taxed at a capital gain rate (i.e., 15%) as a result. While I’m sure many fund managers create value in their portfolios, I’m also sure that many entrepreneurs do so as well in their new venture creation efforts.
Let me be clear, I am not advocating that politicians seek ways to increase taxes, whether through the creation of new tax code or the revision of old code. I’m just suggesting that the use of a simple tax that encourages all those who are inclined to pursue the creation economic value equally is likely to generate more overall value at the end of the day. Here’s a thought following this logic for all those politicians who are afraid of upsetting today’s beneficiaries under the current loophole . . . rather than relabeling such compensation as income and increasing the tax rate to the customary 35%, we could ‘level the playing field’ by allowing entrepreneurs to label their compensation from new venture creation activity as capital gains too! Under the standard logic that lower taxes encourages economic development, shouldn’t this lead to the generation of more economic value? What do you think?