First, long term cap gains tax rates are already quite low (relative to regular income), and I can't think of a single entrepreneurial or investor scenario where I've seen: "gee, if tax rates were lower I'd {invest,start this company}"
Second, it will be tough to implement in a loop-hole proof way. Every private equity and hedge fund will be organizing "startup" projects, so they can make take profits tax free. My guess is it will be capped, making it even less of any sort of meaningful incentive.
My take: there are other tax areas that need work first, like code simplification and AMT.
People don't avoid starting companies because they're afraid of the capital gains tax on their anticipated profits (At least, people with a healthy dose of perspective don't do this).
If you're going to pick from the list of reasons that people avoid starting companies, at the top of the list has to be the fact that most are afraid that they'll be unable to take care of themselves and their family during the lean times. Universal health coverage is an obvious step toward alleviating this fear. The abstract, vague notion of someday paying a (rather low) tax on the eventual, theoretical profits from the venture doesn't even come close.
You're focusing on the trees. Who do you think pays the private health care premiums for your hypothetical startup? The insurance fairy?
That money comes out of your pocket, today -- not out of (speculative) future capital gains dollars. And since it's nearly always more expensive (per head) to insure smaller groups, you're very likely going to pay more by insuring your own small company, versus participating in a national program.
That said, I don't necessarily think that capital gains are the best place to find money for health care. But if it came down to a choice between raising capital gains taxes (which are quite low in this country) to fund universal coverage, and eliminating our already meager capital gains taxes to "promote" small business, I'd take the health care in a minute. And I'd still start a company, because my expected upside will massively exceed any loss due to taxes -- again, it's all about perspective.
At the end of the day, the "taxes discourage business" canard only works for the ultra-rich, who already have significant capital gains to protect. For the rest of us, it's a much better deal to get guaranteed health coverage.
Canada: 8 weeks for heart surgery
America: Next Week.
Nova Scotia: 25 weeks for a specialty consult
Iowa: 1 week for a specialty consult
http://www.cbc.ca/health/story/2007/10/15/waittimes-fraser.h...
Although I think Exxon would somehow become 5,000 oil and gas exploring startups.
Wow, that's amazing.
Source: http://blogs.moneycentral.msn.com/topstocks/archive/2008/04/...
Sources:
http://money.cnn.com/2008/07/31/news/companies/exxon_profits...
http://www.pardontheinformation.com/2008/06/why-are-oil-comp...
What people get confused about is that (to my knowledge) no public-run oil firm has managed to match the efficiency of private oil firms. Even heads of state seem to get confused (or prefer to be confused, to win popularity points).
It doesn't make it "right," however.
Note: I am suggesting an AMT so if you have 10 million in assets you will pay at least (10M - 1M) * .01 = 100k in taxes, but if you would pay 101k in income + capital gains taxes nothing changes.
PS: People trying to avoid capital gains on highly appreciated assets distorts the market. This would be a "cheep" way to increase flexibility without dramatically impacting tax revenue. It most heavily impacts passive / safe investors while having little impact on those with strong 12+% returns.
And I say all this as a minimalist - all my possessions could fit in a 12x12 room.
I have a fix: Reduce spending & lower taxes. (Not libertarian style but in a true fiscal conservative sense) The government is so bloated with worthless employees, pork and shit kicking programs it's sickening.
Consider...Tens of Thousands of out of work financial types along with their lawyers. They start opening law offices and "financial services firms" because entrepreneurs can now operate tax free. Only now we are going back down this road of 'faux wealth creation' that got us here.
Now consider Tens of Thousands of out of work real estate agents who start creating 'startups' that hawk foreclosed homes.
Or Tens of Thousands of out of work mortgage brokers who start their own businesses slinging mortgages for those foreclosed homes.
Are you starting to see the concern I have?
Will these firms be considered 'startups', or part of that section of the economy that creates wealth?
How should we treat the service economy in general? Are services 'wealth'? What are they backed by?
These are very important questions. We should think through this stuff thoroughly prior to enacting policy. Questionable policy is what got us here in the first place.
BTW - I love this idea if it can be somehow restricted to people who start a company producing things that other people will pay money for. As opposed to services. This is the definition of wealth creation.
EDIT : I see payne92 has hit on a similar concern.
