Tax code

Analysis: Some Proposed Tax Code Changes Would Hinder Innovation

Editor’s Note: David Gardner, Founder of Cofounders Capital in Cary, is a regular contributor to WRAL TechWire.

CARRIE – Taxes are not only a way to pay for everything governments provide, they are also a powerful tool used to influence how citizens are made to invest, save, support charity, etc.

As Congress scrambles to find ways to pay billions of dollars in new spending, nearly all of the tax incentives seem to be on the potential chopping block. In its frenzy to raise taxes, close loopholes and reduce tax breaks, it’s important for lawmakers to pause and consider why some of these tax incentives were originally put in place.

Saving tens of millions of dollars by eliminating an incentive might sound pretty good right now until you find out that it will in fact cost the government hundreds of millions in lost revenue over time, in fact exacerbating the very problem it is intended to address. .

Graphic provided by David Gardner

This is the case with some of the proposed incentive reductions, such as the 1202 exemption reduction for investing in start-ups, which I wrote previously. articles In regards to. Since 2010, several Republican and Democratic administrations have supported the 1202 exemption. It has been used effectively to encourage investors to direct their dollars to early stage businesses in the United States. It helps offset the risk of investing in startups by offering investors a zero federal tax rate on earnings if the investor meets criteria such as holding the investment for at least five years. Unfortunately, the currently proposed Biden plan would cut that rate in half. Other proposed reductions will make it more difficult for investors to invest in companies at an early stage from their IRA accounts or even to qualify as accredited investors to invest. Such changes add to a great deterrent from investing in early stage companies in the United States.

Why is this the wrong area to reduce incentives?

David Gardner (photo of Capital co-founders)

In recent years, investors have turned to increasingly larger venture capital funds where risk and returns are generally lower. This trend is well documented in many reports and my own precedent publications.

Big funds should write big checks so that they don’t make early-stage investments. This has created a growing shortage of start-up capital, which is a particular problem as start-ups are not only where most of our innovations occur in the United States, but also where almost all of them come from. later stage companies. The whole innovation ecosystem begins to crumble if the money for early stage companies dries up for too long.

The proposed change will discourage entrepreneurs from setting up businesses and start-ups from investing. Many investors will simply move their portfolios to international markets or other U.S. sectors such as real estate where tax incentives continue to abound. This would be particularly punctuated in North Carolina, where our tax code follows that of the Fed, creating an even greater deterrent.

With all the focus on corporations, let’s not forget that 75% of corporate taxes are paid by small businesses, not large corporations. If those dollars run dry, many of these businesses will not start up and this could create an even bigger tax deficit in the future. Yes, we need more tax revenue now, but we also need to avoid any knee-jerk legislation that could make our fields fallow even more in the years to come.

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