cover image: How Democrats’ Capital Gains Tax Hikes Would Damage Innovation

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How Democrats’ Capital Gains Tax Hikes Would Damage Innovation

29 Sep 2021

As Democrats try to push their tax and spending bills through Congress, there is a gulf between what they are promising and what their bills would actually do.President Joe Biden often promises high‐​paying jobs, but his business tax increases would actually produce fewer jobs with lower wages. Democrats say they oppose corporate welfare, but their bills include billions of dollars in subsidies for energy companies and other businesses.Rhetoric also differs from reality on technology policy.Democrats want to increase federal subsidies for research, but private capital is far more important for spurring innovation.Biden’s jobs plan touts “research” 20 times and “innovation “17 times. But Democrats’ proposed capital gains tax hikes would undermine research and innovation in technology hubs such as Silicon Valley. New industries and products are often pioneered by new companies. Apple, not then‐​dominant IBM, pioneered the personal computer in the 1970s. Tesla is the leading electric car producer, not the major automakers. As startups, these innovative companies were funded by wealthy angel investors and venture capitalists taking big risks in the hopes of earning capital gains years down the road.Capital gains tax hikes would discourage such risk‐​taking and induce investors to shift their funds to safer dividend‐​paying stocks or bonds. That would undermine the virtuous cycle in technology hubs of capital gains generated from successful startups being recycled into new rounds of startups. Elon Musk used his wealth from previous startups including PayPal to fund Tesla back in 2004. An engineer named Mike Markkula used wealth he earned at Intel Corporation to fund startup Apple back in 1977.Leading‐​edge industries need wealthy investors to take risks on entrepreneurs with potentially revolutionary ideas. That is one reason why we’ve long kept capital gains tax rates below ordinary tax rates, and it is why most high‐​income nations do the same.Our combined federal‐​state capital gains tax rate of 29% is already higher than the average rate in Europe of just 19.5%. Biden’s proposed increase would push our tax rate up to 48%, more than double the European average. Democrats in the House would push our rate up to 37%.Such tax increases would be a blow to startup investment and entrepreneurship. People considering launching technology startups would instead stay in salaried jobs because earning a smaller after‐​tax gain from a startup would not be worth all the extra stress, risk, and hard work.Higher capital gains taxes would also make it harder for startups to attract skilled workers. Tech startups are often cash‐​poor, so they offer stock options to lure workers away from salaried jobs at big companies. Three‐​quarters of Silicon Valley firms offer stock options to employees, which are generally taxed at the capital gains tax rate. Low capital gains taxes and stock options give startups a chance at challenging dominant companies.

Authors

Chris Edwards

Published in
United States of America