McClaughry: What a capital gains tax increase would do to angel investors

By John McClaughry

Leafing through a new Cato Institute monograph the other day, titled “How Wealth Fuels Growth: The Role of Angel Investment” by Chris Edwards, I extracted a few useful thoughts.

Flickr/401kcalculator.org

Weeding out tax loopholes that unfairly benefit the wealthiest is worth doing, but destroying the angel investor and venture capital market is a notably bad idea.

Angels are early money investors who “provide their money, effort and experience to help new businesses grow.. Angel-backed start-ups often pioneer breakthrough products and technologies that create broad-based benefits to society. … Wealthy angels fund startups that pry open rigged industries and generate competition. The best check on big corporations is vigorous competition in deregulated markets from well-funded start-ups.”

“Democrats are now proposing to sharply raise capital gains taxes. If applied to startup investing, that would kill incentives for angels and starve cash from the virtuous cycle in technology hubs of successful investors and entrepreneurs generating wealth and then plowing it back into new businesses.”

“America needs diverse sources of funding for innovative businesses, and wealthy individuals are a crucial source. Wealth is central to the nation’s entrepreneurial ecosystem, which has spawned so many great companies and advances over the decades.”

Leftists like Sens. Elizabeth Warren and Bernie Sanders constantly rail against inequality of wealth. Parenthetically, Bernie and his wife and Warren and her husband each have more wealth than the total of the lowest forty percent of citizens — keep that in mind.

Weeding out tax loopholes that unfairly benefit the wealthiest is worth doing, but destroying the angel investor and venture capital market is a notably bad idea.

John McClaughry is vice president of the Ethan Allen Institute. Reprinted with permission from the Ethan Allen Institute Blog.

Image courtesy of Flickr/401kcalculator.org
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7 thoughts on “McClaughry: What a capital gains tax increase would do to angel investors

  1. Mr. McClaughry

    Huge disparities with the very rich controlling the vast majority of wealth and resources and much of soicety having little or nothing, has always been a reciepe for instability in societies from ancient Rome to France and Russia on down. The current gap between the super rich, 1% with over 90% of the wealth in our own country, does not bode well and is an underlying cause of some of the tension and resentment that now exists in our nation.

    You make a good case regarding the value of angle investors and the capital investment market. You also mention the value of weeding out tax loopholes that benefit the weathiest. Do you or the Cato Institute have any specifics on which tax loopholes you feel should be eliminated?

    • Re: “Huge disparities with the very rich controlling the vast majority of wealth and resources and much of society [SIC] having little or nothing, has always been a reciepe [SIC] for instability in societies from ancient Rome to France and Russia on down.”

      This is, yet again, another false dichotomy.

      There have always been ‘huge disparities’ in wealth throughout human history. But that this as a recipe for instability is debatably not the case in the history of the U.S. The Founders, after all, controlled the vast majority of the wealth in their time too. People who are motivated, intellectually and physically, will always accumulate more resources than those who are unmotivated to do so.

      Historic case in point: Every attempt to legislate resource equality has always ended in disaster. The Pilgrims were some of the first to figure this out in 1623. The Commonwealth (Communism) has always led to dystopian social norms.

      The point being missed here, in the case of the United States, is that ‘the disparities’ are fluid. While there are always those with few resources and those with more resources, the people that make up these cohorts change.

      As Thomas Sowell pointed out in one of the studies he cited – Ninety-seven percent of the people in the lowest income quintile, at a given point in time, moved into higher income cohorts in 8 years or less. In Sowell’s specific study, in fact, as many people who remained in the lowest income quintile (3%), moved all the way to the highest income quintile in that 8 year period.

      Mark Zuckerberg (Facebook), Bill Gates (Microsoft), Jeff Bezos (Amazon), Elon Musk (Tesla and Space X), Jack Dorsey (Twitter), Sergey Brin (Google) and nearly everyone who invested their efforts with them, were not in the top quintile of income earners when they started their ventures.

      The question we should ask ourselves is, do people like Mr. Freitag have the wherewithal to better invest these resources on societies behalf than those who earned those resources in the first place.

