Who Really Builds A Business

Who Really Builds A Business?

Recently, our President made the comment that if you are an entrepreneur and own a small business, you didn't build it yourself.  He made the comment in an attempt to show the importance of infrastructure and other government services such as public schooling.  Instead, he gave us a revealing glimpse into his world-view and the role he believes our government plays in job creation and the private sector.
Mr. Obama argues that if it weren't for infrastructure like roads, rail, and ports, then private businesses would not be able to so easily transport goods and services and would therefore not exist.  He also puts forth the theory that teachers are a motivating force that spark the entrepreneurial spirit of kids that go on to become tomorrow's business owners.  I will show that Mr. Obama suffers from an inability to properly assign causality to these issues and how that effects his policy that has restrained growth while in office.
Let's start with the argument that teachers are the motivating force behind entrepreneurs and therefore the U.S. economy.  For the record, my dad is an eighth grade math teacher and I have the ultimate respect for what these public servants do on a daily basis.  However, it is a leap too far to say that teachers are the causal factor in an individual's decision to pursue a business venture of their own creation.  After all, entrepreneurs have existed long before public schooling, and many autodidacts have gone on to be fantastic titans of industry.  Andrew Carnegie did not have a teacher that showed him how to create steel and told him to use it to transform the history of our country and cities across the world.  Steve Jobs wrote to two other entrepreneurs, Hewlitt and Packard, to ask for the parts necessary to build his own computer without the poking or prodding of a teacher.  Don't get me wrong; teachers do a great deal to inspire children and young adults to pursue their dreams and expose them to dreams they may not have even thought of on their own, but they do not create entrepreneurs out of mindless drones.
Now let us move on to the idea that without infrastructure, industry would cease to exist.  Again Mr. Obama is putting the cart in front of the horse here.  Before there were ports, roads, electrical grids, or railways young enterprising men and women came to the new world for a chance to create their own destiny. Let's look at the flow of capital as further evidence of whether the government creates industry or industry supports government and infrastructure.  In order for the government to build infrastructure, they need revenue.  Where does this revenue come from?  It comes from a couple sources; individuals through the individual income tax and businesses through the corporate income tax.  If all the businesses in the U.S. were to board up their doors tomorrow and not employ a single person or sell a single good or service there would cease to be revenue for the government to function.  If the government instead were to tear up all the roads, rail, electrical grids and everything else under their complete control, businesses would adapt and continue to exist.  Would it be a difficult transition?  Yes.  Would it be the end of entrepreneurs?  No.
This doesn't even mention the fact that the government is using capital that was created and accumulated by the private sector in order to create the infrastructure that exists today.  Before the government built roads, pioneers cleared paths and used horses and other beasts of burden to transport goods.  Before airports were even dreamed of, the Wright brothers used their entrepreneurial spirit to claim the sky as their own.  The private sector has always found a way to meet demands that exist in the market, regardless of whether infrastructure existed or not.  Infrastructure and governments don't create businesses.  Businesses create the capital that allows a government to exist.
I'm a big fan of analogies so I want to give a few that I think show the error in Mr. Obama's line of thinking.  Without medicine, there would be no doctors.  Without machines, there would be no mechanics.  If it weren't for books, trees would disappear from our planet.  It doesn't work in any of these relationships, and it doesn't work the way Mr. Obama asserts no matter how loud he shouts it.
What does it mean for us that we have a President that believes the car drives the driver?  Perhaps the most obvious implication is the role the government plays in our lives.  If our leaders believe they exist only because we allow them to and they thrive because of our success, then individual freedoms, property rights, contract law and all the other necessities of a successful free market are protected.  When we have a President like our current one, we see things like the auto sector failed bailout where contract law is completely nullified in order to serve the interests of a particular group that helped the President gain office.  We see things like the individual mandate where the government says they know what's best for you much like a parent would for a three year old.  We see things like Solyndra where resources are taken from the free market and given to a special interest group that tries to create a product that isn't technologically efficable at a price that the free market wouldn't support.  Perhaps Solyndra would still be in business if every home owner with electricity was required to buy their product.
The issue isn't that Solyndra failed, it is that it failed with money that was given to them unilaterally by a government that took the money from those who created it in the first place.  The issue is that our President believes this is how advances are made in the private sector - only with the help of government subsidies and handouts will businesses succeed.  Only by taxing businesses in order to build more infrastructure will businesses be able to generate larger profits.  Only by exerting more goverment control will we all be free to prosper.
In four months we will choose who our President will be for the next four years.  We will also be selecting our congressmen and senators.  Perhaps more importantly, we will tell our government officials who we think we are and who they are in the causal relationship of society and government.  Do we believe we are subjects that exist because of the benevolence of the ruling government, or do believe that we are sovereign individuals who work, toil, sweat, and bleed to create a better life for ourselves and those we will leave behind and the government exists only because we say it does.

Taxes and income inequality.

