- - Tuesday, September 18, 2012


At the Democratic National Convention, Costco co-founder and former CEO Jim Sinegal provided his endorsement of President Obama. The administration may have felt the need to bring in a heavy gun from the corporate world to respond to Republican attacks targeted at Mr. Obama’s “you didn’t build it” speech. While I disagree with Mr. Sinegal’s politics, I enjoyed hearing him speak about all that Costco has done for America. Rather inadvertently, Mr. Sinegal may have made the most compelling case possible about why tax increases, even when they theoretically are targeted at “the wealthy,” are so detrimental to the American economy.

Costco was founded in 1983, two years after the first Reagan tax reforms. Taken together, those reforms lowered rates across the board and simplified the tax code. With more capital pushed out to the private sector, many innovative, neophyte companies such as Microsoft, Dell and Oracle benefited immensely. Costco was part of this group, conducting an initial public offering in December 1985 — a move that would have been more difficult in a weaker capital market.

Costco has a very proud success story. As Mr. Sinegal recounted during his convention speech, his firm has created tens of thousands of jobs. Not only that, but he has been able to pay higher wages and provide greater benefits than many of his competitors. Of course, the company did more than produce jobs. It also helped provide an entire nation with low-cost goods, affordable not only for the wealthy, but also for lower- and middle-income consumers. By any reasonable standard, Costco is a true American success story, one that highlights how important private-sector entrepreneurs are to our national economy.

Costco’s success story is impressive, but it’s questionable whether it could have occurred in a less favorable investment environment that might have been created by higher taxes and huge regulatory burdens. The president’s first set of tax increases came buried in the so-called Affordable Care Act (Obamacare), a 2,000-page monstrosity that conveniently delayed its most egregious provisions until after 2013. He also has forcefully pushed for raising the top marginal rates in the federal income tax code. In advocating these tax increases, he seeks to portray the issue as a struggle between “the wealthy” and “the middle class,” insisting that the only way to protect middle-class Americans is to raise taxes on the wealthy. In reality, though, this is a struggle over whether the federal government should control more of our nation’s vital capital at the expense of the private sector.

The real questions are: Who is more effective at creating real economic growth? Who is better at raising the living standards of average Americans? Is it entrepreneurs like Jim Sinegal, Bill Gates and Michael Dell? Or is it the federal government?

The president spent more than $800 billion on a stimulus act that barely created any jobs. Using the federal government as a sort of super venture capitalist, he also provided massive loan guarantees to alternative-energy firms such as Solyndra and Beacon Power. Both firms went bankrupt within a few years. The president has helped create an army of regulators and bureaucrats with Obamacare, Dodd-Frank and the so-called Consumer Financial Protection Bureau. If that’s not enough, our inefficient government-directed health care system continues to bleed taxpayers dry, and Medicare’s unfunded liabilities are set to skyrocket to unsustainable levels over the next few decades. Of course, it’s true that the federal government builds roads and bridges, but it’s also true that highway spending constitutes a mere 1.1 percent of the federal budget. Most of that is funded via the consumption-oriented gasoline tax — not the income tax Mr. Obama seeks to raise.

In contrast to the federal government’s lackluster record, Mr. Sinegal created tens of thousands of jobs and found a way to provide vital goods and services that are affordable to most Americans. All the while, the success of his business also benefited his shareholders, which include many pension and retirement funds. Mr. Sinegal may have endorsed Mr. Obama for president, but his own success story shows us why the private sector provides our greatest source for innovation, wealth creation and sustainable job growth. It also very clearly displays the dangers of raising taxes in an attempt to substitute private-sector growth with public-sector growth.

Jake Huneycutt is an investment manager in Atlanta.

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