Majority of Americans Fail to See Link between Taxes and Investment


According to the latest Reason-Rupe poll, most Americans do not believe raising taxes on the rich will impact investment or the rate of technological progress. This explains why 66 percent approve of raising taxes on the wealthy, since they see little cost in doing so.

It will be an uphill battle to convince Americans that hiking taxes even on the rich will actually impact all of us because it will slow the rate of technological innovation and thwart new jobs associated with innovation.

Specifically, only 35 percent of Americans think raising taxes on the wealthy will reduce the pool of funds available to invest in new companies, for instance the money that started companies like Facebook, YouTube, and PayPal. This is particularly troubling because less investment money available invariably means fewer startups and less technological innovation. This is essentially what Edward Conard tried to explain in his book, Unintended Consequences.

Warren Buffet's anecdote-based pontification persistently overlooks this fact that tax rates affect more than individual investors' decisions, but the aggregated sum of money available to be invested in business startups. On-the-ground entrepreneurs see tax policy differently than does Mr. Buffet. For instance, the Washington Post interviewed Christopher Hum, CEO and co-founder of Mercantile Capital Corporation, during which he explained:

"When income tax rates are higher, or even raised from current levels, the "pool" of potential startup dollars, especially early stage capital from angel investors, is greatly diminished…the more income startup investors keep the more they'll have to invest [in startup companies].

Likewise, Eric Corl, president and co-founder of Fundable LLC explained "any tax incentives that can reduce tax burdens for…investors will help foster more entrepreneurship."

A majority (68 percent) of Americans also do not believe raising top rates will cause high-earners to reduce the amount they work and invest. Instead, only 21 percent of Americans and 41 percent of Republicans believe higher rates will cause high earners to work and invest less.

Without understanding the economic consequences of raising taxes on capital gains and upper income households directly, it's understandable that three-fourths of Americans believe raising taxes on the wealthy will not impact the rate of technological progress. Republicans are the most likely (25 percent) to believe raising taxes on the wealthy will reduce the rate of technological innovation, still two-thirds think it will have no significant impact.

One can reasonably assume most Americans like technological progress, as it offers cures for diseases, more efficient household and business tools, more productive and fulfilling careers, and an overall enhanced quality of life. Americans also do not believe that increased government revenues through higher taxes will drive the technological growth they desire. Instead, 66 percent of Americans think private sector investment is more important than government investment for technological innovation. In sum, Americans like innovation and the private sector investment that moves it forward. What is missing is their understanding of the link between tax structure and investment.

Americans need to understand that raising taxes reduces the pool of funds available to the private sector for investment in new companies. This is especially true when the increased taxes fall on the wealthy, who tend to save/invest incremental income rather than consume it. Less money available for funding startups invariably means fewer startups. This should deeply trouble anyone concerned about fixing unemployment, since startups have historically been the most important source of job creation.

In sum, this means the kid working out of his garage or living room might not get the funding he needs to launch his tech business, and the computer science student many have a harder time finding a programming job for which she trained. With fewer good ideas getting off the ground, this will necessarily slow the rate of technological innovation and progress.

It is no doubt tempting for the middle class to look to the wealthy to solve the budget deficit—after all, raising taxes on the One Percent doesn't appear to affect the rest of us. But such thinking is misguided. While hiking the tax bill on the wealthy will not affect the middle class's tax filings directly, it will prevent entrepreneurs from getting the seed money they need to get their businesses off the ground. And without well-funded entrepreneurs opening their doors for business, the would-be programmers, marketers, accountants, secretaries and janitors will have to keep looking for a job.