Saturday, February 01, 2014
Even the top 1% is disgusted by Tom Perkins
This is a guest post by investor and technology consultant, John Forbes:
The recent WSJ letter to the editor “Progressive Kristallnacht Coming?”, written by Tom Perkins, has already drawn many comments, including those posted by Digby a few days ago. But I think a somewhat deeper examination of his letter is called for, particularly in regards to the emerging dialog regarding the direction our capitalist system is now taking, and the corrosive effect it is having on the social, political and physical infrastructure of the United States.
First, let me say that I have a somewhat different background than the typical contributor to this blog. I have been a serial entrepreneur for over 25 years, and I’ve served as a CEO and senior executive at numerous technology companies. Kleiner Perkins was a significant investor in one of those companies, and I spent many years working with venture capital partners at the firm Mr. Perkins co-founded, as well as with many others in Silicon Valley and on Wall Street. So I have more than a passing familiarity with how our current system of capitalism works, and particular insight into how it’s rewards are typically allocated to technology executives and venture capitalists like Mr. Perkins.
By writing his letter to the editor, Mr. Perkins has taken it upon himself to speak for the 1%. While nowhere near as financially successful as Mr. Perkins, I have been successful enough to be a member of this group. However, on the issue of economic equality in particular, I must part ways with Mr. Perkins as well as some of my other colleagues in the business community who subscribe to his simplistic, almost childlike point of view regarding the factors that are driving the emerging debate on inequality.
Mr. Perkin’s statements are part of a trend by wealthy investors and corporate executives to try and paint the people who are advocating more sensible and equitable economic policies in this country as a bunch of ignorant villagers waving torches and pitchforks, desperate to demonize those that they see as more successful than themselves. Perkins is not the first to take this position, with Stephen Schwarzman of Blackstone having made a similarly tone-deaf statement equating closing tax loopholes with the Nazi invasion of Poland. I assume in the coming days that we will see more of these breathless condemnations of those who dare to challenge the privileges that many of these people now enjoy, many of which are completely unearned and actually deeply damaging to our society.
The simple fact is that many high net worth individuals and large corporations in this country are no longer paying their fair share of taxes, and the critical infrastructure of our country including core priorities like transportation and public education are being severely damaged by these policies. As with many issues affecting public policy, it has taken some time for the trends and underlying numbers to become clear. I would argue that we have now reached a turning point where the damage that inequality is doing (and the ongoing corruption of our legal and tax system that is enabling it) is no longer a fringe opinion; it is now substantiated by economic statistics and recognized as fact by many economists, investors and financial analysts.
Corporations and wealthy individuals have always lobbied for their own best interests, as is their right. But not since the Age of the Robber Barons in the late 1800’s have we seen the balance of power swing so far towards business interests and the wealthy. Our legal and tax systems have now been seriously corrupted by corporate lobbying, with business interests drafting hundreds of new laws that favor high net worth individuals and corporations over the interests of the overwhelming majority of ordinary Americans.
To illustrate this, let me get specific about some current policies that favor wealthy investors like Mr. Perkins at the expense of regular taxpayers. It is important to state that the current members of Congress, including both Democrats and Republicans, permit many of these inequitable policies to continue, and they bear shared responsibility for the damage that these policies are doing.
The first is the absurd tax break that allows venture capitalists, hedge fund managers, and other wealthy individuals like Mr. Perkins to pretend that the salaries they receive to manage investment funds are not regular taxable income. The general public is easily misled by arcane terms like “carried interest”, but let me assure you as somebody who has worked in this industry for a quarter of a century that this loophole has no justification, and no relation to what capital gains tax rates were originally created for. It should be an embarrassment to every taxpayer and elected official in the United States that this loophole continues to exist. I should note that I am joined in this opinion by such well-known financial commentators as Jim Cramer, who is hardly an enemy of Wall Street. This tax break alone is costing the country billions of dollars every year in lost tax revenue.
The second policy is the institutionalized tax dodging of America’s largest corporations, which has now risen to a truly pathological level. When I sold one of my recent startups to a large technology company, one of their first priorities was outlined to me in a memorable conference call with the company’s CFO. He explained to me how they were going to use the “Double Irish” structure to avoid paying taxes on any revenues generated by our technology. This involves setting up a corporation in Bermuda, which is in turn owned by a corporation in Ireland. The end result is that little or no corporate taxes are paid, even if the revenues generated are in the billions of dollars.
It is important to understand that large US-based corporations are now using these artificial structures to pay tax rates that are so low that they are effectively destroying the corporate tax base of this country. These strategies are well known to executives and institutional investors. Understandably, they would much prefer that these facts not be brought to the attention of the American public and discussed as part of the emerging dialog about inequality.
The end result is that tax revenues have been falling, and the burden has been shifting away from high net worth individuals and corporations and onto the regular taxpayer. While everybody loves low tax rates, it’s obvious that if you have continuously falling tax revenues they will eventually result in the underfunding of the critical infrastructure that we rely on to stay competitive in the global marketplace. In addition, many of these funding shortfalls are then shifted to ordinary taxpayers in the form of things like rising tuition costs at state colleges, which no longer receive the subsidies from tax revenues that used to make a college education affordable for middle class students. Having come from a middle class family, I am acutely aware of the key role that my college education played in my subsequent success in the technology industry, and feel it is essential that our children continue to have the same access to a quality education that we did.
When you combine these issues with the fact that many highly profitable corporations are paying their employees wages that are so low that they have to rely on welfare and food stamps (the costs for which are then shifted to taxpayers and local municipalities), you have the makings of a perfect storm. What we are seeing now are the gathering clouds of a second financial crisis, driven by many of the same people who helped create the first one. This time, however, they are determined to be more proactive, and to try and discourage any dialog that might expose their role in creating these problems.
The growing resentment that Mr. Perkins and many other wealthy investors in Silicon Valley and Wall Street are now feeling has its real roots not in envy or class warfare, but in the emerging realization by the majority of taxpayers that they are being forced to shoulder an unequal share of the burden that is required to preserve our countries most fundamental institutions.
If wealthy commentators like Mr. Perkins would like to be taken seriously on these issues, they can start by advocating for the repeal of the carried interest tax break, permanently eliminating offshore tax structures like the Double Irish, and encouraging corporate CEO’s to pay a living wage that doesn’t force people into state and federal welfare programs that have to be paid for by the American taxpayer.
We can be sure that we will see continued attempts to hide these facts from the American public, and we can anticipate that the stakeholders in the current system will mount increasingly sophisticated marketing campaigns designed to convince the American public that these unbalanced policies favoring the wealthy are key to our shared success. In fact, nothing could be farther from the truth, and Americans from all economic classes need to join together and apply their best efforts to reform the regressive economic and tax policies that are currently doing so much damage to our country.
John Forbes lives in Seattle, WA.
digby 2/01/2014 12:30:00 PM