Archive for April, 2007

Capital games tax

Thursday, April 26th, 2007

I’ve been involved with several startups over the years. I’ve watched some CEOs successfully raise a lot of equity. I’ve also tried it myself, with much more limited success.

It’s an article of faith that entrepreneurs and their investors should be rewarded for their risk taking, because society benefits from the new technologies and jobs that are created by these ventures. Among the rewards is favorable capital gains treatment, whereby investment assets are taxed at lower rates than ordinary income. Knowing how difficult it is to raise venture capital, and the small likelihood of success, I don’t think the capital gains tax rate for startups is low enough! I would favor complete forgiveness of these taxes.

One thing I don’t understand however, is why stock trading in the public markets receives favorable treatment. Buying and selling shares of AT&T, or Intel, Amgen, etc., doesn’t create any new jobs. There is no new stock issued when you buy shares on an exchange, and the publically traded company receives no infusion of capital with which to buy new equipment or expand the business. Society does not receive the benefits of new technologies, services and jobs, so stock trading just should not be entitled to favorable tax treatment. It’s income just as surely as your paycheck, and should be taxed as such.

I propose the creation of a special warrant attached to new stock issues — a tax appreciation warrant which can be used once, and only once to avoid capital gains taxes. This would encourage investors to infuse capital into companies so they can improve their balance sheets, invest in equipment, R&D, jobs, etc. The warrant can be exercised by the original investor, or transferred to whomever purchases the shares (they would presumably carry a premium), but only one person would get the capital gains tax break. Why allow transfer? To encourage investors to buy the new shares in the first place, since the tax appreciation warrant might enhance the shares’ liquidity.