Obama to eliminate all cap gains taxes for VCs and entrepreneurs

https://news.ycombinator.com/item?id=328841

by Alex3917 • 18 years ago

82 91 18 years ago

news.ycombinator.com

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.

noodle• 18 years ago

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

davidw• 18 years ago

It's also "politics"...

jsmcgd• 18 years ago

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.

hugh3• 18 years ago

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

andreyf• 18 years ago

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.

joeter• 18 years ago

Well, entrepreneurs are creating additional job opportunities for the economy at large. So if the tax cut creates a more favorable environment for entrepreneurship, there will be more entrepreneurs, and then more jobs should be available. Doesn't seem like the tax payers (who I assume you mean those whose majority of earnings are taxed under income tax rates) are really loosing out when they have more opportunity and a wider job selection.

josefresco• 18 years ago

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• 18 years ago

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

fnazeeri• 18 years ago

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...), 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.

hugh3• 18 years ago

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• 18 years ago

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.

Prrometheus7• 18 years ago

We used to raise funds for startup companies in the several hundred million dollar range. Raising several hundred million dollars to buy financial assets (like, say, distressed debt) with an experienced millionaire management team is a very different kind of startup from the kind Mr. Graham and company fund.

Anyways, I think its clumsy and stupid when Congress tries to engineer society through the tax code.

vaksel• 18 years ago

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.

opal• 18 years ago

Crazy in that it's a big shift. Crazier if it actually happens. I don't see anyone saying that it's a bad idea though.

Prrometheus7• 18 years ago

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.).

Retric2• 18 years ago

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.)

ConradHex• 18 years ago

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.

anamax5• 18 years ago

> 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.

known3• 18 years ago

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

auston2• 18 years ago

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• 18 years ago

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

auston2• 18 years ago

Good point.

pxlpshr2• 18 years ago

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• 18 years ago

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.

DougBTX• 18 years ago

Not everything is black and white, he could still like him for other reasons, or even just like him more than the other guy.

pxlpshr2• 18 years ago

Because I believe people learn from their mistakes...

SwellJoe2• 18 years ago

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

gnaritas3• 18 years ago

Bad loans did not create the mess, they are a symptom of the mess. Excess credit caused by some serious deregulation is what created the mess. Once the excess credit was available, banks wanted to leverage it and that started bad loan crap because they can't profit of their newly available leverage if they don't loan it to someone. The dems are not to blame here, mostly the republicans are.

The housing market was just a convenient place to dump all the excess credit, had that not been doable the investment banks would have just found some other sector to lend to, problem would still have occurred.

hugh3• 18 years ago

I don't think it makes sense to talk about "deregulation" as the problem. The problem is mis-regulation. No doubt some aspects of banking were over-regulated and others were under-regulated, but the real problem is that the regulations which were in place were the wrong ones.

The danger in talking about "deregulation" as the problem is that it makes it sound as if we can solve it for the future just by putting more regulations in place. Unless the new regulations are exactly the right ones, it'll only create new problems.

logjam2• 18 years ago

Uh, no. "Clinton did it" ain't gonna cut it (right wingers are even trying desperately to blame CARTER...whose presidency ended almost thirty years ago) for "the mess".

This is merely political spin that nobody is seriously buying. The game's up. The excesses absolutely rampant in an unregulated, financial industry (and in business in general) is the cause of almost all of this mess. Using unsecured real estate paper en masse in a shell game to leverage extremely unethical, naked derivatves bets was a wonderful game while it worked, and banks and the slimy MBAs who run them lived high for a while, then parachuted out rich.

Masters of the universe, I think they called themselves, right?

Republicans have had eight years, six of those with both the presidency and more of those years prior to 2000 in control of the legislature It was profitable to them and theirs to deregulate, and they did it with a vengeance. Now many of the fundamental flaws of unregulated capitalism return to roost for the thousandth time. Capitalism doesn't really allow for the simple truths that we are all interconnected, what harms you almost always comes back to harm me, and bad decisions eventually harm all of us. And here we are, watching credit dry up and the DOW plummet again on a Friday afternoon, looking downstream at a horrible impact on an entire generation of young people, brought about by the greed of a few.

