Cut Capital Gains, Not Incentives – Entrepreneurial Support is the Key to Economic Growth

Sustainable opportunities and growth for American citizens will not happen without economic support for entrepreneurs and their missions. Obama’s state of the union address touched on the possibility of a reduction in capital gains taxes, perhaps for one year, to incentivize investments in new businesses to drive job creation.

According to a Kauffman Foundation report, cited in recent editorials by Thomas L. Friedman and Peter Cohan; from 1980-2005 firms less than five years old accounted for all net job growth in the United States.

However, a key component of the “entrepreneurial ecosystem” which both Friedman and Cohen seem  to underemphasize in their analysis is the positive impact a longer-term tax incentive to prospective investors would have in jump-starting potential start-ups that could boost our economy and lower unemployment rates.

92 percent of Americans say entrepreneurs are critically important to job creation; 75 percent think the United States cannot have a sustained economic recovery without another burst of entrepreneurial activity.

We at Spencer Trask have seen over 20 years in the business and new ventures need more than one year to get off the ground and begin generating revenue and profits for investors. One year of capital gains cuts won’t cut it.

Our take on an ideal legislative change to successfully incent investment in new companies by High Net Worth (HNW) individuals: implement zero capital gains tax rate for 100 percent of capital gains resulting from a startup investments over the next five years. This would provide an irresistible lure to get HNW investors back into the startup game, especially given impending tax doom (real or perceived) as a result of federal spending and state deficits.