Capital Ideas

Warren Buffett urges higher taxes, Al Gore becomes a "venture capitalist," and Spitzer ditches his drivers-license plan.

Paul Gigot: This week on "The Journal Editorial Report," billionaire Warren Buffett says Congress should raise his taxes, but are there costs to soaking the rich? We ask one of Silicon Valley's top CEOs. Plus Al Gore's new gig: Is he a venture capitalist or Washington lobbyist? We'll take a closer look. And New York's governor abandons his plan to give drivers licenses to illegal immigrants. Was it the right move? Those topics, plus the Barry Bonds indictment, but first these headlines.

Gigot: Welcome to "The Journal Editorial Report." I'm Paul Gigot.

Warren Buffett went to Washington this week to ask Congress to raise his taxes. The billionaire businessman told the Senate Finance Committee, quote, "I think we need to take a little more out of the hides of guys like me."

Here with a look at taxes and their consequences is entrepreneur T.J. Rodgers. He's the founder and CEO of Cypress Semiconductor, a Silicon Valley computer-chip maker.

T.J. Rodgers, thanks for being here.

Rodgers: Thank you.

Gigot: I think that Warren Buffett was not just talking about himself, but also guys like you, saying raise their taxes. Do you agree with him?

Rodgers: I agree with that comment, but I'd have to modify it. Warren Buffett is not talking about himself. He's the master of hypocritical statements. He's talking about guys like me. Warren Buffett has billions, tens of billions of dollars beyond the tax stage. So it's easy for him to say tax the other guys.

I'm a micromillionaire. My money's invested in Silicon Valley companies. And if he starts taxing the wealth creators in the world, which are younger guys like me right now, we're simply going to move a bunch of money from productive investment to Washington, and if anybody believes it's going to be more productively invested there, I need to talk to them.

Gigot: OK. The capital gains tax in particular now--the rate is 15%, and there are a lot of people who say, you know, why should people pay 15% on capital gains when ordinary workers, honest salary earners, are paying 28%, 31%, 35%. What's the argument for that differential rate?

Rodgers: Well, there's always been an argument that it would be different. For example, if I work in an investment company and earn a salary and I pay income tax on that, then I invest money and I earn a capital gain on that, and then that's, in effect, an added tax on top of the salaries that financial companies pay.

If you raise that tax--let say it's 50%, let's say a parity between capital gains and income--if you raise that tax, what happens is people lock up their investments. Any rational human being will avoid being taxed, giving away their money to the government. That means instead of being able to move my money from one, today, energy investment, to a different energy investment, that means that I'll lock up my money and I'll avoid taxable events or I'll put it in tax-free whatever. And the net result is that the tax structure will force people to change their behavior, and it will harm investment and Silicon Valley in particular.

Gigot: The corporate rate is about 35% in this country. It's either the first or second highest in the world after Japan, depending on how you measure it, if you include state taxes as well. Has that affected your behavior as a CEO and where you invest and how you invest? And would it make a difference if it were reduced?

Rodgers: Sure. You know, add on to the 35% California, which is one of the high-tax areas, and can you look at--for example, Silicon Valley is no longer Silicon Valley. We talk about Silicon Valley as if it's a place that you can go see--they make silicon there. We don't make silicon here anymore. I was one of the last holdouts in Silicon Valley--I, meaning Cypress Semiconductor--one of the last hold outs in Silicon Valley to still keep the silicon fab here. I shut my fab down and sold it last year, so I make no silicon in Silicon Valley. I make it in Minnesota and Texas. And if they start creating more punitive tax laws, I move it out of the country.

Right now, the center of silicon manufacturing is moving to Taiwan and to mainland China. So it's like anything. If the tax on cigarettes gets to be $100 million, or $100 a pack, then people will stop smoking or the mob will help us out by moving tax-free goods. And basically what California has done, and which other states shouldn't replicate, is forcing industry out. There's a big sign at the California border, and it says, "Business not welcome." And as a result, businesses in California, mine included, are putting our plants elsewhere.

