What drives economic inequality in the US? Should we be concerned about the concentration of wealth in the hands of the few at the expense of the many?
I am not writing about this out of the blue – this seems to be the topic of the day in my social stream based on blogs written, retweets rendered and attaboys handed out.
I found the conversation a bit disconcerting. Yes, income inequality exists and yes it’s a natural consequence of capitalism and other forms of government are decidedly worse than capitalism because they inefficiently create and allocate resources. But the celebratory nature of today’s conversation felt tone deaf and seemed to ignore the rules that get bent in favor of those with resources or born into privilege.
So in stead of celebrating income inequality perhaps we would be a bit more compassionate about it.
Here are a few things on the topic worth pointing out, in no particular order. :
1. Founders start companies. They get huge tax breaks for doing so. They get to have “long-term capital gains” taxes which are much lower than short-term capital gains taxes paid by people who have stock options or income taxes paid to workers. In the old days this may have made sense since founders took huge economic risks and often refinanced houses or built companies with almost no money. These days founders often raise money with minimal time spent creating a company and often have salaries from the early days. I’m sure the tax gains of founders is dwarfed by the economic gains made by merely creating a company – but it is worth at least pointing out that this tax break exists. It is seldom ever mentioned.
2. VCs also get large tax breaks. Everybody knows this. We invest large sums of our after-tax money into our funds and this gets a long-term capital gain tax rate when we make a profit. Most people think this is fair. I dunno. To me it favors people like me with capital over those that are purely labor. I’m certainly not a socialist – but pointing out that tax rates favor me over somebody else I guess is just a fact. VCs also get capital gains tax rates on “carried interest,” which is what irritates the masses. Carried interest is the upside that VCs get after returning the money they raised – it is the VC “profit” if you will. The arguments against a lower tax rate is that this money isn’t really “at risk” and I tend to agree with that. On the other hand, I’m not convinced many founders have the same “at risk” capital as they once did. It seems to me that these are both forms of tax breaks that favor a small number of elite people. Of course “carried interest” tax breaks are more at risk than founder tax breaks. Maybe that’s as it should be. But what I really wanted to point out is what happens to the 99% of people who work in the startup industry – they get neither of these benefits …
3. Both of these privileged, very small group of people in 1 & 2, have much better tax rates than say, the third employee at a startup who might have joined 3 months after the founders. That employee was given “stock options,” which pay the exact same rate of taxes as income. In California considering state, federal and local taxes that can be as high as 56%. Think about it – if the first two employees work 6 years and sell a company while employee 3 works 5 years and 9 months … should they really pay grossly different tax rates? Of course if an employee “exercises” his or her options AND holds the stock more than one year then they are eligible to earn long-term capital gains. But this often requires relatively large sums of money and it implies writing a check in a company whose future is uncertain. That might actually seem fair. But ask yourself why employee three (and four and four hundred) has to write the check while employees 1 & 2 do not?
I wish founders, startup employees and VCs all paid the same rate of taxes. I also wish we paid the same amount of taxes as nearly any employee earning above-average income. But we all don’t and we’re not likely to fix any of that.
4. Luckily many, not all, tech employees in Silicon Valley earn good wages as a result of educations from top schools that allowed them access to this talent market. So if one works for several years at startups one can acquire wealth afforded to accomplished individuals. As a free-market capitalist this is as it should be and of course this in its own right creates a degree of income inequality that is tolerable. So these people invest some of their income in stocks. If they choose companies who pay high dividend rates they can accumulate wealth with lower taxes because dividends pay lower taxes than income. If they keep their hard-earned money in the stock market they can one day sell their stock and pay much lower taxes because – again – long-term capital gains pay lower tax rates.
5. Finally, if one is lucky enough to leave ones money in the stock market over the long-term this tends to yield better results than many other investment types. But. The system can be juiced in favor of capital over labor. How? Well, when corporations make profits they have lots of decisions about what to do with those profits. They can expand operations and hire more people creating more wealth for a larger pool of people. They can increase worker wages and hire more employees, which benefits labor. They can pay dividends as outlined above, which is paid a lower tax rate to people who have investment dollars. And they can buy back stock. With fewer shares in a company the price per share goes up and those that own stock in the company own a larger, usually more valuable stake. It’s a form of compensation from company to shareholders. And you guessed it – it benefits both people with large amounts of capital and those pay smaller tax rates than secretaries or any average worker in the company.
This isn’t even a post about the relative merits of dividends, share buybacks or wage increases. It is simply pointing out that trying to simplify the argument into a “we create jobs through innovation and deserve to be rich – you WANT us to be rich” short of argument doesn’t give the full picture. Just so you know – the tax benefits on capital gains taxes and dividend taxes is estimated to amount to $120 billion per year in the US or about 10% of all tax breaks for individuals.
