The Sales world learned a long time ago, that you incent the behaviors you want. If you want your sales team to sell a certain product, increase the commissions on that product. If you want to increase gross margin, commission the sales team on gross margin not revenue. Sales people will chase the money. People have an amazing ability find the benefits that best suits their wallet.

Knowing this I am confused with Obama’s new budget. I doesn’t incent the right behaviors.

Obama’s new budget is proposing some interesting and arguably unaligned incentives.

His plan proposes:

1) Raising capital gains taxes from 15% to 20%. for those making over 250K
2) Capping the mortgage and charitable deductions, at 28% down from 38% currently
3) Taxing “carried interest”, the income earned by executives at hedge funds, private equity firms as regular income rather than at the 15% capital gains.
4) Do nothing about “losses”. Today, an average investor will pay 15% tax on all capital gains (money earned through an investment) but can only write off $3,000 a year in losses. In other words, if a person invests $10,000 and makes $1,000 they only get $850. However if that investment goes bad and they loose the $10,000 they can only write off $3,000 of it a year, taking 3.5 years to write it off.

This all seems counter intuitive to me. The incentives aren’t aligned. We are spending billions trying to open up the credit markets and get banks to lend more. The economy is in desperate need of liquidity. If the banks, can’t, won’t or are unwilling to lend we are going to need another source of capital. This source will be private money. Obama’s proposed capital gains increases do nothing to incent the behaviors of private investors, large or small, to take risk. We need to get money off of the sidelines and get it working. There are two to types of capital; debt and equity. If the banks (primarily debt), aren’t going to fix the problem then we need to incent private equity to help out.

I say we . . .
1) Have a 12 month moratorium on capital gains for non institutional investors. We need to offset the risk of investing in this environment by increasing returns
2) Increase the amount in losses non-institutional investors can right off to 10k a year or 20% of their taxable income which ever is greater.
3) Reduce the capital gains tax for Institutional investors to 10% for the next 12 months and 0 capital gains for investments deemed strategic to our economy (Alternative Energy,etc.)
4) Create a new investment class to identify and categorize “Angel Investors” and create unique tax incentives to increase their willingness invest. Angel investors are a critical part of start-ups as they can act as the bridge between mainstream V.C. money and the founders investment.

We need to get capital into the markets. Obama seems to be looking at only one side of the equation, the debt side. The cost of a capital gains moratorium pales in comparison to the cost of trying to shore up the banks to get them lending again.

Obama is making a classic sales manager mistake. He wants to sell more tin, but he’s incenting the team to push the extended warranty. He’s gonna get some tin, but a whole lot more warranties and right now there is no money in a stinking warranty.