I'm really skeptical of the tax plans both parties are putting forward. Additionally I'm extra super skeptical of having one party completely in charge of the country, which is where it looks like we are heading.
If I understand Obama correctly, investing in startups would be tax-free but as soon as you make 250K per year we're going to zap you with extra taxes? Seems like that would reward investors, which is good, but then stick it to the sole proprietors who make it on their own (bootstrap).
So -- good news for one type of startup and bad news for another? Beats me. The tax code is a complete mess, and for one, I'm tired of politicians continuing to tinker with it to engineer society one way or another. It's dumb.
I'm not sure I approve of the whole idea, but I have to admit it would have good consequences if it were implemented correctly. However, if I could be so bold as to propose Hugh's First Law of Politics, it would be this:
The unintended consequences of any policy change are almost always more significant than the intended consequences.
And this is almost always doubly so if you're either (a) deploying the military or (b) creating a huge new tax loophole.
I foresee two problems. The first is under-defining startups. As others have pointed out by now, it's not that difficult for some rich guy to start a "startup company" in order to handle all his capital-gains producing affairs. Wanna buy an investment property? Better start a company to hold it, so that you can sell it without capital gains tax. Pretty soon you'd have a huge collection of "fake" startups which would probably swamp the real ones.
The second possibility is over-defining startups. In order to overcome the problem of fake startups, you define that a "real" startup must have properties X, Y and Z. But some day somebody might start a real startup that's so innovative in its business model that it has X and Z but not Y. Pretty soon you're actually holding back the startup scene by restricting the kinds of startups which people can produce. And at the very least, it's going to create a new administrative burden for startups, who are going to have to spend some time proving to the government that they're real startups and aren't engaging in any unstartuplike activities.
Those are the two problems I can think of, off the top of my head. There might be others which I can't think of (but which no doubt will seem obvious in hindsight).
For both problems you cite, the worst case scenario comes down to the situation without that law, right? A startup that has X and Z but not Y, will be no worse with the new law than without it. And if the "new administrative burden" wasn't worth it, startups could ignore it and pay their taxes.
You may argue that startups that fail to get the tax discount would incur a competitive penalty. I don't think this handicap would be really insurmountable for enough startups that the loss from their failure would outweight the overall gains elsewhere.
Actually, the worst case might be that the law favors some "startup" companies over others. Already, my three person startup has higher regulatory burden, relatively speaking, when it comes to taxes and payroll processing and such, than a much larger company (who can amortize their team of accountants across tens of thousands of employees). Of course, I'm not saying that it's a showstopper, or that dealing with taxes and payroll is going to kill us or keep us from competing. But, if there were a law that defined my biggest competitor as a "startup" and my company as a non-"startup", and as a result they got free money that I don't have...it warps the competitive landscape.
How big of a difference can this make? I dunno. We don't know the definition or the specifics of what the plan entails. But, for an example of what seemingly subtle favoritism can do, you need look no further than the US broadband market. I'm intimately familiar with this, as my first startup was entirely a business built on selling to independent ISPs (though it had to evolve for reasons that'll be obvious). There were thousands of them in the US ten years ago. Broadband came along, and while everyone agreed that there needed to be some way for competition to happen in the broadband space, it took a long time to come to an agreement on how the line access would be sold (because good ol' AT&T owns pretty much every phone line in the country, and local cable companies own the other option, and those folks, particularly AT&T, know how to buy a congressman). In the end the terms that were reached guaranteed that AT&T and the cable companies could offer broadband cheaper than their competitors that had to rent the lines (while, of course, making it clear to their regulatory overseers that the cost efficiencies that allowed them to sell broadband cheaper than all of their competitors were to be found in places other than the lines). The laws that were intended to allow competition to flourish was merely a subtle death warrant for every independent ISP in the country. There are now a tiny handful of alternative DSL providers that squeak by providing business class services and other premiums. Killed by small differences in the competitive landscape. Would it be so dramatic? No, probably not. But it can make a difference, and it has made a difference many times in history. There's a reason why the biggest companies in the US have teams of lobbyists working constantly for little favors. Laws that give established players just one more tiny leg up over their competitors.
I don't think that Obama's "startup" tax incentives would be any different. He is, after all, a big supporter of corn...aint nothing but lobbyist money driving that machine forward.