Gigot: It makes it sound as if Silicon Valley, the Silicon Valley that you started your company in 30 years ago, really has changed. And yet we do see that there are start-ups that are still moving ahead. We have had the Google explosion and the Internet companies. We've had the biotechnology companies, which are still starting and growing. You're saying it's changed, though, that that doesn't happen anymore. What about all these companies that are in fact growing?

Rodgers: Well, what's happened is major investment by larger companies--mine is now a couple-billion-dollar company--in California, become infeasible. So to create a factory, to create jobs, to give people jobs here in California, that has been pushed aside. Nobody in his right mind would invest a few billion dollars in California to create a plant to create jobs here because of the punitive tax structure.

Meanwhile, back in the venture capital industry, that's still well and thriving, but if you think about how that works, venture funds put money into a start-up. Young managers who want to make it, want to build a company, get--wait for years. They get stock in their company, and then if the company goes public, they have a major liquidity event, and they sell their stock. They get capital gains tax, which is low. And they create a new industry in California. That's the story with Google.

We were Silicon Valley. Then we were Server Valley, then we were Biotech Valley. Then we're Search Engine and Software Valley. And now, by the way, we're becoming Energy Valley. As soon as you tax capital gains, as soon as you make the return on investment for venture capital worse, then all of a sudden money stops flowing to venture capital, venture capital stops going to young entrepreneurs, and Silicon Valley stops being Silicon Valley. And these guys are not the rich guys that Buffett's talking about.

Gigot: So an increase of the current capital gains rate--that is, 15%--to, say, 28%, as Barack Obama and John Edwards want to do, or 20%, even, that Senator Clinton wants to do--that would make, in your view, a tangible negative impact on venture capital entrepreneurship in the valley.

Rodgers: Of course. Think about your bank account. You go to one bank they say, I'll give you 8% interest. You say, Great, I'll put my money in. Then they call you up and say, We've decided to change it by five percentage points. It's 3% interest. So if you change five percentage points the return on investment in any channel of capital, then the capital is in there, and it's in there invested to make money; it's not in there to do good for the world. It's in venture capital to make money--and by the way, venture capital does good for the world in making a profit--then that money will move to another channel where profit can get made.

Gigot: All right. T.J. Rogers, thanks so much for being here.

Next, Al Gore's headed to Silicon Valley, but as venture capitalist or lobbyist?

Gigot: Al Gore is taking his global warming crusade to Silicon Valley. The former Democratic vice president and recent Nobel Peace Prize winner announced he is joining a powerhouse venture capital firm, Kleiner Perkins, in an effort to finance so-called green technologies.

Here with a closer look at Gore's new gig, Wall Street Journal columnist and deputy editorial page editor Dan Henninger, assistant editorial page editor James Freeman and Washington columnist Kim Strassel.

James, you've been following this. Kleiner Perkins is one of the most famously successful venture firms in America, financed some of the great companies, high-tech companies. What is Al Gore up to?

Freeman: His timing could be perfect for Kleiner, because the firm has backed more than a dozen of these clean technologies, but they haven't been able to exit any yet. So as they look to cash out, a big, big issue for them is the energy bill, now stalled in Congress, with lots of subsidies and favorable regulations for these companies and their portfolios. So Al Gore--Mr. Gore is showing up at a critical time here for the company.

Gigot: Wait a minute. You're saying that this is not necessarily all about venture capitalism, but it may be about venture politics in Washington?

Freeman: Well, as far as why they make certain investments and how, I'll leave that to experts, but what's absolutely clear is that the stakes are huge for the companies they've invested in, in the green tech space in the Washington energy bill, if it ever happens.

Gigot: What companies are those? Are they in ethanol, solar?

