Don't Fall For the 'War on Startups' Talk

While President Obama and House Republicans do Fiscal Cliff battle over raising taxes on the wealthiest Americans, Californians have voted to do just that. Under the recently passed Prop 30, there are four new tax tiers for taxable income from $250,000 to $1 million. The new revenue, perhaps $6.8 billion, is ostensibly (though maybe not) earmarked for education.

The voter mandate, which handily won 54%-46%, is bringing out not just anti-tax hawks, but a new group seeing disaster in the making: the startup crowd. Because of this tax, the argument goes, California's entrepreneurs will start entrepreneuring less. Adios Silicon Valley.

Unpacking the argument is (among others) Redbeacon founder Ethan Anderson, who in an AllThingsD guest column likens the tax increase to "expropriation" rather than a... tax increase. He raises fears of developing nation tactics and "country risk premium" and is horrified the hike actually applies "retroactively" to income earned in the same tax year in which Prop 30 passed.

The stark warning about, and advertised promise for, Prop 30 is identical: It targets people least likely to feel the pinch. The "unfairness" spin, however, is novel: Pity entrepreneurs and the people they underpay with equity and promises of a windfall, which mostly never comes. But hit one out of the park and their hard-fought gains are now going to be "expropriated." The definition of "expropriation?" An adjusted gross income of $1 million taxed at a top marginal rate of 13.3% instead of 10.3%.

Oh, but Occupy Silicon Valley could be so much worse now that the lid is off, per Anderson.

"A precedent has been set with Prop 30. What would stop voters or legislators from passing a 100 percent top marginal rate extending back to 2010? You might scoff at the notion, but the state has now determined it can legally reach into individuals’ savings accounts and take money out on a whim."

Then there's the chilling effect. Here’s the thing: It doesn’t exist. At least not for the crowd who actually cares about creating new companies or investing in great ones. If you make your business decisions based on a tax you might owe if you're successful, Warren Buffett has some advice for you: You're an idiot.

"... (M)aybe you’ll run into someone with a terrific investment idea, who won’t go forward with it because of the tax he would owe when it succeeds," Buffett wrote in a New York Times Op-Ed calling for a minimum federal tax on the wealthy. "Send him my way. Let me unburden him."

Maybe I’m wrong. Maybe Prop 30 will turn The Valley to a ghost town. Eastward Ho commences the stampede of start-up tax exiles, perhaps to New Hampshire or Delaware or even New York, which still coddles denizens of Silicon Alley with an 8.97% rate on AGI of $500,000.

Among the ironies of this trumped up Armageddon is that California's revenue crisis has its roots in another voter mandate — Proposition 13 — which elevated Howard Jarvis to anti-tax stardom 30 years before there was a Tea Party. That 1978 law reduced property taxes to 1975 levels — there's retroactive, for you — and tied increases to inflation, but capped them at 2% a year.

Naturally, with less revenue and the same bills to pay, property-tax-starved municipalities (which pay the lion's share for public schools) had to find money elsewhere. Like increases in regressive sales taxes which, unlike progressive income taxes, take a greater bite out of what lower income people get to keep.

Analysis from UCLA's Anderson Forecast is that California's economy will slow, but not sputter under Prop 30. So all that's left now is the moaning. Let's hope that drops off a cliff of its own.

(Image: Mort Kunstler's, 'The Rough Riders')