Friday, March 10, 2006
Cesar Conda makes an argument on how capital gains taxes are a drag on the economy...
"The capital-gains tax impedes business creation and entrepreneurship. History shows that the amount of seed-capital funding available to fledgling start-ups is highly sensitive to changes in the capital-gains tax. For example, when the top capital-gains tax was slashed from 49 percent in 1977 to 20 percent in 1983, the amount of venture-capital funding for new firms increased from $68 million to $5.1 billion - a 700 percent increase. Conversely, when the capital-gains rate was raised to 28 percent, venture-capital funding fell by almost 60 percent (between 1986 and 1991).
New business start-ups, particularly in the innovative high-technology sector, have been the engine of our economic growth and are critical to global international competitiveness. Leading-edge companies like Google, eBay, and JetBlue got their start with venture-capital funding.
Furthermore, start-ups depend heavily on equity investments by individuals - friends, family, and other informal sources - who are sensitive to the level of the capital-gains tax. In a survey of 284 new companies undertaken in the late 1980s, professors William Wetzel and John Freear of the University of New Hampshire found taxable individuals to be the major source of funds for those start-up firms, raising $500,000 or less at a time. A high capital-gains tax rate would certainly discourage equity investments by individuals.
By promoting economic growth, a zero capital-gains tax would over time produce additional tax revenue. As former Federal Reserve chairman Alan Greenspan once explained, "If the capital gains tax were eliminated - we would presumably, over time, see increased economic growth which would raise revenues for personal and corporate taxes as well as other taxes that we have." [The] major impa"