Profit Prophet

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There had been three hundred high tech start-ups in 1966; in 1976, after the new tax law, there were none at all.

It pushed it in many cases to nearly 50 percent. The results were quietly disastrous—quiet because the media, fixated on the twenty-one millionaires, failed to notice. In 1968, when the tax rate on capital gains had been no higher than 25 percent, the government had collected thirty-three billion dollars in capital gains taxes. In 1977, when it ranged as high as 50 percent, receipts were down to twenty-four billion, adjusted for inflation. Even worse, where there had been more than three hundred high tech start-up companies in 1968, there were none at all in 1976.

The reason was simple enough. Starting a company utilizing new technology is a very high-risk affair. And one of the iron laws of economics is that the higher the risk, the higher must be the potential reward for investors or the risk won’t be taken. But the capital gains tax now took 50 percent of the reward in the case of success, while the losses in case of failure could only be offset against possible future gains. Rep. William Steiger resolved to do something about that.

Steiger had been born in Oshkosh, Wisconsin, in 1938, and went to high school there. Blessed with a sunny disposition and no little wit, he also had a first-rate mind and graduated from the University of Wisconsin with a degree in economics. He won a seat in the Wisconsin legislature the year he graduated. In 1966 he was elected to Congress. Aged only twenty-eight, he was the youngest member of the House when he took his seat.

The Republican party by the late 1970s was in deep political disarray. Stained by the Watergate scandal, it was perceived as the party of the past, controlled by old white men set in their ways. In the 1976 election Republicans won only 158 seats in the House, leaving the Democrats a huge 112-seat majority.

Regardless, Steiger, a member of the House Ways and Means Committee, which writes tax legislation, worked to convince his colleagues to make capital gains taxes part of the Tax Reform Act of 1978. Fairness (getting those twenty-one escapees to pay their share) was still the banner under which most tax reforms were proposed at that time. President Carter wanted to eliminate deductions for the three-martini lunch and other business expenses. The Kemp-Roth proposal to reduce marginal rates across the board, an idea that would carry Ronald Reagan to the White House two years later, was still widely ridiculed.

Steiger was a persuasive man. He soon lined up his fellow Republicans on Ways and Means, and he also got seven, and later thirteen, Democrats to join him, giving him a two-to-one majority. The media and the Democratic establishment fought the proposal tooth and nail. President Carter threatened to veto the bill. The New York Times , ignoring the history of the 1930s, argued for eliminating all distinctions between income and capital gains. Sen. Edward Kennedy, nestled in the bosom of his father’s fortune and having no need to make his own, denounced the proposal as a giveaway to the rich.

But Steiger, who had proposed a top tax rate of 25 percent for capital gains, was able to get a 28 percent top rate through Congress, and Carter, despite his veto threat, signed the bill into law on November 6, 1978. The effect was immediate. In 1977 only $39 million had been raised by the venture capital industry. By 1981 it was $1.3 billion. Initial public offerings had averaged only 28 a year in the mid-seventies. They jumped to 103 in 1979, the year after the Steiger amendment, and reached 953 in 1986. The great boom of the last two decades of the twentieth century owes much of its strength to William Steiger.

Because of his success with the capital gains tax, Steiger was widely viewed as a rising star in the Republican party, one who had a limitless future. It was not to be. Although a diabetic, Steiger was a vigorous man, and after a physical on November 17, he was pronounced in good health. Then, on December 4, less than a month after his triumph with the Tax Reform Act of 1978, he died of a heart attack in his sleep, aged only forty.

Life, like taxes, sometimes just isn’t fair.