Washington's entrepreneurs must engage in the coming tax-reform debate

SPEAKING earlier this week to the U.S. Chamber of Commerce, President Obama outlined his plans to foster innovation and entrepreneurship while encouraging his audience to "invest in America." America's investors and business leaders will enthusiastically suit up for the president's plan if he is willing to provide the essential tools — namely a tax policy that will encourage investment and economic growth.

Few understand and appreciate this more than the pioneering innovators from Washington state, many of whom are breathing an extra sigh of relief from the tremendous tax burdens that could have been. The first is the defeat of Initiative 1098, the "soak the rich" income-tax proposal that voters rejected over fears of future middle-class implications. The second is the temporary reprieve Congress granted to all taxpayers by extending the Bush-era tax cuts for the next two years.

While taxpayers may feel better about the events that took place toward the end of 2010, they were merely a warm-up for the biggest debate on U.S. tax policy in decades. It's a debate in which forward-thinking Washington entrepreneurs who have built global brands, created thousands of jobs, produced spinoff companies, and developed innovative goods and services for society's betterment could also play a center-stage role in shaping future tax policy — just like they did three decades ago.

In 1978, President Jimmy Carter believed that certain elements of the federal tax code were unjust windfalls for the wealthy. He launched a campaign to tax capital gains at the same rate as ordinary income, which would have effectively doubled the rate for many taxpayers. Carter didn't realize the economic realities that higher capital-gains taxes not only impact the rich, but also middle-class savings and investment while placing a chilling effect on entrepreneurship and risk-taking.

Fortunately, some farsighted business leaders in Washington state, Silicon Valley and across the country said this should not happen. They went to the nation's capital to make the case that capital-gains tax rates shouldn't just be preserved, they should be reduced to help spur much-needed economic growth and jobs.

The message resonated, and a bipartisan group of lawmakers came together to reverse a tragic tax hike into a dramatic cut, ushering in an era that shifted tax-policy focus from income redistribution from upper- to lower-income individuals to economic growth in the '80s.

Today, with heightened buzz about the need for tax reform, history can repeat itself if Washington's business community is willing to step up as they recently did in the defeat of I-1098.

Our tax system is broken and can no longer sustain the political and economic demands on it. Americans believe that the U.S. tax system is unfair; it rewards the politically powerful and penalizes the average American. Change is needed and tax policy is a lever that can be used to alleviate our deficit and debt problems.

Economic research shows that tax policy, particularly when it comes to capital gains, can have a significant bearing on economic growth. A study last year by Allen Sinai, president and CEO of Decision Economics Inc., found that raising the nation's current top individual capital-gains rate by 5 percentage points to 20 percent would cut real annual economic growth by an average of .05 percent.

Slower growth in GDP would reduce real per capita GDP by $250 in 2020; for a family of four this amounts to a loss of $1,000 per year. In addition, an average 231,000 jobs would be lost annually between 2011-2016, according to the study.

Fortunately, this rate increase hasn't happened yet, and current rates on capital gains are temporarily preserved along with other tax rates. But the two-year stay will pass in the blink of an eye. The greater debate over tax reform is already commencing among the largest crop of new members of Congress in more than 60 years.

To restore our fiscal house and pursue a pro-growth tax code, this fresh, eclectic political mix of lawmakers will need to be educated from outside the Beltway from forward-thinking leaders who can speak from a proven track record. It's an excellent opportunity for Washington state's entrepreneurs to rise and join their brethren across the country in this challenge once again.