Why Kickstarter’s great for tax revenues

By Felix Salmon
June 18, 2012
Matt Yglesias has a very odd piece at Slate entitled "The Kickstarter Recession".

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Matt Yglesias has a very odd piece at Slate entitled “The Kickstarter Recession”. In a nutshell, he seems to think that a crowdfunded economy would run on less money than the current economy, and therefore produce less in the way of much-needed tax revenues. He’s wrong on both counts, I think.

Kickstarter, when it works well, is a disintermediation tool for creative projects. Films get made, albums get recorded, art projects get realized which would otherwise never have seen the light of day — because the people who love those things are sending money directly to the creators, without production companies or record labels or art galleries feeling the need to veto any project where they can’t make money themselves. When the inefficient intermediary is cut out, many more projects become viable, and the cultural economy expands rather than contracts.

Up until now, the cultural world has been reliant upon intermediaries to the degree that it was basically impossible for a creative person to be successful unless and until they could support not only themselves but also a pretty large number of professionals whose job it was to help package and sell whatever it was that was being created. The result was a heavy artificial dampener on the creative economy. With Kickstarter, that’s changing: while professional packaging and selling still has its place, it’s no longer the determinant of whether something gets the opportunity to generate money or not.

But even if the creative economy didn’t expand as a result of Kickstarter, the chances are that crowdfunding would still increase rather than decrease tax revenues. Here’s Yglesias:

In conventional finance, money doesn’t care about your passion or the joy you get from being your own boss. People deposit money in bank accounts, and then the banks try to make a profit by lending it out. That means giving credit to people with sound business plans and likely profits. The genius of Kickstarter is to open the door a bit more widely. People sponsor something like Neal Stephenson’s sword-fighting game or the wildly successful Pebble smart watch project not because they think kicking in capital is the optimal investment strategy, but because they—like the founders—are just enthusiastic about the idea. In other words, Kickstarter gives investors the chance to do what workers and small business people have been doing forever—sacrifice potential earnings for the sake of passion.

What Matt misses here is the tax implications of the two models. I deposit money in a bank account, and get some derisory rate of interest on it: I’m not going to be paying any significant taxes on that income. The bank lends the money out to Neal Stephenson or to Pebble — but because these are risky startups, a lot of them fail, and the bank has to write off a lot of those loans. Overall, its profits on that lending are small — and as we all know, banks never pay much in the way of taxes in the first place. Maybe a few bankers will get a slightly higher bonus, and pay income taxes on that bonus. But as a percentage of my original bank deposit, the amount of money we’re talking about here is tiny. And the loan itself, of course, isn’t taxable: Neal Stephenson and Pebble only have to pay taxes once they’ve paid back the loan and started making profits.

In the crowdfunding model, by contrast, when Kickstarter writes a check to Neal Stephenson, that’s Neal Stephenson’s income, right there, and he has to pay taxes on it. Yes, he can probably write off associated expenses. But the fact is that the tax revenues associated with a successful Kickstarter campaign are enormous compared to the tax revenues associated with putting the same amount of money into a checking account. And remember that Kickstarter, too, pays income taxes on its own profits.

When I fund a Kickstarter project instead of keeping that money in a checking account, it’s silly to consider me to be “sacrificing potential earnings” — I’m just spending money, which is a different thing entirely. It’s consumption, and it’s taxable: it’s exactly the kind of 21st-Century economic activity which the government wants to encourage.

Now it’s possible that when Yglesias talks about Kickstarter, he isn’t really talking about Kickstarter, but rather about the crowdfunding mechanisms built into the JOBS Act, none of which yet exist, and which Kickstarter has said it has no interest in being part of. Since they don’t yet exist, we can’t really judge them — but they’re still equity rather than debt, and that alone means that they are going to generate much more tax revenue than funding from banks.

In other words, when you cut out the middleman, be it a bank or a record label, that’s good for the economy and great for tax revenues. Kickstarter was not built as some kind of engine for the US macroeconomy. But at the margin, it can only help.

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