      Ask yourselves, for example, what has Bernie Sanders achieved during his 30 or more years in politics as a so-called Democratic Socialist? He sponsored or co-sponsored approximately 400 bills in Congress. To the best of my knowledge, before President Biden was elected, only three of Sander’s bills have become law. One increased cost-of-living benefits for veterans. The other two renamed two Vermont Post Offices.

      Ayn Rand, for all of her misgivings, best described the false promise of legislated equality as follows.

      ”There is no difference between communism and socialism, except in the means of achieving the same ultimate end: communism proposes to enslave men by force, socialism – by vote. It is merely the difference between murder and suicide.”

      • People like Bernie are con-men and people like Mr.Freitag have fallen for them..
        They bought into their snake oil factory dreams, and we all know that Misery Loves Company. They then become Missionaries to recruit followers and to grow their numbers to work as a pack.. to then erode away the rights and power of the individual.
        Human nature plays a part in all of this too.

        • When America was at its greatest was when there the opportunities were the most and the disparities in wealth were the least. Think the 1950’s.
          While there will always be disparties in wealth, throughout history when the disparties became the greatest, societies were the least stable and/or the most repressive with the least amount of individual liberites.
          The answer of course is not socialism or communism, but how a modicurm of fairness that allows each individual to be able to reach their full potential can be achieved. When a Bill Gates or Jeff Bezos is taxed at a lower rate than most of their employees , some adjustment is in order. The weeding out of tax loopholes that benefit the wealthiest as suggested by Mr. McCluaghry in this commentary seems like a reasonable course of action.

          • This so much B. S. to unpack.

            In the 1950s we had the Rockefellers, the Fords, the DuPonts, The Mellons, Howard Hughs and J. Paul Getty, to name a few. The average annual income was $3,400 for men and $1,100 for women.

            Re: “The answer of course is not socialism or communism, but how a modicurm [SIC] of fairness that allows each individual to be able to reach their full potential can be achieved.”

            Fairness? Compare the 1950s to today. What unfairness is there? We have all sorts of social services (welfare), disability subsidies, housing subsidies, education subsidies, affirmative action, minimum wage, food stamps – all initiated since the late1960s.

            Re: “When a Bill Gates or Jeff Bezos is taxed at a lower rate than most of their employees.”

            This is nonsensical gibberish typical of most socialists. The top 10% of income earners pay 71% of income taxes. And they pay a higher ‘rate’ of their income because the tax law is progressive. The more one earns, the higher the percentage of tax paid.

            And, finally, as usual, you end with the latest in your long list of continuing false dichotomies. Yes, Mr. McClaughry said, in passing, that “Weeding out tax loopholes that unfairly benefit the wealthiest is worth doing”. But that point is anything but the crux of McClaughry’s article. It’s telling, yet again, that in your myopic economic perspective you ignore his emphasis… that “… destroying the angel investor and venture capital market is a notably bad idea”.

            Yes, this is a challenge, Mr. Freitag. An invitation for you to equivocate yet again, with yet another of your false dichotomies. To explain why you think these people pay a lower ‘rate’ of tax on their income than do their employees… “with some adjustments’ indeed.

            Then we can discuss the nuances of tax structures – e.g. ordinary income vs. capital gain, total revenue vs. total expenses, and so forth. And then we can discuss risk vs. reward, capital investment, research and development. Not to mention charitable giving.

  2. Meanwhile, the State is, apparently, already rolling in surplus money.

    State expects an ‘unprecedented’ $90 million surplus in the education fund. Where should that money go?
    https://vtdigger.org/2021/12/02/state-expects-an-unprecedented-90-million-surplus-in-the-education-fund-where-should-that-money-go/

    This gluttony is grotesque. Don’t be surprised to see officials try to hide their new-found hoard behind their collective backs, like kids caught with their hands in the cookie jar while their mouths are so full they can’t speak.

    Where should that money go? Really?

  3. Nothing the guuvmint hates worse a new and successful enterprise.

    But they love the taxes it brings!!!!

    All guvmint wants is the tax money, from business and workers tax

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