
Obama to eliminate all cap gains taxes for VCs and entrepreneurs - Alex3917
I was just watching Obama live in Ohio and he said he was going to put forward a bill to eliminate all capital gains taxes for anyone investing in startups. This essentially means that entrepreneurs and venture capitalists will pay no taxes at all. This is craziness, what's going on here.
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payne92
As an entrepreneur and investor, I think Obama's proposal solves a "problem"
that doesn't really exist.

First, long term cap gains tax rates are already quite low (relative to
regular income), and I can't think of a single entrepreneurial or investor
scenario where I've seen: "gee, if tax rates were lower I'd {invest,start this
company}"

Second, it will be tough to implement in a loop-hole proof way. Every private
equity and hedge fund will be organizing "startup" projects, so they can make
take profits tax free. My guess is it will be capped, making it even less of
any sort of meaningful incentive.

My take: there are other tax areas that need work first, like code
simplification and AMT.

~~~
timr
Another suggestion: raise the tax, and use it to fund universal health
insurance -- something that will encourage entrepreneurs by making their lives
_easier_.

~~~
astine
It will certainly give them less incentive to look for a job that provide
health-care, but it won't give people any more incentive to engage in startups
in particular. You are giving people less incentive to get rich (one big
reason to begin a startup) and you are making it more difficult, by taxing
them directly. So I don't think universal health coverage will do much for
startups. It will mostly help low income and freelance laborers at the expense
of the rich and the steadily employed. This might be a good thing, but it
won't really help startups all that much.

~~~
timr
That's utter nonsense.

People don't avoid starting companies because they're afraid of the capital
gains tax on their anticipated profits (At least, people with a healthy dose
of _perspective_ don't do this).

If you're going to pick from the list of reasons that people avoid starting
companies, at the top of the list has to be the fact that most are afraid that
they'll be unable to _take care of themselves and their family_ during the
lean times. Universal health coverage is an obvious step toward alleviating
this fear. The abstract, vague notion of someday paying a (rather low) tax on
the eventual, theoretical profits from the venture doesn't even come close.

~~~
astine
I can't speak on behalf of 'people,' but I can speak on behalf of myself.
Universal health coverage would be very expensive, and if a large portion of
it were paid with capital gain's taxes, you can bet that it would effect my
decision making process of whether it was worth going through the effort to
begin a startup. It would certainly effect my strategy and golas in starting
one.

~~~
timr
_"Universal health coverage would be very expensive"_

You're focusing on the trees. Who do you think pays the private health care
premiums for your hypothetical startup? The insurance fairy?

That money comes out of your pocket, today -- not out of (speculative) future
capital gains dollars. And since it's nearly always more expensive (per head)
to insure smaller groups, you're very likely going to pay _more_ by insuring
your own small company, versus participating in a national program.

That said, I don't necessarily think that capital gains are the best place to
find money for health care. But if it came down to a choice between raising
capital gains taxes (which are quite low in this country) to fund universal
coverage, and eliminating our already meager capital gains taxes to "promote"
small business, I'd take the health care in a minute. And I'd still start a
company, because my expected upside will _massively exceed_ any loss due to
taxes -- again, it's all about perspective.

At the end of the day, the "taxes discourage business" canard only works for
the ultra-rich, who _already_ have significant capital gains to protect. For
the rest of us, it's a _much_ better deal to get guaranteed health coverage.