Do I benefit from some of these tax breaks? I do. Do I generally wish tax rates were more uniformly paid as a percentage? I do. Do I wish we had fewer exclusions, fewer carve-outs, fewer schemes to help those with money reduce tax payments? I do. Do I wish overall that we paid lower taxes and tried to keep government small? I do. I am generally libertarian in nature but I do believe in a social safety net and in helping those who weren’t given the same economic leg up as I and many of my peers had.
6. Then things get worse. Extremely wealthy people are able to dedicate large amounts of money to lobbying politicians. Politicians primary job is to get elected (which is why I’m for smaller government) and to get elected they need larger pools of capital. So politicians work with wealthy people to create laws that make it easy to shield wealth and income from taxes by moving money offshore. People who can pay millions to avoid paying tens of millions in taxes often do.
7. And while we’re on the topic of taxes – I wish we would abandon tax incentives that skew all industries. Of course I don’t believe that VCs should be a protected class. But it’s hard to want to pick on just VCs without also bringing up tax breaks for the oil & gas industry, farm subsidies, corporate tax inversions and many other programs of industrial favoritism. Every industry seems to have its hand out and of course those with money and power have more benefits.
8. And there’s another invisible side to capital over labor. It turns out that executives at companies are often compensated with large amounts of stock. This has a lot of positive benefits because it can align executive incentives with growth in shareholder value. But I have also seen close up situations where tech executives (although it’s not specific to tech) have laid off large amounts of people to try and move a company close to profitability in order to quickly sell the company reaping the executive team with a large payout – again in lower taxes – while junior employees are made unemployed. I’m not saying this is widespread – I’m merely pointing out that it happens.
9. There are a lot of things the go into the advantages of Silicon Valley and the tech ecosystem. The starting point is often the birth lottery of being born in the right country or if not born in a country like the US then often immigrants are born into families that have access to advanced education, to computers, to science, to learning and into families that are not tied to heavy labor. I think it’s also fair to say that we have many economically disadvantaged people right here in the US born into families with a single, working parent in a lower-income neighborhood without the same resources many of the elite grew up with. They may have grown up in a household where English isn’t the first language or where no parent has gone to college or even where one’s parents were in jail or addicted to substances. Unfortunately in our country poorer economic circumstances are often tied to non-white ethnic groups who are born with a natural disadvantage.
10. I value innovation and the startup ecosystem. I am fine with the wealth that it creates for those that bring benefits to society. I want it to be more inclusive but I also don’t want to trim the wings of those that unleash our societal potential. Of course much innovation isn’t a “zero sum game” in which one’s extra pie is another person’s dinner with no dessert. On the other hand, we are sometimes invisible to pie that has gone missing. When manufacturing gains brought huge advantages in production to US corporations many of us were rewarded with cheaper goods and more disposable incomes for other uses. But many workers were displaced and I do believe we as a society have both a moral responsibility and an economic imperative to try and retool, retrain, refocus. When tech efficiency drives productivity and loss of clerical workers or service personnel we can easily be blind to that, too. There are gains, there are losses. The gains to me seem to vastly outweigh the losses, for sure. But why would we want to only celebrate and not acknowledge that wages have stagnated for a great many people.
I have no solutions for you, today. I’m not writing to propose new social policies or fix our nations woes. Income inequality exists. There will always be inequality – even in systems that favor communism or socialism. Democracy, it is said, is the worst form of government, except for everything else.
But I have to say, it is absolutely tone deaf to try and pretend like Silicon Valley or the tech industry is rich simply because some people – regardless of their social, economic, gender or racial backgrounds – happened to be better at “hacking computers” and worked harder than others, were more focused that others and out of sheer smarts, cunning and hard-work have created enormous economic wealth for themselves. Of course the situation is more complicated than that. It really pains me when smart people are both tone deaf and color blind. And that the “correct answer” in our industry seems to be to champion only unfettered libertarianism.
Yes, I have libertarian biases and governmental concerns. I am neither truly Democrat nor Republican. I am am fiscally moderate and socially liberal. Like many, but not all of my friends and colleagues.
But I also have a social conscious and an awareness of the privileges that I was handed and although I was merely the son of a Jewish, South American immigrant who grew up in a decidedly middle-class town and background devoid of country clubs or luxury vacations. As a Jew with a Latino father I guess I was a sort of an “other” and not really part of the establishment. And I believe that makes me who I am and good with that.
I still had privilege. I grew up in a house with two hard-working parents who valued education, I lived in a safe neighborhood, I had sober parents, I attended public schools including college, I had a computer in my house from a young age, I was never physically abused, I didn’t know anybody who had been in prison and I didn’t have to do manual labor.
I believe in income inequality in so much as it’s an obvious consequence of capitalism. I have no problem when success is rewarded with riches. But I don’t celebrate income inequality. It pains me.
nobody has read this post for me. it has not been edited. i didn’t even spell check it. i never do. it isn’t data laden intentionally. it is an opinion piece. written by me. cathartically. to make sure there wasn’t only one loud voice on the topic.
(Image credit: Bigstock)
(Cross-posted @ Both Sides of the Table)