Democrats want to increase federal subsidies for research, but private capital is far more important for spurring innovation.
As Democrats try to push their tax and spending bills through Congress, there is a gulf between what they are promising and what their bills would actually do.
President Joe Biden often promises high‐paying jobs, but his business tax increases would actually produce fewer jobs with lower wages. Democrats say they oppose corporate welfare, but their bills include billions of dollars in subsidies for energy companies and other businesses.
Rhetoric also differs from reality on technology policy.
Biden’s jobs plan touts “research” 20 times and “innovation “17 times. But Democrats’ proposed capital gains tax hikes would undermine research and innovation in technology hubs such as Silicon Valley. New industries and products are often pioneered by new companies. Apple, not then‐dominant IBM, pioneered the personal computer in the 1970s. Tesla is the leading electric car producer, not the major automakers. As startups, these innovative companies were funded by wealthy angel investors and venture capitalists taking big risks in the hopes of earning capital gains years down the road.
Capital gains tax hikes would discourage such risk‐taking and induce investors to shift their funds to safer dividend‐paying stocks or bonds. That would undermine the virtuous cycle in technology hubs of capital gains generated from successful startups being recycled into new rounds of startups. Elon Musk used his wealth from previous startups including PayPal to fund Tesla back in 2004. An engineer named Mike Markkula used wealth he earned at Intel Corporation to fund startup Apple back in 1977.
Leading‐edge industries need wealthy investors to take risks on entrepreneurs with potentially revolutionary ideas. That is one reason why we’ve long kept capital gains tax rates below ordinary tax rates, and it is why most high‐income nations do the same.
Our combined federal‐state capital gains tax rate of 29% is already higher than the average rate in Europe of just 19.5%. Biden’s proposed increase would push our tax rate up to 48%, more than double the European average. Democrats in the House would push our rate up to 37%.
Such tax increases would be a blow to startup investment and entrepreneurship. People considering launching technology startups would instead stay in salaried jobs because earning a smaller after‐tax gain from a startup would not be worth all the extra stress, risk, and hard work.
Higher capital gains taxes would also make it harder for startups to attract skilled workers. Tech startups are often cash‐poor, so they offer stock options to lure workers away from salaried jobs at big companies. Three‐quarters of Silicon Valley firms offer stock options to employees, which are generally taxed at the capital gains tax rate. Low capital gains taxes and stock options give startups a chance at challenging dominant companies.
If Democrats raise capital gains taxes, money will flow out of startups and technology hubs. Tech industry leaders should be up in arms. It is true that various breaks allow startup investors to reduce or defer capital gains taxes, so maybe tech leaders assume they will retain these breaks even if overall capital gains taxes rise.
However, the general thrust of Democratic proposals should be ringing alarm bells. In addition to pushing for higher capital gains tax rates, the House tax plan would reduce a capital gains break for startup investment called Section 1202. Senate Finance Committee Chairman Ron Wyden of Oregon also wants to tax gains even before stocks are sold.
Democrats want to increase federal subsidies for research, but private capital is far more important for spurring innovation. Consider that the mRNA technology behind the Moderna and BioNTech‐Pfizer COVID-19 vaccines was developed with $3 billion in funding from angel investors and venture capitalists.
Furthermore, the work of scientist Katalin Karikó at the University of Pennsylvania, who made the initial breakthroughs in mRNA, was “too far‐fetched for government grants,” reported Statnews.com . Fortunately, startups Moderna and BioNTech built on her advances, which prepared them to rapidly produce vaccines when the pandemic hit in 2020.
America is blessed with 335,000 wealthy angel investors who fund technologies and entrepreneurs that governments and big corporations overlook. It would be foolish to raise a capital gains tax barrier to such socially beneficial activity.