~~~
delackner
Given the overwhelming evidence that nationalized health care is more
efficient and humane (by definition, covering everyone), I really don't think
you will get far arguing with the holdouts that have their fingers in their
ears.

~~~
viggity
more efficient? what planet are you from?

Canada: 8 weeks for heart surgery

America: Next Week.

Nova Scotia: 25 weeks for a specialty consult

Iowa: 1 week for a specialty consult

[http://www.cbc.ca/health/story/2007/10/15/waittimes-
fraser.h...](http://www.cbc.ca/health/story/2007/10/15/waittimes-fraser.html)

------
bilbo0s
We should be careful how we structure this.

Consider...Tens of Thousands of out of work financial types along with their
lawyers. They start opening law offices and "financial services firms" because
entrepreneurs can now operate tax free. Only now we are going back down this
road of 'faux wealth creation' that got us here.

Now consider Tens of Thousands of out of work real estate agents who start
creating 'startups' that hawk foreclosed homes.

Or Tens of Thousands of out of work mortgage brokers who start their own
businesses slinging mortgages for those foreclosed homes.

Are you starting to see the concern I have?

Will these firms be considered 'startups', or part of that section of the
economy that creates wealth?

How should we treat the service economy in general? Are services 'wealth'?
What are they backed by?

These are very important questions. We should think through this stuff
thoroughly prior to enacting policy. Questionable policy is what got us here
in the first place.

BTW - I love this idea if it can be somehow restricted to people who start a
company producing things that other people will pay money for. As opposed to
services. This is the definition of wealth creation.

EDIT : I see payne92 has hit on a similar concern.

~~~
greendestiny
Apart from the other concerns over this plan, would that kind of restructuring
of the labor force into independent operators be so bad? I think labor markets
are the least efficient markets around, and I think we'd probably all be
better off if they were more flexible.

------
DanielBMarkham
Just for some background, I'm a libertarian (though not a party member)

I'm really skeptical of the tax plans both parties are putting forward.
Additionally I'm extra super skeptical of having one party completely in
charge of the country, which is where it looks like we are heading.

If I understand Obama correctly, investing in startups would be tax-free but
as soon as you make 250K per year we're going to zap you with extra taxes?
Seems like that would reward investors, which is good, but then stick it to
the sole proprietors who make it on their own (bootstrap).

So -- good news for one type of startup and bad news for another? Beats me.
The tax code is a complete mess, and for one, I'm tired of politicians
continuing to tinker with it to engineer society one way or another. It's
dumb.

------
fnazeeri
This has been part of his tax plan since at least last year. It is pretty
vague however (see section II on page 3 of his tax plan
[http://www.barackobama.com/pdf/taxes/Factsheet_Tax_Plan_FINA...](http://www.barackobama.com/pdf/taxes/Factsheet_Tax_Plan_FINAL.pdf)),
for example he doesn't define what a "startup" is (e.g. does Bill Gates have
to pay tax on his Microsoft stock?). In any case, it's not a new, off-the-
cuff, erratic policy proposal.

~~~
hugh
That's a shame, because defining a "startup" is the most crucial part of the
proposal, and I'm not convinced it can be done sensibly.

I'm not sure I approve of the whole idea, but I have to admit it would have
good consequences if it were implemented correctly. However, if I could be so
bold as to propose Hugh's First Law of Politics, it would be this:

 _The unintended consequences of any policy change are almost always more
significant than the intended consequences._

And this is almost always doubly so if you're either (a) deploying the
military or (b) creating a huge new tax loophole.

I foresee two problems. The first is under-defining startups. As others have
pointed out by now, it's not that difficult for some rich guy to start a
"startup company" in order to handle all his capital-gains producing affairs.
Wanna buy an investment property? Better start a company to hold it, so that
you can sell it without capital gains tax. Pretty soon you'd have a huge
collection of "fake" startups which would probably swamp the real ones.

The second possibility is over-defining startups. In order to overcome the
problem of fake startups, you define that a "real" startup must have
properties X, Y and Z. But some day somebody might start a real startup that's
so innovative in its business model that it has X and Z but not Y. Pretty soon
you're actually holding back the startup scene by restricting the kinds of
startups which people can produce. And at the very least, it's going to create
a new administrative burden for startups, who are going to have to spend some
time proving to the government that they're real startups and aren't engaging
in any unstartuplike activities.

Those are the two problems I can think of, off the top of my head. There might
be others which I can't think of (but which no doubt will seem obvious in
hindsight).

~~~
euccastro
Re: over-defining startups,

For both problems you cite, the worst case scenario comes down to the
situation _without_ that law, right? A startup that has X and Z but not Y,
will be no worse with the new law than without it. And if the "new
administrative burden" wasn't worth it, startups could ignore it and pay their
taxes.

