(This post originally appeared on The Hill)
In the past few weeks, U.S. senator and presidential candidate Elizabeth Warren has been pitching her “Rebuilding The Middle Class” plan with the aim of taxing the wealthiest people in order to pay for social programs that will ultimately benefit society as a whole.
The plan isn’t complicated. If you’ve got more than $50 million in assets, you’ll be levied a two percent annual tax. More than $1 billion? The tax goes up to three percent. The proceeds of the tax – about $2.75 trillion over a ten-year period, she estimates – will go towards funding student debt relief and tuition reimbursement, Medicare for all, payments on the Green New Deal and other programs.
Not surprisingly, the plan – which would face long odds of becoming actual law should she be elected – is controversial. Her supporters are touting it as a way to redistribute wealth and give money back to the 99 percent. Her opponents call it an attack on capitalism and the end of America as we know it.
Warren’s plan should not be ignored. She is a leading contender for the Democratic nomination to become president and could very well be elected. So, putting aside the drama for a moment, how would her plan impact America’s approximately 30 million small business owners? Would it hinder or help their business investing decisions? Their hiring? Their companies? Their livelihoods?
The fact is that no one really knows the impact of such a major initiative. Since the time of the Gracchi, wealth re-distribution has been tried before in other countries with mixed results. Socialist societies have come and gone. Even our very best economists have a hard time predicting tomorrow’s interest rates or whether or not we’ll have a recession in a few months, let alone understanding the impact of a plan involving trillions of dollars that will play itself out over a decade. Just watch a few episodes of the “Big Bang Theory” and you’ll quickly understand that there are limits to human intelligence, no matter how smart people say they are.
For the small business owner, that’s not very helpful. We’re left having to decide for ourselves how a giant, big-government plan like Warren’s is going to impact our long-term prospects. One thing is certain: it will.
On the one hand, Warren’s proposals could be a big benefit to some small business owners. The more the government pays for health care and sick time means the less they have to spend on these things and even helps to level the playing field with their big company competitors.
If the government wants to forgive loans and help pay for college so small business owners are able to hire smarter and more skilled employees then who’s going to complain about that? If going super-Green means a better, more energy efficient world (not to mention a boom in construction, engineering and related projects), I don’t think a lot of small contractors and their community of customers and suppliers are going to have a problem.
The fact is that few – if any – small business owners have more than $50 million, let alone $1 billion, in the bank. The average one – the merchant, mechanic, landscaper, restauranteur – makes about $70,000 a year. The better ones have socked away a few million bucks and merely hope to one day have some extra time to watch football and play with their grandkids. Warren’s tax isn’t going to reach so far down as to affect our tax bill and assets.
So we’re good, right? Well, not so fast.
Most small businesses – about 70 percent according to one study – have debt in the form of working capital loans to buy inventory, credit card balances that fund travel or mortgages on our properties and equipment. Many others, particularly the hall of famers who emerge from the pack to become billion-dollar babies, rely on venture capital and Wall Street to fund their dreams. Those dreams, as we know, have changed the world by providing us with food items, health care products, technologies and entertainment that our ancestors of even recent generations could never imagine.
Will Warren’s tax plan cause the flight of this capital that’s helped to fund these advancements? Will the wealthy move and invest elsewhere? Will it so diminish, as this Washington Post analysis points out, the wealth of the wealthy that markets will dive, asset values will sink, valuations will plummet and the availability of capital, be it debt or equity, becomes significantly more scarce so as to inhibit that entrepreneur’s dream of changing the world? Or even a pizza shop owner’s dream of fixing her oven?
No one really knows this either. But it’s very possible, even likely. I admire people who want to do bold things that could make the world a better place. I think Elizabeth Warren is one of those people. But supporting her plans would take a very big leap of faith. I know nothing in life is guaranteed. But as a small business owner, I’m averse to taking such chances without a better understanding of the potential return on investment.