Tonight, President Obama is going to talk about income inequality and how unfair the tax code is as it stands right now because the wealthy pay less on income that comes from investments.  I'm going to spend a few minutes showing why this is fundamentally untrue and a dangerous stance for our businesses if this fallacy is accepted.
Let's first talk about the differences in how our tax code treats income.  The income that most of us get in our paycheck is what I will refer to as regular income.  The percentage of taxes you pay on this depends on how much money you earn in regular income and can vary from 10% for the lowest earners to 35% for the highest earners.
The income that comes from investments (capital gains and dividends) is treated separately by our system.  If you have held a stock for over 60 days and that stock pays a dividend, it is considered a "qualified" dividend and you pay a lower rate on this income.  This rate is 0% for the lowest two income brackets and 15% for everyone else currently.  Capital gains are similar.  If you held a stock for over a year and then sell it, the profits are considered long term capital gains and are taxed at the same rate as qualified dividends.  It should be noted that any ordinary dividends (stock being held under 60 days) and short term capital gains (stocks bought ad sold within one year) are taxed at the same rate as regular income.
Now at first glance it may seem unfair that someone who held a stock for a few years and made a million dollars on it pays a lower tax rate than someone who earns $35,000 from their job, but let's explore that a little more thoroughly.  First, we should note that any money used to buy stock has already been taxed once.  Therefore, if someone earned $35,000 they would pay 25% on their ordinary income.  If they then invested some portion of that money and sold it two years later for a one million dollar profit, they would then pay 15% on that one million dollars.  It's plain to see that this is not unfair, because they already paid their fair share on their ordinary income and shouldn't be punished for investing in a successful business.
If we go even further into this we can explore what this money was used for during the time it was invested.  The main purpose of stock markets is for public companies to raise money needed to start or build businesses, and in turn, create jobs.  People who buy stock hope that the company will generate profits which will be passed on to them via higher stock prices or dividend payouts.  It is the business profits that are passed on to the stock holder that are taxed at this "lower" rate than regular income.  However, businesses in the United States currently pay 35% in corporate income taxes before any of the profits are paid to shareholders.  So in reality, the effective tax rate on any profits from business that are passed on to individuals is 44.75%  (35% plus 15% of the remainder).  Hopefully, it is clear now that the individuals who already paid their fair share on ordinary income, took some of what was remaining to promote a successful business that created jobs for more people, and then paid taxes on profits that had already been taxed once have paid their fair share.
Now let's talk about the ramifications of having higher taxes on investment income.  Since this is pretty elementary, this part will be rather short.  If you increase the taxes on interest income, you lower the incentive for individuals to invest.  If you lower the incentive for individuals to invest, you decrease the ability for businesses to raise money to start and expand businesses that create jobs.  If you have less businesses creating profits and jobs, not only does your economy lag, but your tax revenue falls as well.
I understand our country is searching for alot of answers on how to balance the public welfare with individual liberty, but I can guarantee the answer is not to tax investment income higher.

The Dangers of Political Pendulums

Shortly after Barack Obama was elected as our President, I said to my wife "I hope he succeeds."  I didn't say this because I voted for him (I actually voted for someone else). I didn't say this because I believed in his vision.  I said this for no other reason than I had seen how far our political pendulum had swung from George W. Bush to President Obama, and I was afraid of where it would swing if he failed.  While it is understandable for people frustrated with a crumbling economy to look for a different set of ideas or a new approach, the ideas held by President Obama are among the most liberal of any politician in our government. 
Now, four years later, the GOP primaries are giving a glimpse into the volatility in our political system.  The Iowa primary is still up for grabs between three men who have their eyes focused on the White House.  Mitt Romney is the most central of these and his views are pretty conservative.  The other two candidates competing with Mr. Romney are Ron Paul and Rick Santorum.
First, let's talk about Mr. Paul.  It's hard to say it any other way than he's crazy.  He would have America be an isolationist state, legalize not only marijuana but also heroin, cocaine, and any other controlled substance, and try to abolish the Federal Reserve.  He would also get rid of FEMA, the Department of Homeland Security, the Department of Health and Human Services, and the list goes on.  The idea that someone with these viewpoints has a legitimate chance at winning a primary shows how far we could go in 2012.
Now for Mr. Santorum.  Let's start with the fact that he has voted against multiple bills and amendments to bills that require background checks for individuals who want to purchase firearms.  He's also supported auditing the Fed, which would basically put political pressure on an appointed organization which is supposed to be non-partisan.  He's also stated that the reason social security is failing is because one third of Americans that should be in this generation aren't alive because one out of three pregnancies end in abortion.  One of his solutions - stop funding pro-choice groups like planned parenthood. Also, in an interview with Meet the Press he said he believes "that any doctor who performs an abortion would be criminally charged for doing so."  I don't think he could overturn Roe v Wade, but again just the fact that he is being considered for the candidacy with these views show how far right the GOP has swung.
In his "Discourses on Titus Livi", Machiavelli talks about how governments are cyclical. Monarchies lead to Tyrants.  This leads to an Aristocracy which eventually becomes an Oligarchy.  That is replaced by a Democracy which degrades into Anarchy.  The question for the United States to answer is this: will we allow our democracy to fall into anarchy, or can we curb the acceleration in our political pendulum?  If tonight's primary in Iowa is any indication, things aren't looking good.