You may argue that startups that fail to get the tax discount would incur a
competitive penalty. I don't think this handicap would be really
insurmountable for enough startups that the loss from their failure would
outweight the overall gains elsewhere.

~~~
mlinsey
The worst case scenario for startups, sure. For society as a whole, the first
scenario results in the loss of considerable amounts of tax revenue from
people whom the law wasn't meant to affect, and that's worse than the status
quo.

------
vaksel
How is that crazy? Entrepreneurs are the ones that drive America forward. By
encouraging investment it will make the country better and may very well
rejuvenate the economy.

~~~
Prrometheus
You know what else would rejuvenate the economy? Cutting taxes on all
businesses, and not playing favorites. America has the highest corporate tax
rate in the OECD.

I'm all for startups, I'm all for cutting taxes, but I'm a skeptic of
politicians attempts to engineer society through the tax code. At best, it
smacks of the old dream of a totalitarian state where an enlightened central
director plans society for the good of all. At worst, it provides an incentive
for corruption (ok, pig farmers get a tax break but not cow farmers, public
school teachers get a tax deduction but not homeschoolers, etc. etc.).

~~~
Retric
I think our tax rate is more about keeping acountants employed than collecting
revenue. There are an insane number of loopholes out there so it becomes a
race to see who has the most daring accounting team.

I say pick whatever todays average effective tax rate is round it up to the
next whole % and destroy all loopholes. That way we can eliminate the economic
drag that our stupid tax code produces without reducing revenue. (Ok, this
will never happen but I can hope.)

------
pxlpshr
I like Obama and I'm most likely voting for him, but he was on the team (w/
the Clintons) that's partly to blame for this big mess.

<http://www.youtube.com/watch?v=ivmL-lXNy64>

NINJA loans made me cry. No income, no job or assets = APPROVED!

~~~
jobeirne
Why would you still vote for the guy assuming you understand he had a hand in
this current mess? That doesn't make any sense to me.

~~~
SwellJoe
Because the other option _also_ had a hand in this mess? Damned if you do,
Palined if you don't.

------
known
In Japan, there are two options for paying tax on capital gains. The first,
Withholding Tax all proceeds (regardless of profit or loss) at 1.05%. The
second method, declaring proceeds as "taxable income" requires individuals to
declare 26% of proceeds on their income tax statement.

Many traders in Japan use both systems, declaring profits on the Withholding
Tax system and losses as taxable income, minimizing the amount of income tax
paid.

<http://en.wikipedia.org/wiki/Capital_gains_tax#Japan>

------
fallentimes
Just so I understand: So say a fictional company, let's call it
"TicketStumbler", were to issue dividends instead of paying salaries (or pays
minimal salaries), the investors and founders of this hypothetical company
would not have to pay taxes?

Or am I missing something?

------
lanceweatherby
Mr. Obama's official tax plan states the following:

Eliminate capital gains taxes for small businesses, cut corporate taxes for
firms that invest and create jobs in the United States, and provide tax
credits to reduce the cost of healthcare and to reward investments in
innovation. __* What you have stated he said is very different, and perhaps he
has changed his position.

Regardless, I would love to hear Obama explain what he means by eliminating
capital gains for startups and small businesses?

There is a big diff between eliminating all capital gains taxes on start-ups
and small businesses and eliminating all capital gains taxes for individuals
that found/invest in start-ups and small businesses.

Small businesses and startups have very little capital gains liabilities.

Entrepreneurs that start successful companies and those that invest in them
have potentially huge capital gains liabilities and the latter by definition
reside in the wealth class that Obama wants to tax more.

You really think he is proposing that folks like PG, Cuban, Larry, Sergey, and
Bill Gates for that matter pay no taxes on their capital gains. I think not.

The concept would encourage investment so I like it. But I want the details
which have not been forthcoming.

~~~
anamax
> You really think he is proposing that folks like PG, Cuban, Larry, Sergey,
> and Bill Gates for that matter pay no taxes on their capital gains.

He doesn't have to propose that because it's already law.

I don't know about PG, but the estates of the others, which will get the vast
majority of what they earned, won't pay taxes when they die. At most they're
going to pay capital gains on what they spend while they're alive, and even
then there are some tricks.

Inheritance tax is optional if your assets are liquid enough and large enough.
In short, when Gates and Buffet said that estate taxes should be higher, they
were talking about taxing other people.

