President Obama has suggested it is time to raise income taxes for “millionaires and billionaires” but beyond the rhetoric, this applies to anyone earning over $200,000. The two “Warrens” (Buffet and Elizabeth) have also recently weighed in on the merit of an income tax increase and with this avalanche of support, it reminded me of the last time income tax increases became a swelling political issue. It was early in the Clinton Presidency and I was a young man, deeply in debt and newly installed as president of a fledgling Sigma Investment Counselors. The computer revolution was just taking hold, and it was evident that in order for Sigma to make it to the next level, I was going to have to double the number of desktop computers from one to two. If I did that, I could enable both Nancy Kunkel and Barb Arnold to have their own machines versus sharing one computer. In so doing, I strategized that I would then be able to handle more clients. If I was successful in getting more clients, I could then hire another investment professional to bring in yet more clients. Since I was already indebted from the purchase of Sigma, I knew I could not get a bank to lend me the money to buy the computer. As I did the math, I realized that the only way I could afford one was if the Clinton income tax increase (to 39.4% from the Reagan 28% rate) got delayed for a year. If it did, this would yield the moderately paid Bob Bilkie an additional $2,000 of income (a tax increase I would not have to pay), just enough to pay for the computer. As it turned out, the tax increase kicked in the following year, and therefore I was able to buy the computer. A year or so later, I made another professional hire and continued on to build to a current staff of 15 employees. This is a true story as my long time colleague Nancy Kunkel (and my wife Shari) can attest.
So why am I bringing this up? Because it is a very clear and practical example of the impact that income tax increases have on entrepreneurs who are just starting, or trying to grow, their businesses. At the time of my story, I was not a millionaire, let alone a billionaire. I was a capital constrained entrepreneur (no money!). I needed every cent I could eke out. I was not using firm profits to buy toys and take trips. I was using them then to build a business. It is that simple. So, when you hear the strong resistance to tax increases in this environment of high unemployment, and you understand how critical capital is to the hiring decision, hopefully you have a better appreciation for where that resistance is coming from.
Bob Bilkie