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August 20, 2004
Tax Cuts Slash Google IPO Capital Gains Payments to $11 Million
    by William Baue

A new report uses the Google initial public offering to illustrate how tax cuts reward individuals while robbing programs supported by taxes that incubate business success.


Yesterday's Google (ticker: GOOG) initial public offering (IPO) enhanced the wealth of company founders Sergey Brin and Larry Page by $73 million, on which they will pay 15 percent ($11 million) in capital gains tax. They would have paid significantly more (20 percent, or $14.6 million) before the 2003 tax cut and even more (28 percent, or $20 million) before 1997. In other words, these tax cuts diverted $9 million from tax coffers to the founders' pockets.

While Mssrs. Brin and Page enjoy this windfall, the system that helped create the climate necessary for the development of Google will suffer, according to a new report debunking the "self-made man" myth of wealth creation by exposing its social factors.

The report, published by the Responsible Wealth program of United for a Fair Economy (UFE), points out that capital gains tax cuts rely on the logic that they minimize penalization of individuals for their innovation and entrepreneurialism. What this logic elides, however, is the degree to which individual achievement relies on societal support, according to the report.

For example, the success of Google depended not only on the creativity of its two founders, but also on taxpayer-funded research in Silicon Valley and Stanford University, where the technology was developed. As well, Google's efficient search engines perform their feats on the Internet, an invention funded by the US government, which the report characterizes as the "world's largest venture capitalist." What's more, the IPO relies on government regulation of capital markets.

"Google's success shows what kind of public investments are key to wealth creation," said Scott Klingher, co-director of Responsible Wealth. Mr. Klinger co-authored the report with Mike Lapham, co-director of Responsible Wealth, and Chuck Collins, associate director of UFE, a nonprofit that exposes how concentrated wealth undermines economic progress, racial harmony, and democracy. "It's not tax breaks. It's real investments--from public education to technology research--that will deliver the Googles of the future."

The report profiles a series of successful individuals who repudiate the self-made myth necessary to justify capital gains tax cuts, and instead acknowledge how their success rested on benefits accorded by systems supported by taxes.

"I personally think that society is responsible for a very significant percentage of what I've earned," said Warren Buffett, CEO of Berkshire Hathaway (BRKa).

Commenting in the 1993 Berkshire Hathaway Annual Report on the $390 million in taxes the company paid that year, Mr. Buffet said, "I have absolutely no complaints about these taxes."

"We work in a market-based economy that rewards our efforts far more bountifully than it does the efforts of others whose output is of equal or greater benefit to society," he continued. "Taxation should, and does, partially redress this inequality."

The report also profiles Amy Domini, founding CEO of Domini Social Investments, who discussed the importance of government regulation of markets, and Ben Cohen, co-founder of Ben & Jerry's, who spoke of his commitment to return profits to the community. Perhaps most compelling is the profile of Martin Rothenberg, founder of Syracuse Language Systems, a software company he sold in 1998 to form Glottal Enterprises.

"I’m a small business owner, and my family is in the top two percent of wealthy Americans who would get a windfall if the estate tax is eliminated," said Mr. Rothenberg. "But I believe the estate tax should be fixed, not repealed."

"Here’s why: my wealth is not only a product of my own hard work. It also resulted from a strong economy and lots of public investment, both in others and in me," he continued. "I received a good public school education, and used free libraries and museums paid for by others. I went to college under the GI Bill. I went to graduate school to study computers and language on a complete government scholarship, paid for by others."

In contrast, the report also profiles several individuals whose actions belie how they benefited from social support fueled by taxes. For example, former US Senator and current vice chair of UBS Investment Bank Phil Gramm (R-TX) grew up on his father's veteran's disability pension and attended the University of Georgia for free under the War Orphans Act. He earned his doctorate under a complete fellowship paid for by the National Defense Education Act, and then taught economics at Texas A&M, a land grant college founded and sustained on state and federal subsidies.

"His legislative career in Congress was distinguished by several decades of votes to cut taxes, reduce public investment, and slash education funding," the report states. "An ardent foe of government spending, he even attacked the very veterans' benefits, land grant colleges and subsidies that he personally benefited from."

Ultimately, the report's profiles and its argument against the myth of the self-made man are not esoteric issues, but rather practical issues that bear in directly on UFE's mission of creating a more just and equitable society.

"How we think about wealth creation is important since policies such as large tax cuts for the wealthy often draw on the myth of the self-made man," said Mr. Collins. "Taxes are portrayed as onerous, unfair redistribution of privately created wealth--not as reinvestment or giving back to society."

"Yet, where would many wealthy entrepreneurs be today without taxpayer investment in the Internet, transportation, public education, legal system, the human genome, and so on?" he asks.

 

 
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