Power Players

Bill Gates: Tax rates on the wealthy were nearly double when we started Microsoft and 'it didn't hurt' us

Microsoft Co-founders Bill Gates and Paul Allen in 1984
Doug Wilson | Corbis Historical | Getty Images

Bill Gates disagrees with the idea that the prospect of paying higher tax rates would discourage entrepreneurs from working to build a successful business.

"In the 1970s, when Paul Allen and I were starting Microsoft, marginal tax rates were almost twice the top rate today. It didn't hurt our incentive to build a great company," Gates wrote in a year-end blog post Tuesday of the company that now has a market value of more than $1.2 trillion.

Some opponents of higher taxes have argued that significantly raising taxes on the rich would hinder innovation by giving entrepreneurs less incentive to launch new start-ups, the thinking being that entrepreneurs would be less inspired to become rich one if it meant their wealth would be highly taxed. Others argue that higher taxes on the wealthy would lead to business owners hiring fewer employees.

But in 1975, when Gates and Paul Allen founded Microsoft, the top marginal tax rate on individuals was 70% (for incomes over $100,000 per year), versus 37% today (on annual incomes over $510,300).

And Microsoft was far from the only company founded in the U.S. under those marginal tax rates in the mid-1970s. Other examples include investment advisory The Vanguard Group, which was founded by investor Jack Bogle in 1975 and now manages assets valued over $5.3 trillion. In 1974, the first Foot Locker opened in the Los Angeles suburbs, and the company now has over 3,200 locations and $7.9 billion in annual revenue. And in 1976, Steve Jobs teamed with co-founders Steve Wozniak and Ronald Wayne to launch Apple out of Jobs' parents' garage. Today, Apple is valued at $1.3 trillion.

Gates has noted before that Microsoft "was a business from the beginning, not that we had any clear view that it would ever be a large business." Still, a higher tax rate didn't stop him from wanting to build the company and "hire even more people to get ahead, to be the leader, and doing lots of products that could share code with each other and take the [software] market," the billionaire said in 1994 about the early days of Microsoft.

By 1978 Microsoft topped $1 million in annual sales. In March 1986, Microsoft went public. (That October The Tax Reform Act of 1986 was passed, lowering the top marginal tax rate for individuals to 28% from 50% while raising the maximum tax rate on capital gains from 20% to 28% for individuals. The Microsoft IPO valued Gates' 45% stake in the company at roughly $350 million, and Gates sold shares that were worth $1.6 million at the time.) Gates remained CEO of Microsoft until 2000, helping to build the company into one of the world's largest.

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Bill Gates sounds off on Sen. Elizabeth Warren's proposed tax plan

On Tuesday, Gates — who, with an estimated net worth of $113 billion, is the world's second-richest person, according to Bloomberg — wrote that the U.S. tax system as it currently works "isn't fair" because it is contributing an ever-growing wealth gap.

"A few people end up with a great deal — I've been disproportionately rewarded for the work I've done — while many others who work just as hard struggle to get by," Gates wrote.

But he believes that "we can make our system fairer without sacrificing the incentive to innovate." That being said, Gates adds that the U.S. does "need to be thoughtful" about how the government goes about raising taxes.

"One of the reasons that innovators flock to the United States is that this country makes it easy to start a business, invest capital, and earn a profit," Gates wrote in his blog post. "We shouldn't destroy those incentives, but we're a long way from that point now. Americans in the top 1% can afford to pay a lot more before they stop going to work or creating jobs."

The debate over whether or not wealthy Americans should pay more in taxes is one that has taken center-stage in political discourse. Democratic congresswoman Alexandria Ocasio-Cortez has floated the idea of returning to a top marginal income tax rate of 70%.

And ahead of the 2020 election, Democratic presidential candidates such as senators Elizabeth Warren and Bernie Sanders have proposed wealth taxes on wealth individuals with net worths over a certain threshold (such as a 2% tax on wealth between $50 million and $1 billion, in Warren's case).

Though Gates has expressed some trepidation recently about specific wealth tax proposals from the likes of Senator Warren, the billionaire has been a vocal advocate for taxing the wealthy at higher rates, much like fellow billionaires such as Warren Buffett and Ray Dalio.

"I need to pay higher taxes … I've paid more taxes, over $10 billion, than anyone else, but the government should require people in my position to pay significantly higher taxes," Gates told CNN's Fareed Zakaria in 2018.

In his blog post this week, Gates proposed some changes to the American tax system, including raising the estate tax and the capital gains tax — both moves that would primarily affect the wealthy.

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