That's not to say I don't wish that small startups could avoid some of the regulatory and tax burden that is somewhat heavier on smaller companies. My first startup was definitely slowed down a few times when I got to the end of a quarter and realized I owed Uncle Sam twenty grand (the previous business wasn't very steady...some months were fantastic, some were awful, and taxes would sneak up at the exact wrong time: when things were going well and I needed the cash on hand to keep the good times rolling).
Anyways, I think its clumsy and stupid when Congress tries to engineer society through the tax code.
I'm all for startups, I'm all for cutting taxes, but I'm a skeptic of politicians attempts to engineer society through the tax code. At best, it smacks of the old dream of a totalitarian state where an enlightened central director plans society for the good of all. At worst, it provides an incentive for corruption (ok, pig farmers get a tax break but not cow farmers, public school teachers get a tax deduction but not homeschoolers, etc. etc.).
I say pick whatever todays average effective tax rate is round it up to the next whole % and destroy all loopholes. That way we can eliminate the economic drag that our stupid tax code produces without reducing revenue. (Ok, this will never happen but I can hope.)
http://www.youtube.com/watch?v=ivmL-lXNy64
NINJA loans made me cry. No income, no job or assets = APPROVED!
The housing market was just a convenient place to dump all the excess credit, had that not been doable the investment banks would have just found some other sector to lend to, problem would still have occurred.
The danger in talking about "deregulation" as the problem is that it makes it sound as if we can solve it for the future just by putting more regulations in place. Unless the new regulations are exactly the right ones, it'll only create new problems.
3 of the 5 companies that were allowed to do this have now sunk, the proof is in the pudding.
ACTUAL banks, the kind that take deposits and are regulated by the FDIC, have always been under strict capital adequacy rules and regulations, and can be taken over by the FDIC if they let their capital ratios fall below a certain threshold (this is the regime that the big investment banks have been put under by becoming bank holding companies or being bought by them).
It irks me when people so self-righteously blame "deregulation" for the crisis when they so obviously don't have a shred of knowledge about what they are talking about.
Citation please. And excuse me, but I do believe that even knowing about the 15:1 to 40:1 change, does qualify as a shred of knowledge.
It's not my responsibility to chase down the sources of other people's irrelevant points.
This is merely political spin that nobody is seriously buying. The game's up. The excesses absolutely rampant in an unregulated, financial industry (and in business in general) is the cause of almost all of this mess. Using unsecured real estate paper en masse in a shell game to leverage extremely unethical, naked derivatves bets was a wonderful game while it worked, and banks and the slimy MBAs who run them lived high for a while, then parachuted out rich.
Masters of the universe, I think they called themselves, right?
Republicans have had eight years, six of those with both the presidency and more of those years prior to 2000 in control of the legislature It was profitable to them and theirs to deregulate, and they did it with a vengeance. Now many of the fundamental flaws of unregulated capitalism return to roost for the thousandth time. Capitalism doesn't really allow for the simple truths that we are all interconnected, what harms you almost always comes back to harm me, and bad decisions eventually harm all of us. And here we are, watching credit dry up and the DOW plummet again on a Friday afternoon, looking downstream at a horrible impact on an entire generation of young people, brought about by the greed of a few.
Cooperation, codified via sensible regulation, is always a higher good than competition.
That doesn't sound like a deregulation problem to me, it sounds like a mis-configured regulatory system.
"Models" have nothing to do with regulation, or with the lack of ethics that has brought us to this point, other than the curious coincidence that these "models" supported and aligned so well with unbridled greed.
People are stupid, but they're not (usually) deliberately self-destructive.
Many traders in Japan use both systems, declaring profits on the Withholding Tax system and losses as taxable income, minimizing the amount of income tax paid.
Or am I missing something?
Eliminate capital gains taxes for small businesses, cut corporate taxes for firms that invest and create jobs in the United States, and provide tax credits to reduce the cost of healthcare and to reward investments in innovation. * What you have stated he said is very different, and perhaps he has changed his position.
Regardless, I would love to hear Obama explain what he means by eliminating capital gains for startups and small businesses?
There is a big diff between eliminating all capital gains taxes on start-ups and small businesses and eliminating all capital gains taxes for individuals that found/invest in start-ups and small businesses.
Small businesses and startups have very little capital gains liabilities.
Entrepreneurs that start successful companies and those that invest in them have potentially huge capital gains liabilities and the latter by definition reside in the wealth class that Obama wants to tax more.