Freeman: Two companies in ethanol. Another company that is biofuels, claiming to be creating something even better than ethanol, which probably won't be hard. Whether it can be better than gasoline is the tough challenge. Then you have two companies in solar, another one in geothermal.

Gigot: Wow. So 60 votes in the Senate may be Al Gore's real game here if can he do something in Washington to get that energy bill through the Senate.

Henninger: Yeah, that's right, Paul. You know, at some level, I think it's quite preposterous and even dangerous. If you want to put a solar panel on the roof of your house, feel free. But we're talking about the energy sources for the entire economy. Things like biomass, solar, geothermal, this all requires--this is immensely complex issues, and the only way to sort through which one works is with the price mechanism. And it seems to me, if you fool with the price mechanism with these subsidies, as we're learning with ethanol, you're going to really put the economy at risk if you try to go down the road and purport to be able to subsidize fuel for the entire American economy.

Gigot: Kim Strassel, you're our Washington expert here, following the maneuverings in the Beltway on energy. Where does this energy bill stand, and is it as crucial to these alternative fuels as we've been discussing?

Strassel: The energy bill is stuck at the moment, which is actually a good thing, because it's a horrible bill. It gets exactly to what James and Dan have been saying. These days if you're an energy company it is not about building a product and getting Americans to want to buy it. It's about getting Congress to mandate its use. This is what the bills that are in the House and the Senate are about right now.

In the Senate version, you've got a CAFE provision to raise fuel efficiency on cars. This is a huge boon to people who're making clean car technology and all of the people that go along with that. And then in the House you've got something called the Renewable Portfolio Standard, which requires utilities to produce at least 15% of their electricity from renewable sources--wind, solar, geothermal--by 2020. This is again a huge sort of handout requiring people to use wind power, solar power, geothermal power. These companies probably wouldn't compete on the market otherwise.

Gigot: But Kim, I think if you're Al Gore, you'd you say global warming is such an overwhelming problem. It threatens our existence, and therefore, these taxpayer subsidies, or something like this, they really should go to developing these alternative energies, because that's the only--if that's the only way they will be competitive, so be it. But this is something we, as a culture, as a society, as a country, ought to invest in. What's your response to that?

Strassel: I think there are two. One, is that if you really believe in that, OK, except at least put your money something that works. Right now renewables are about 3% of our electricity energy needs at the moment. And it is going to take a phenomenal amount of money to even double that number. So it's not going to make much of a dent in what we actually emit.

The other thing, though, is there's a great argument out there that by instituting these things--who's going to pay for all this? Fundamentally, American consumers. Anytime energy costs go up, it's bad for the economy. Wouldn't the economy, wouldn't the country be better off if you had a booming economy, if energy prices were low, and you could then use the fruits of all of that to come up with sort of smarter tech investments. That's how the markets work, and in the past, it has been how we get some of our best innovations to fix some of these environmental problems.

Gigot: James, there's also been something of a political backlash, interesting enough, against corn ethanol. As it's boomed in the Midwest, some parts of the country where these plants are going up don't like them.

Freeman: That's right. You have competition for water, and as ethanol sucks more of that water from other uses, you're going to have more controversy out there. Right now, to create a gallon of ethanol, you need about 1,700 gallons of water and about a gallon of oil. So it's obviously not economical. I think people are realizing that. But even on the environmental side, greens are starting to say, Wait a minute. This has a huge water appetite. Let's cut back.

Gigot: All right.

Strassel: Paul, ethanol's also a great example of how when you centrally direct markets, it has a knock-on effect across everything else.

Gigot: All right, Kim, thank you very much.

When we come back, New York Gov.rnor Eliot Spitzer pulls the plug on his licenses-for-illegals plan. Was it the right move? There's a debate ahead.

Gigot: New York Gov. Eliot Spitzer pulled the plug on his controversial plan to issue driver's licenses to illegal immigrants, citing fierce public opposition. Spitzer proposed the initiative in September in an effort, he says, to improve safety in New York, home to more than one million undocumented immigrants, many of whom are driving without licenses.

