Double Quote of the Week

Oct 19, 07 in Quotes

11 Comments

"When it comes to taxes, Barack Obama is no Jack Kennedy."

The Wall Street Journal.

The Journal's assessment is based on the Illinois Senator's announcement that he wants to to nearly double the captial gains tax to 28% and the quote below:

"The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy."

John F. Kennedy, 1963

I don't venture much into politics at FoG but I gotta tell you, I am not going to vote for anyone that wants to increase the capital gains tax and urge folks in the technology startup community to do the same.  Here's why.

First and foremost having a low capital gains tax encourages risk taking and investment.  Conversely, having a higher rate will discourage these activities.  Venture capital hurdle rates will increase.  Thus investment and the availability of capital to start new ventures will decrease.  As someone involved in the world of technology startups, this outcome is not something that I can support.  Moreover, this is particularly damaging to the economy because studies indicate that small businesses create anywhere from 50 percent to 80 percent of all new jobs in the United States.   The Cato Institute has much evidence to support what I have outlined here.

Beyond that, at the macro level, there is no guarantee that an increase in capital tax rates will actually produce an increase in tax revenues.  While they don't cite the source, The Wall Street Journal claims that for the past 40 years capital gain tax increases have been associated with a decrease in tax revenues.  It seems that when capital gains tax increases are put into effect investors rush to unload many of their holdings before the change takes effect.  They also have an incentive to hold onto a current investment longer to avoid paying the tax.  Like the venture investor, the hurdle rate for individual investors to make a new investment increases.  According to  Strategas Research, after the 1986 Tax Reform Act increased the capital-gains tax rate from 20 to 28 percent, capital gain tax revenue remained depressed for nearly a decade thereafter with the higher tax rate in place.  What broke the slump?  President Clinton's cut back to 20%.

Getting things a little more personal, the financial markets immediately incorporate the higher tax rate into their models.  An increase in the capital gains tax rate will result in  lower stock prices.  I know this is overly simplistic and some tax wonk is welcome to correct my logic, but given that a 5% capital gain tax cut of 2003 resulted in a 10% increase in stock values one could surmise that a 13% increase in the capital gains tax would result in a 26% decrease in stock values.  I don't know about you, but I don't want to see that.

And I won't vote for anyone that wants to increase the capital gains tax.