July 25, 2013 5:44PM

Entrepreneurs and Capital Gains Taxes

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I testified to the Senate Small Business Committee

last week about capital gains taxation.

I noted to the committee that reduced capital gains taxes can generate greater financing of young companies by angel investors and venture capitalists. Lower capital gains taxes can also encourage people to become entrepreneurs because the payoff from a successful start-up is improved compared to a wage job. Entrepreneurs put their own money into their ventures and want to maximize the financial returns from their hard work and sacrifice.

The higher capital gains taxes that were recently enacted risk killing off future Apples and Amazons, which we will need to power tomorrow's economic growth. Congress raised the top federal tax rate on long-term capital gains from 15 percent to 23.8 percent. When state-level taxes are included, the average top U.S. tax rate on long-term capital gains is 27.9 percent.

U.S. policymakers need to understand that capital gains are different than ordinary income, which is why most nations have top capital gains tax rates that are much lower than their top rates on ordinary income. The U.S. capital gains tax rate is much higher than the average rate of just 16.4 percent in the 34 nations of the Organization for Economic Cooperation and Development (OECD).

Long-term capital gains should be subject to low or zero tax rates. Hopefully, federal policymakers will reconsider capital gains tax policy in coming months and reduce our tax rate to at least the average rate of our OECD trading partners. A lower capital gains tax rate would boost innovation, spur entrepreneurship, and help America regain its competitive edge.

See my recent report for a full discussion.