Cooperation, codified via sensible regulation, is always a higher good than competition.

DanielBMarkham2• 18 years ago

Wasn't there an article posted on HN in the last two weeks about how these things worked from inside the IT part of the industry? The computer models were perfectly fine at managing the complexity of the fractional mortgage instruments but in the heat of trading nobody updated the splits and the models were managed by institutions who had a conflict of interest.

That doesn't sound like a deregulation problem to me, it sounds like a mis-configured regulatory system.

astine3• 18 years ago

Pretending that the current administration and bankers are not responsible for the current problem would be wrong. But is true that the Clinton administration put into place many of the laws which gave banks the incentive give out the bad loans in the first place, and so also share a good amount of responsibility.

abossy• 18 years ago

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.

fallentimes5• 18 years ago

Anyone can issue dividends :).

dmix• 18 years ago

A healthy capital market (VC/angel) is always good for the high-technology industry.

With this type of tax reduction, making investments in startups looks more appealing then other investments, driving more capital to software/biotech/chip makers etc.

abstractbill• 18 years ago

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.

fallentimes5• 18 years ago

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?

bilbo0s• 18 years ago

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• 18 years ago

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.

payne92• 18 years ago

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.

timr3• 18 years ago

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

astine3• 18 years ago

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.

known3• 18 years ago

aka http://en.wikipedia.org/wiki/Flexicurity

steveplace• 18 years ago

Last time I heard about this, he mentioned small businesses with revenue under XXX,XXX dollars would have this tax benefit.

Although I think Exxon would somehow become 5,000 oil and gas exploring startups.

chriskelley• 18 years ago

With a projected $550 Billion revenue, they would actually need to break into 550,000 startups to keep them all under $1 Million.

Wow, that's amazing.

Source: http://blogs.moneycentral.msn.com/topstocks/archive/2008/04/...

Retric2• 18 years ago

I think the best way to use taxes to stimulate investing is to have an AMT that taxes total net assets. A flat 1% AMT on assets over 1 million would let someone liquidate ~4% of their holdings a year without negative tax consequences and "Safe" investments are going to look less attractive.

Note: I am suggesting an AMT so if you have 10 million in assets you will pay at least (10M - 1M) * .01 = 100k in taxes, but if you would pay 101k in income + capital gains taxes nothing changes.

PS: People trying to avoid capital gains on highly appreciated assets distorts the market. This would be a "cheep" way to increase flexibility without dramatically impacting tax revenue. It most heavily impacts passive / safe investors while having little impact on those with strong 12+% returns.

fallentimes5• 18 years ago

I don't like the idea of recurring taxes (even though many of them exist). Why should you be penalized each year for what you own? I could understand taxes on net worth "additions" but even then... Also, how does one properly assess their net worth let alone thousands (millions?) of people? It sounds like more government TPS, red tape and paper work will be involved.

And I say all this as a minimalist - all my possessions could fit in a 12x12 room.

I have a fix: Reduce spending & lower taxes. (Not libertarian style but in a true fiscal conservative sense) The government is so bloated with worthless employees, pork and shit kicking programs it's sickening.

known3• 18 years ago

Sometime back I read Americans prefer Mobility and Opportunities.

rajat• 18 years ago

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.

mrkurt• 18 years ago

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

calambrac• 18 years ago

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

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

bkmrkr• 18 years ago

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

Prrometheus7• 18 years ago

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

DanielBMarkham2• 18 years ago

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.

jdavid• 18 years ago

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.

lanceweatherby4• 18 years ago

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.

anamax5• 18 years ago

> 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....

lanceweatherby4• 18 years ago

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.

helveticaman• 18 years ago

Fabulous. Kick ass.

t0pj• 18 years ago

"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

dfranke2• 18 years ago

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• 18 years ago

"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."

dfranke2• 18 years ago

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.

Allocator2008• 18 years ago

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.

Obama to eliminate all cap gains taxes for VCs and entrepreneurs

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