And you thought that they set up those foundations to do good....

~~~
lanceweatherby
I beg to differ.

Estates are currently taxed. I believe to the tune of 45% of the amount over
$2 million.

As far as capital gains goes, they are due when you sell your capital. In the
case of PG this most likely occurred when he sold ViaWeb. Everytime Larry and
Sergey sell their GOOG stock they incur captial gains.

Obama is generally proposing raising the capital gains tax from 15% to 20% for
anyone that earns over $250,000. Any startup founder that has a successful
exit should make a heck of a lot more then $250k. By def an angel investor
must earn $200k per year or have a net work of more than $1 million.

And that is why I want to see the details.

~~~
anamax
> Estates are currently taxed.

The key word there is "estates"; "legal estates" would be more accurate.

Gates et al move their accumulated wealth out of their legal estates into tax-
free foundations and the like. So, while their legal estates may be taxed,
there is almost nothing there to tax.

No, they didn't sell their stock to fund these foundations - they donated
stock, which is either tax free or provides a tax benefit. Yes, those
foundations serve many of the purposes of "estates". (The Gates kids and their
kids and so on will always have an income.)

There are other things that they can do to shift money to their kids and
grand-kids without significant tax consequences. (Yes, there's a $10k limit on
some transactions, but ....)

There are things that these folk can do while they're alive to generate tax
benefits that they can then use to make other sales tax free, giving them
something to live on. (I don't know the legal status of the Google planes, but
the planes that are available to NASA could easily generate tax benefits.)

~~~
lanceweatherby
You think that Bill got that money to build that big ol house of his tax free?

~~~
anamax
I don't know how much tax planning Gates does. He may think that avoiding cap
gains on $40M (which is what I heard that his house cost) isn't worth the
trouble.

I previously mentioned using donations to shelter income. His house offers
some additional opportunities.

I think that a huge fraction of the cost went to cool custom gadgets. If Gates
set up a company to research/develop those gadgets, he can deduct the "losses"
when said company doesn't manage to sell them. Yes, he should pay for the
gadgets themselves, but they're cheap compared to the NRE.

There are some ways to do tax-free roll-over to fund companies, so the
deductions would shelter other income.

Even if Gates had to pay cap gains to fund the company that developed the
gadgets, he's way ahead if the deductions are at ordinary income rates. If he
both pays and deducts at cap gains rates, he's just out cap gains on the
gadgets themselves.

However, like I said, I don't know how much tax planning Gates does. He has
over $60B, so avoiding cap gains on $40M is like someone with $2M avoiding cap
gains on a cheap used car. Then again, he may have set up a system 20 years
ago to pull out money tax-free every year. Putting $40M through it may be just
SOP.

~~~
lanceweatherby
Fair enough, though I think that we have strayed from the topic of taxes on
capital gains on startups or investments in startups or whatever it is that
Obama is proposing.

My point was, however poorly made with the Gates example, that I doubt that
the thought, other loopholes aside, is to eliminate capital gains tax for
people that are deemed to be "rich".

Regardless, I am all for any tax incentive that provides incentives for anyone
to start or invest in a startup.

~~~
anamax
> My point was, however poorly made with the Gates example, that I doubt that
> the thought, other loopholes aside, is to eliminate capital gains tax for
> people that are deemed to be "rich".

I think that it's silly to consider "the thought". We should look at where we
actually are and what is likely to actually happen if we make proposed
changes.

Part of "where we actually are" is that the very rich don't pay estate taxes
and can work around cap gains taxes, so evaluating cap gains proposals based
on their effects on the very rich is silly.

Instead, we should look at people who are actually paying cap gains (and
estate taxes for that matter).

------
jsmcgd
Seems fair enough to me. Entrepreneurs and VCs are major wealth creators. It
doesn't make too much sense to stifle nascent wealth with blanket taxation
rules.

~~~
hugh
Except that _all_ taxpayers are wealth creators, and this would just mean
screwing the rest of 'em to benefit a small bunch.