You really think he is proposing that folks like PG, Cuban, Larry, Sergey, and Bill Gates for that matter pay no taxes on their capital gains. I think not.
The concept would encourage investment so I like it. But I want the details which have not been forthcoming.
He doesn't have to propose that because it's already law.
I don't know about PG, but the estates of the others, which will get the vast majority of what they earned, won't pay taxes when they die. At most they're going to pay capital gains on what they spend while they're alive, and even then there are some tricks.
Inheritance tax is optional if your assets are liquid enough and large enough. In short, when Gates and Buffet said that estate taxes should be higher, they were talking about taxing other people.
And you thought that they set up those foundations to do good....
Estates are currently taxed. I believe to the tune of 45% of the amount over $2 million.
As far as capital gains goes, they are due when you sell your capital. In the case of PG this most likely occurred when he sold ViaWeb. Everytime Larry and Sergey sell their GOOG stock they incur captial gains.
Obama is generally proposing raising the capital gains tax from 15% to 20% for anyone that earns over $250,000. Any startup founder that has a successful exit should make a heck of a lot more then $250k. By def an angel investor must earn $200k per year or have a net work of more than $1 million.
And that is why I want to see the details.
The key word there is "estates"; "legal estates" would be more accurate.
Gates et al move their accumulated wealth out of their legal estates into tax-free foundations and the like. So, while their legal estates may be taxed, there is almost nothing there to tax.
No, they didn't sell their stock to fund these foundations - they donated stock, which is either tax free or provides a tax benefit. Yes, those foundations serve many of the purposes of "estates". (The Gates kids and their kids and so on will always have an income.)
There are other things that they can do to shift money to their kids and grand-kids without significant tax consequences. (Yes, there's a $10k limit on some transactions, but ....)
There are things that these folk can do while they're alive to generate tax benefits that they can then use to make other sales tax free, giving them something to live on. (I don't know the legal status of the Google planes, but the planes that are available to NASA could easily generate tax benefits.)
I previously mentioned using donations to shelter income. His house offers some additional opportunities.
I think that a huge fraction of the cost went to cool custom gadgets. If Gates set up a company to research/develop those gadgets, he can deduct the "losses" when said company doesn't manage to sell them. Yes, he should pay for the gadgets themselves, but they're cheap compared to the NRE.
There are some ways to do tax-free roll-over to fund companies, so the deductions would shelter other income.
Even if Gates had to pay cap gains to fund the company that developed the gadgets, he's way ahead if the deductions are at ordinary income rates. If he both pays and deducts at cap gains rates, he's just out cap gains on the gadgets themselves.
However, like I said, I don't know how much tax planning Gates does. He has over $60B, so avoiding cap gains on $40M is like someone with $2M avoiding cap gains on a cheap used car. Then again, he may have set up a system 20 years ago to pull out money tax-free every year. Putting $40M through it may be just SOP.
My point was, however poorly made with the Gates example, that I doubt that the thought, other loopholes aside, is to eliminate capital gains tax for people that are deemed to be "rich".
Regardless, I am all for any tax incentive that provides incentives for anyone to start or invest in a startup.
I think that it's silly to consider "the thought". We should look at where we actually are and what is likely to actually happen if we make proposed changes.
Part of "where we actually are" is that the very rich don't pay estate taxes and can work around cap gains taxes, so evaluating cap gains proposals based on their effects on the very rich is silly.
Instead, we should look at people who are actually paying cap gains (and estate taxes for that matter).
Not as much as entrepreneurs who deal directly with customers - customers are less forgiving than bosses or PhD advisors. A boss may let you get away with not being productive if you're a nice enough person and trying hard to do your job, but customers want a product for their money.
Remember that the "qualified investor" rules keep most of us out of a lot of startup investments.
Just like 'McCain's idea' of buying up bad mortgages and re-negotiating new values/payments ... Hillary proposed it months ago.
Oh and davidw is right, politics as usual.
With this type of tax reduction, making investments in startups looks more appealing then other investments, driving more capital to software/biotech/chip makers etc.
If you're a founder, or an investor, or a fortunate early-employee of a startup, capital gains is the tax you'll be paying on the money you make in the event that your company gets acquired.
I say this because he has repeatedly stated "You will not see an increase in taxes if you make less than $250k per year."