Lightbulb surrounded by ideas

Photo and bio of author James Notaris, CPA, ESQ. and Legal Editor

After 4 years of college, 4 years of medical school, 8 years of residency, and 5 years of astonishing, life-saving practice as a neurosurgeon – at age 39 Jane has an idea- she believes that she can create a miraculous neuro-device that will cure patients of a dreadful suffering and debilitating disease that she has endured with some of her patients. So Jane boldly decides that she will do that, she will go the entrepreneurial route- Jane is incentivized to save and improve lives, and she also considers potential remunerations for her and her family if the capitalistic route is successful.

So Jane quits practicing and raises money to create “Miraculous Medical Company”. Jane works 7-days per week for 5-years, without salary, and then the magic occurs – she creates the magical neuro-device that she believed in. Miraculous Medical Company goes on to create and share the neuro- device around the world, and it goes on to perpetually cure patients of dreadful suffering and debility.

In doing so, the Company now has 500 employees who earn $100k per year in salary, and Jane earns $5 million per year. And due to the life-saving magic created by the company, Jane’s stock in the company becomes worth $100 million.

Stack of coins showing increase of wealth
Now given all this, let’s analyze the effect that the new Elizabeth Warren and Bernie Sanders proposed tax changes would have on and impact Jane’s entrepreneurial “Miraculous Medical Company”, creation of its magical neuro-device, and its ability to create new additional miraculous devices.

1. First, let’s look at the economic impact of Jane’s bold, entrepreneurial, risks.

i. Miraculous Medical Company now has 500 employees who earn an average of $100k each, and as a result of its success, Jane earns $5m per year in salary and profits.

2. Second, let’s look at the impact of the new Warren/Sanders tax laws:

i. The 500 employees who earn $100k will incur 70% in tax (federal + state), so they will keep $30k each for themselves. Note that this is effectively the goal of socialism, to ensure that all citizens live equally. They believe that profit motive ruins citizens. So, any profits should be shared and distributed. The Warren/Sanders law shall assure that by offering welfare and subsidies to the unemployed and lower-tier positions—they too shall keep at least that same amount, $30k — to assure equality.

ii. Jane created the company and its miraculous device, so she earns $5m in salary and profits. Wait though, she will, in fact, lose money each year because she will bear $7.25m in tax. The new income tax rates total 85% (federal + state) and she will bear a 3% annual wealth tax on the $100m value of her equity in Miraculous Medical Company. So, she earns $5m per year, but she pays $7.25m in tax.

So what is the ultimate effect of the Warrens/Sanders new tax law? Here it is:

1. Jane, because of the wealth caused by her bold, entrepreneurial route, will now bear more tax each year then she earns. For that reason, she, and others, shall be forced to consistently sell company stock.

2. The result is that her company’s stock shall, as will all other stocks, crash. The reason is that everybody else will be trying to do the same.

3. Investors disappear and company profit declines, so the company can no longer grow- in fact, it is disincentivized to create new additional miraculous devices. Socialist heaven ends workers’ sweat, sacrifice, and motivation.

4. In fact, the company cannot even keep existing employees, as its employees are disincentivized. They say “why should we work? –the government subsidies provide us more than working.”

Business man and city landscape with red arrow showing economic instabilityThe reality is that Socialism alway­s destroys wealth. Its intent is to redistribute it, but the fact is that it disincentivizes it. The Elizabeth Warren and Bernie Sanders proposals target and punish entrepreneurs and citizens worth $36m or greater. That would sap innovation and the motivation of entrepreneurs.

“You’re going to completely disincentivize capital investment, which is going to be very, very bad for economic growth,” Treasury Secretary Steven Mnuchin said in an interview in September. “Taxing capital is not a good thing for creating economic growth, and if anything we should be looking at how we create more incentives for economic growth.” [rather than disincentivize innovation].[1]

Left-leaning economists have expressed their own doubts about a wealth tax. Earlier this year, Lawrence Summers, who was President Bill Clinton’s Treasury secretary, warned in an article with Natasha Sarin, a law professor at the University of Pennsylvania, that wealth taxes would sap innovation by putting new burdens on entrepreneurial businesses while they are starting up. In their view, a country with more millionaires is a sign of economic vibrancy. [2]

Recall what Nazi ideologist Gregor Strasser proclaimed:

We are socialists. We are enemies, deadly enemies, of today’s capitalist economic system with its exploitation of the economically weak, its unfair wage system, its immoral way of judging the worth of human beings in terms of their wealth and their money, instead of their responsibility and their performance, and we are determined to destroy this system whatever happens!

[1] https://www.nytimes.com/2019/10/01/us/politics/sanders-warren-wealth-tax.html?smid=nytcore-ios-share

[2] id.

By James Notaris

Photo and bio of author James Notaris, CPA, ESQ. and Legal Editor

Callens Capital