Luke Brown Marketing Blog

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Pay-to-play is a concept that surfaced years ago in radio (the payola scandal of the 1950s), spread to live concerts (Hollywood’s Sunset Strip in the 1990s) and has now reared its ugly face in, of all places, angel investment groups.

The concept is that entrepreneurs looking for funds for their startup business will pay handsomely – up to $1,500 handsomely – to get in front of those with the money to invest, the so-called angel investors.

To most people, angels are heavenly and spiritual. In business, there are angels in name only who have no confidence in their ability to spot a good investment and manage it to maturity. So they take money from the entrepreneur up front. Call me cynical, but these are the people your Mom told you to watch out for.

A few courageous and principled men have decided to take a stand against this type of ‘angel’ investor (screw it, let’s just call them by their proper moniker – devil investors).  Jason Calacanis, CEO and founder of Mahalo.com (a human-powered search engine) is expecting Sky Dayton, who founded Earthlink, and Matt Coffin, founder of LowerMyBills.com, to join him as he launches the Open Angel Fund in the first quarter of 2010.

Calacanis, who is no stranger to controversy, hopes his Open Angel Fund will put Keiretsu Forum out of business.  Calacanis has singled out Keiretsu as an example of pay-to-play angel investors. Keiretsu has 18 chapters, 14 in the US and 4 international chapters in China, England, France and Spain.

Keiretsu is one of the largest for-profit angel groups in the world and, naturally, issued a “… we support and welcome his new organization.” statement. Nobody who rakes in money like Kieretsu wants competition so their corporate statement is the typical smiling face which stabs you in the back the second you turn around. I wouldn’t be surprised to find several cases of Vaseline in their corporate offices.

Calacanis has stated that the Open Angel Forum would not charge entrepreneurs or members any fees. He said he’ll personally cover all expenses and invest in as many as 10 promising companies every year. Calacanis is confident he’ll be profitable and doesn’t seem fazed by any upfront expenses he may incur.

I wish Jason Calacanis the absolute best of luck in this endeavor.  I respect him for his courage and initiative. That’s the spirit of an entrepreneur. That’s the type of person – somebody with an idea, a plan, and passion to act – who can make a difference in business. That’s what business is all about. Go get ‘em, Jason. Go get ‘em.

Small business in America plays second fiddle to large corporations. This is not whining or complaining, just a basic fact. Big business can afford lobbyists who convince politicians to write and pass laws to favor or protect their industry. No so for the average small business owner. And it’s about to get worse – much worse.

The latest version of the health care/insurance reform bill – all 1,990 pages of legalese – is the worst screwing of the typical American small business since the Supreme Court’s 2005 eminent domain decision in Kelo v. City of New London. If you own a small business and think taxes are high, your definition of high is about to be considerably expanded.

Like The Alternative Minimum Tax Concept? You’ll Love This!

The AMT was passed into law in 1969 and became effective in 1970. It was originally intended to target 155 individuals with income of over $200,000 who paid no federal income tax. The law, however, was not – and is still not – indexed for inflation.

That is why every year Congress must waste time modifying the law to protect over 24 million mostly middle-class taxpayers (in 2008) from higher taxes. It would be smarter and save time to permanently index it. But Congress is doing all it can – to protect their jobs.

The current health care/insurance reform bill, H.R. 3200, is not indexed for inflation. So, the 5.4% surcharge on incomes over $500,000 will be paid by more and more people every year, even at low average annual inflation rates of 2-4%. By 2020, people will be paying the surcharge on the equivalent of $350,000 of today’s dollars, at an average inflation rate of 3.6%. The amount would be even lower if inflation is higher.

Not only does this surcharge apply to income, it also applies to capital gains and dividends. Dividends, currently taxed at 15%, will rise to 39.6% if Congress lets the Bush tax cuts expire, which they have stated they would do. Add the surcharge and dividends will be taxed at 45%.

Dividends, the portion of corporate profits paid to stockholders, are a source of income for many investors and retirees. How much investing will people be willing to do if almost half of their income is taxed by the feds? Add in state taxes – especially high tax states like New York and California where the top rate is around 10% – and the incentive to invest is reduced even further.

But Wait – There’s Even More Bad News!

Not only is the surcharge not indexed for inflation, neither is the business payroll penalty! The bill imposes a penalty of 2%, starting on payrolls of $500,000 and rising to 8% on payrolls over $750,000. This affects business which do not offer health insurance or pay less than 72.5% of a worker’s insurance.

Using 4% average annual inflation, in 10 years this would affect businesses with the equivalent of $335,000 to $510,000 in today’s dollars. So every year, more business owners will get the shaft while the government gets the gold mine.

The Bad News Isn’t Finished Yet!

In the Senate bill, some of the taxes raised to pay for reform are taxes on high cost health plans or ‘Cadillac’ health plans, those plans commonly costing $8,000 per year or more and most often offered to government employees and union members.

This, too, uses deceptive means to appear indexed to inflation. It indexes $8,000 as a base and it can rise by the inflation rate plus 1%. Sounds good, right? Wrong! Because health care inflation historically is twice as high as the inflation rate.

So the businesses which provide these good insurance plans will pay more in taxes. Business with employees with pay more taxes. Investors will pay more taxes. Which means prices will have to rise on everything, causing more inflation and generating more taxes!

The dastardly, deceptive and debilitating methods of screwing the average American are Hall of Fame reckless. The spin put on by those trying to rush this ruse through before Americans find out more is shameful. Yep, I’ve reach my tipping point. Now I’m mad as hell and I’m not going to take it anymore.

I’m bringing back my clenched fist t-shirt from 1970. I’ve had enough.