Editor’s Note: David Gardner, Founder of Capital of the co-founders at Cary, is a regular WRAL TechWire contributor.
CARY- Taxes are not just a way to pay for everything governments provide, they are also a powerful tool used to influence how citizens are incentivized to invest, save, support charities, and more.
As Congress scrambles to find ways to pay for trillions of dollars in new spending, nearly every tax incentive seems to be on the potential chopping block. In its frenzy to raise taxes, close loopholes, and cut incentive tax breaks, it’s important for lawmakers to stop and ask why some of these tax incentives were put in place in the first place.
Saving tens of millions of dollars by eliminating an incentive might sound pretty good right now until you find out that it will actually cost the government hundreds of millions of dollars in lost revenue down the road, actually exacerbating the problem even targeted.
This is the case with some of the incentive reductions offered, such as the reduction of the 1202 exemption for investing in start-up businesses that I have written about previously. articles on. Since 2010, several Republican and Democratic administrations have backed 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 gains 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 harder for investors to invest in early-stage businesses from their IRA accounts or even qualify as accredited investors to invest. Such changes add up to a big disincentive to invest in early-stage companies in the United States.
Why is this the wrong area to reduce incentives?
In recent years, investors have turned to increasingly large venture capital funds where risk and returns are generally lower. This trend is well documented in many reports and my own past editions.
Large funds have to write large checks so as not to make early-stage investments. This has created a growing lack of start-up capital, which is a particular problem because start-ups are not only where most of our innovation happens in the United States, but also where almost all of the business originates. in the start-up phase. The whole innovation ecosystem begins to crumble if the money for start-ups dries up for too long.
The proposed change will discourage entrepreneurs from starting businesses and start-ups from investing in them. Many investors will simply shift their portfolios to international markets or other US sectors such as real estate where tax incentives continue to abound. This would be particularly punctuated in North Carolina, where our tax code follows the Fed’s, creating an even bigger deterrent.
With all the attention given to corporations, let’s not forget that 75% of business taxes are paid by small businesses and not by large corporations. If those dollars run out, many of those businesses won’t start, and that 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 leave our fields even more fallow in years to come.