We're back with Dan Henninger. Also joining the panel, editorial board members Dorothy Rabinowitz and Jason Riley.

Dorothy? What's wrong with giving a driver's license to an undocumented alien?

Rabinowitz: Everything. But before we say that, we have to say that there's something very right about one thing, and that is, Gov. Spitzer has brought to the proper level of lunacy and absurdity the entire question of this opening up the world to illegal immigrants. And that's really the--

Gigot: But you don't think they're not going to drive, do you? I mean, even if they don't get a license, they're here. They're presumably going to be driving anyway because they're working. They need to get to work, and so they will be driving anyway. Isn't the question just whether they'll have a license, and maybe insurance, or not a license?

Rabinowitz: There are some issues in the world that just don't make room for this kind of practicality. The outrage of giving this concession to people who are here illegally and saying, OK, we're going to make our society safer and the roads safer, it reeks of the kind of phoniness that the entire discussion of giving concessions to illegal immigrants do. And that is why the public was so revolted at this.

Gigot: But is it a question of symbolism then?

Rabinowitz: Yes. Yes.

Gigot: Is it a question of what a society is--is it, do you think condoning, sending a signal of condoning illegals if it gives that practice, is that it?

Rabinowitz: Yes. Of course it is.

Gigot: It's not a practical objection.

Rabinowitz: It is not a practical--well, it is practical. The wrong kind of idealistic surge is invariably a practical matter. The people who are arranging or embracing illegal immigrants, marinated in self-righteousness, along with all their supporters everywhere in the press, have to say--

Gigot: I guess we're marinated over here.

Rabinowitz: I mean, they finally have come up with a wall--a wall of genuine public, logical resistance. And Gov. Spitzer, I have to say, set himself up there and apologized.

Riley: Well, Dorothy, Spitzer changed course for political expediency.

Rabinowitz: How cynical of you, Jason.

Riley: His poll numbers were taking a hard hit. Even the national Democratic Party was getting on his case. I mean, this issue dominated the first part of the Democratic debate this week.

But once you've decided that you're not going to deport the 12 million illegal aliens in the country--and we're not--what public policy purpose is served by allowing them to live here but not drive legally? I mean, as Paul said, some are going to do it anyway. And so, that will only leave you with more uninsured and unlicensed drivers on the road.

But also, from a national-security standpoint, from a homeland-security standpoint, a post 9/11 environment where knowing who is in the country is more important than ever. The Department of Motor Vehicle database is the largest security database in the country. Why would you want to purposely exclude millions of residents from being in that database?

Rabinowitz: Let me tell you, Jason. All of these things that you see as so logical have the kind of speciousness that attaches to the entire embrace of immigrants. There is something about this central principle, which is that Americans are rightly enraged at allowing people who should not be here, who have jumped the line, at getting any kind of advantage, and embracing it in legal form, such as, yes, you can have a driver's license, everything else is secondary to that, including the logical points you just made.

Riley: Homeland Security? I'll give you an example. William Bratton, a former police chief in New York and the current police chief in Los Angeles, and someone I don't think anyone would describe as soft on crime or soft on homeland security, was in favor of Spitzer's plan, because he said it would result in fewer hit-and-runs, and also we'd have names and photographs of people in the country and that would help us solve crimes and make us safer from terrorism. He's being specious and impractical?

Rabinowitz: Yes, the larger issue here. I'm sorry, Dan. I'm sure you want to say something.

Henninger: I don't know if I'm getting in the middle of this one.

Rabinowitz: The larger issue is the smoldering anger Americans feel. And it's a trustworthy feeling. This is no lynch mob, despite the efforts to describe it. You realize that everybody who deviates from the idea of embracing immigrants--illegal immigrants--is treated and talked about as though they were some backwoods mentality. However--

Gigot: We love you, Dorothy. We'd never say that.