~~~
andreyf
_Except that all taxpayers are wealth creators_

Not as much as entrepreneurs who deal directly with customers - customers are
less forgiving than bosses or PhD advisors. A boss may let you get away with
not being productive if you're a nice enough person and trying hard to do your
job, but customers want a product for their money.

~~~
kingkongrevenge
Right, because a corporation that builds a new shipping terminal or rail line
does nothing for society.

------
anamax
> I was just watching Obama live in Ohio and he said he was going to put
> forward a bill to eliminate all capital gains taxes for anyone investing in
> startups.

Remember that the "qualified investor" rules keep most of us out of a lot of
startup investments.

------
Prrometheus
Politicians say things all the time. You must be new at this.

------
rajat
It's just a favor for the rich (the cynical part of me asks how many VCs give
money to Democrats?). Most small startups, computers, software or otherwise,
are not suffering from high capital gains taxes. A general corporate tax cut
(we have the 2nd highest corporate tax rate in the world), perhaps targeted at
small companies, would be a lot more interesting.

------
noodle
i am not an expert, but i would guess that it would be temporary to stimulate
the new business area of the economy.

------
t0pj
_"More likely, you'll just get a lot of people doing things that can be made
to look on paper like startups."_

<http://paulgraham.com/inequality.html>

------
josefresco
Not crazy, and not exactly his idea (but might be a good one)

Just like 'McCain's idea' of buying up bad mortgages and re-negotiating new
values/payments ... Hillary proposed it months ago.

Oh and davidw is right, politics as usual.

~~~
jfarmer
This has been a part of Obama's tax plan from the start, FWIW.

------
dfranke
Wrong. He said he's going to eliminate capital gains taxes _on startups_ not
on _startup investors_. So if your startup buys stock in other companies and
makes a capital gain, it doesn't pay taxes on it. Hear recently of any startup
doing such a thing? No, I didn't think so.

~~~
Alex3917
"That’s why I’ve proposed eliminating all capital gains taxes on investments
in small businesses and start-ups. And today, I’m proposing an additional
temporary business tax incentive through next year to encourage new
investments."

~~~
dfranke
Hmm. That and the PDF version of Obama's position statement suggest your
interpretation. Obama's convention speech and the HTML version suggest mine. I
wonder if he's even clear on the difference.

------
ConradHex
How big a sacrifice is this? In order for capital gains to get taxed there
have to be capital gains in the first place. That look like a long shot in the
short to medium term.

------
abossy
How are capital gains relevant to software entrepreneurs? It seems like they
are assets that most early-stage companies wouldn't own and thus couldn't
profit from.

~~~
abstractbill
Capital gains are very relevant to software entrepreneurs.

If you're a founder, or an investor, or a fortunate early-employee of a
startup, capital gains is the tax you'll be paying on the money you make in
the event that your company gets acquired.

------
auston
My assumption is that this has a cap of $250k per year.

I say this because he has repeatedly stated "You will not see an increase in
taxes if you make less than $250k per year."

~~~
icey
The 250k a year discussion is related to income tax, not capital gains.

~~~
auston
Good point.

------
mrkurt
Health care's a bigger deterrent to startups than capital gains taxes are.

~~~
calambrac
He also has a healthcare plan that's pretty friendly to small businesses and
individuals.

<http://www.barackobama.com/issues/healthcare/>

------
bkmrkr
Why can't I just create a hedge fund and call it a startup? Bam no taxes.

------
davidw
It's also "politics"...

------
jdavid
this can be really great if you are starting a company and it is in pre ipo
growth mode, somethimes you have to pay tax on shares that are not sellable.

------
helveticaman
Fabulous. Kick ass.

------
Allocator2008
Senator Obama has it on the money here I think. Going back to the depression,
what was it that really got things moving and finally led to the prosperity of
the 1950's? Well, WWII, which stimulated production. The best, perhaps the
only, "way out" of a depression is new enterprise. We don't need a war for
that of course. We just need new products, new idea, new technologies, which
create new jobs and importantly "moves money" again. The problem is money is
"frozen", being "hoarded" by scared banks and investors. So giving a tax
incentive to entrepreneurs can stimulate the economy by getting start-ups a
hand-up, which gets investment money moving, which creates jobs, etc.
Socializing banks will not lead to prosperity in the long-run. Free-enterprise
will.

