Tax the rich. Make them pay their fair share. These have been the themes recounted by many of the 2020 Democratic Presidential field, with Bernie Sanders and Elizabeth Warren chief among them.
“It’s time for a wealth tax in America. I have heard there are some billionaires who don’t support this plan… All we are saying is when you make it big, pitch in two cents so everyone else gets a chance to make it.” – @Elizabeth Warren
CAMBRIDGE, MA – MARCH 5: Sen. Elizabeth Warren addresses the media hours after dropping out of the … [+]
Boston Globe via Getty Images
The rich should put their two cents in. It sounds reasonable enough, and it gained a lot of attention. Warren says that a wealth tax would pay for universal childcare ($700 billion over 10 years), free college, and student-debt forgiveness ($1.25 trillion), and other subsidies, including a Medicare-for-All plan.
While many of the goals Warren aspires to might be worthy, they are paid for with someone else’s net worth, and the biggest problem of all is defining “the rich.”
Warren’s wealth tax focused on Americans who have a net worth of $50 million or more. The amount increases to 6% for billionaires, such as Microsoft’s Bill Gates and Amazon’s Jeff Bezos. We all understand that people like Gates can afford higher taxes and still pay their bills. In fact, Gates, one of the world’s richest men, told CNBC’s Robert Franks that he has paid more than $10 billion in taxes and doesn’t have a problem with it.
“I’ve paid more than anyone in taxes… If I’d have to pay $20 billion, it’s fine,” Gates said. “If you say I should pay $100 billion, then I’m starting to do a little math about what I’d have leftover.”
Warren also planned higher taxes on unrealized capital gains. That could sink startups and choke growth for small businesses. For example, an entrepreneur owns multiple hotels might have $50 million in assets, but much of that wealth is not liquid. If the government were to add 2% levy, it would bring the annual tax bill to $1 million. Many businesses – especially startups on the rise – have high valuations but not a lot of cash on hand.
On a daily basis, entrepreneurs come to my company looking for small business loans to keep their day-to-day operations going and fuel their expansion plans. Their cash is locked up in the value of their businesses, so they need funding for here-and-now. By stoking the “tax the rich” flames, Warren threatened long-term economic growth.
Defining who is rich and who is not, and how much each should pay is a lot more complicated than Elizabeth Warren would like to have voters believe. Small business owners know this, and the politicians vying for their votes should realize it as well.
Warren on Small Business
“In the Senate, I used every tool available to help boost small businesses,” Warren said on her campaign website.
“I’ve supported funding for entrepreneurship programs, backed community banks and credit unions… I even created an annual small business matchmaker event where small businesses from Massachusetts could meet with federal agencies and big companies with federal contracts that were looking for partners.” — Elizabeth Warren
Warren’s “comprehensive agenda” to boost America’s small businesses included:
- Provide access to credit for entrepreneurs and small business owners
- Promote real competition and level the playing field for small businesses
- Help small businesses deal with regulatory requirements
- Foster clean small businesses to meet the challenge of the climate crisis
- Unleash the full purchasing power of the federal government to support small businesses
Much of her focus in the small business arena focused on leveling the playing field for women and minorities. Warren noted on her website that many small business owners and entrepreneurs cite a lack of access to credit as a key stumbling block, and she is not incorrect.
(Access to capital) is especially tilted against entrepreneurs of color and women. Black, Latinx, and Native American entrepreneurs start out with a fraction of the wealth of their white counterparts. That means they have less of their own money to put into their business and less collateral to attract outside credit. This disparity in startup capital is the single biggest reason that promising Black-owned businesses on average are less profitable and bring on fewer employees than white-owned businesses. ElizabethWarren.com
But one might get the feeling from reading her website that funders, including SBA lenders, CDFIs, and non-profit micro-lenders, were not actively providing capital to minority entrepreneurs.
Warren claimed that her small business agenda “will help unlock access to capital for creditworthy small businesses, ushering a new generation of entrepreneurs to take on the challenges ahead.” One of her keystones was the creation of a “first-of-its-kind Small Business Equity Fund” to help close the startup capital gap for entrepreneurs of color and create 100,000 new minority-owned businesses. To address that startup capital gap, the Equity Fund will have $7 billion available to provide grants to minority entrepreneurs, not loans or loan guarantees — so they can thrive from the beginning without having to worry about ongoing financial obligations or the risk of default.
In other words, she planned to take the risk out of starting a business and wanted to provide grants, not loans that would have to be paid back. Warren did not specify where the $7 billion Equity Fund would get its money. One of the big problems with expansive government programs is not figuring out how to pay for what it being proposed.
Warren called for cancelling the student loan debt that is holding back entrepreneurs. “Our skyrocketing student loan debt burden is leading to fewer people starting businesses, particularly small ones, and slowing the growth of those small businesses that are created,” she said.
During the campaign Warren repeated was questioned about how she would pay for her programs. One of the most challenging days of her campaign came when a video of father challenging Warren for rewarding people who might not have saved for college and now looked for the government to bail them out of debt. The father said he saved and paid for his daughter’s college while his friends spent frivolously.
Warren proposed investing half a billion dollars each year over the next decade in rural entrepreneurs who are building a sustainable farm and food system, including by funding food hubs, distribution centers, and points-of-sale that will boost the economy of rural and small town communities. She would require the Farm Credit System, a nationwide network of borrower-owned lending institutions and specialized service organizations, to allocate 10% of its $5 billion in annual profits towards supporting new and diverse farmers through regional lending mechanisms.
Lastly, Elizabeth Warren has been a big proponent of a $15 minimum wage. Small businesses with less than 50 employees are not very likely to be able to sustain a substantial increase in their labor costs. As candidate Mike Bloomberg pointed out during his brief run for President, none of the other candidates on the stage had ever started a business.
Small businesses generate the lion’s share of new jobs in the U.S., and their success has fueled the strong economy we have had in this country for most of the 2010s. Senator Warren openly appeals to the disenfranchised and the young, whose life experiences most often do not include starting and running a business. Many of them are enticed by the offer of free college tuition and childcare, and they want someone else – “the rich” – to pay for it all. What we did not hear from her was praise for the small business owners who go out and work hard every day to grow their own enterprises and pursue the American Dream.