Rabinowitz: This is how it goes. It's very like the tone taken by MoveOn.org against the right.

Gigot: Let me introduce one other point quickly, though, Dan, and that is, there's an element here of voter fraud, is there not? A concern about that with this illegals program that our colleague John Fund has raised.

Henninger: Yeah, let's discuss this at the rawest level of politics. The Democrats aren't supporting these illegal immigrants out of the goodness of their heart. They see them as a potential voting bloc for them. And there's something called the Voter Registration Act of 1993, enacted by Bill Clinton, called "motor voter," which means that when you get a driver's license, you get to register to vote. And it makes it very difficult to control that at the voting booth. Voter fraud is a real possibility here.

Gigot: All right, Dorothy, we've got to go. Thanks very much.

We have to take one more break. When we come back, the Barry Bonds indictment and our "Hits and Misses" of the week.

Gigot: Winners and losers, picks and pans, "Hits and Misses." It's our way of calling attention to the best and the worst of the week.

Item one, the indictment of Barry Bonds. Dan?

Henninger: Yeah, Paul, the Barry Bonds thing is not so much about him, I think, as it's about us. As this case goes towards trial, as it may, we're going to hear a lot of reasons like--because what Barry did was no big deal. Hey, they're all professional athletes, and hey, everybody in life now pushes the edge of the envelope--sports, business, politics. And we're told as children, Life isn't fair and there's a lot of sharp elbows out there in life. But it seems to me that if we buy into this as we go towards this trial, then what we're going to do is revert to essentially the law of the jungle. We've been there before, and we didn't like it. And I think that if the idea comes forth that Barry was just pushing the edge of the envelope, I hope there's a lot of people out there willing to push back.

Gigot: All right, thanks, Dan.

Next, sorry sports fans. A miss to the National Football League. Jason?

Riley: Yes, it is a miss to the NFL, which is, everyone knows, is full of tough guys. But that doesn't extend to team owners, who think nothing of crying to federal regulators when they don't get their way. And that's what they have done hre. The NFL owns the NFL Network, and they're upset that they are not getting wider distribution on cable television. The cable companies want to regulate the NFL network to their sports tier program, which is a little less popular.

This is not a federal issue. This is not an issue for the government. This is a private dispute that should be handled in the private sector. And if the NFL doesn't like the way they're being treated by cable companies, then they should make them a better offer.

Gigot: OK, Jason, thanks.

Finally a hit to Attorney General Michael Mukasey and his first week on the job. Dorothy?

Rabinowitz: Yes. And he was everything I think that we thought he would be. First of all, during his hearings, those tough hearings, he stood up and was without fault in resisting all the efforts to get him to condemn waterboarding and everything else.

But then he uttered one sentence in his swearing-in speech in which he said, It's good to be back. It's good to be back. Many things have changed. And one of the things that's changed is the confrontation with a threat that--from people who believe it is their religious duty to make war on us.

And I sat there listening to this and I thought, Can you imagine Alberto Gonzales saying anything as specific as this about anything, but much less about the nature of the war? And in that one sentence, we suddenly have the surge of feeling that we are onto one really very good attorney general, and he should have been here a long time ago.

Gigot: All right, Dorothy, thanks.

Dan, on the Barry Bonds business, it looks to me as if he had actually just 'fessed up and said, Look, I did use steroids, this indictment could have been avoided.

Henninger: Yeah, and I think it still would have put us back in the same position I describing earlier, which is: Does the word cheating have any meaning in our society anymore? And if it doesn't, if he had just 'fessed up and people would have slapped him on the wrist, then I think we really would have taken ourselves a few steps down a road we don't want to go.

Gigot: All right, Dan, thank you.

That's it for this week's edition of "The Journal Editorial Report." Thanks to Dan Henninger, Kim Strassel, James Freeman, Jason Riley and Dorothy Rabinowitz. I'm Paul Gigot. Thanks to all of you for watching, and we hope to see you right here next week.