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The truth about taxes and prosperity

(MoneyWatch) COMMENTARY When I was a fully employed high-tech executive, I never minded writing big checks to the IRS. Okay, that's not entirely true. Actually, I come from a long line of people who, having nothing to complain about, always manage to find something.

The point is times were good back then. And, in all honestly, a part of me wore those hefty payments to Washington and Sacramento like a badge of honor. It meant that I'd become something. That I was successful.

So when a friend at USA Today asked if I'd go on the record for a story about how the unprecedented bull market, fueled by the dot-com boom, enabled the federal government to reach its first budget surplus in 30 years, I agreed to do it.

As a result, that pride I felt is memorialized for anyone willing to cough up $3.95 for an archived copy of an article from 1998 entitled "U.S. budget bonus: Thank bull market for deficit's end."

Now, I didn't work for a high-flying dot-com startup, but a boring old Fortune 500 semiconductor company that actually manufactured stuff here in America, of all places. And I remember a lot about those heady days, memories that seem almost otherworldly, given the situation we find ourselves in today:

The already ballooning NASDAQ would skyrocket another 250% over the next 18 months, only to plummet right back down to where it started.

A friend called me up to give me some stock tips on communications technology companies like JDS Uniphase, Ciena, Brocade and PMC Sierra. Their market valuations grew a fantastic 2500% to over $100 billion each over that crazy 18-month period. They're all still around, and worth about one or two percent of that today.

I remember Wall Street analysts rating stocks they followed as strong buys, even as they fell off one cliff after another, bouncing just enough in between to fool investors into thinking they'd actually bottomed. Turns out that some of those analysts were trading fluffed up reports and buy recommendations in exchange for big investment banking deals like IPOs and secondary offerings.

On the subject of taxes: Back then, it was common practice for executives at Internet startups to exercise their penny stock options and hold them for a year to take advantage of long term capital gains before selling. Well, if you happened to do that at just the wrong time -- as one CEO I knew did just before his company's stock went public at $100 and then plummeted to a buck when the bubble burst -- you could end up owing the IRS one or two zeros more than you've got in alternative minimum tax (AMT). No kidding.

Yes, that era taught an entire generation of investors and hot-shot entrepreneurs the meaning of "it was the best of times, it was the worst of times." And yet, as America sits on a national debt of $15 trillion, it's easy to forget that, 15 years ago, a nation drunk on irrational exuberance and the illusion of unparalleled prosperity brought in real tax revenue that helped to balance the federal budget.

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The lesson in all of this? For one thing, the expression "perception is reality" isn't just a qualitative statement. In this case, market perception alone generated a ludicrous amount of real money for the U.S. Treasury, just as it did for Mark Cuban, who sold his dot-com startup to Yahoo for $5.9 billion in stock at the market peak and immediately hedged against a crash. I guess timing is everything.

Also, and this applies to our current situation, I think it's easy to get confused over the cause and effect relationship between prosperity and taxes. When you have the former, you should bank the latter at a time when everybody can live with it. Because you can't do the reverse: Tax people at a time when they can't live with it to try to create prosperity. It just doesn't work that way. And it's surprising that so many people just don't get that simple fact.

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