Capital Gains Taxes, Venture Capital, and Innovation

Here is an interesting piece of analysis looking at capital-gains taxes and the venture capital industry from economic consultant Gerard Jackson.

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Plenty of Democrats, including presidential candidates Barack Obama and John Edwards, are talking about rolling back the 2003 capital-gains-tax cut. Here is an interesting piece of analysis looking at capital-gains taxes and the venture capital industry from economic consultant Gerard Jackson:

In 1978 Congress for once did the sensible thing and slashed capital gains taxes: This resulted in the supply of venture capital exploding. By the start of 1979 a massive commitment to venture capital funds had taken place, rising from a pathetic $39 million in 1977 to a staggering $570 million at the end of 1978. Tax collections on long-term capital gains, despite the dire predictions of Keynesian big-spending critics of tax cuts, leapt from $8.5 billion in 1978 to $10.6 billion in 1979, $16.5 billion in 1983, and $23.7 billion in 1985. By 1981 venture capital outlays had soared to $1.4 billion, and the total amount of venture capital had risen to $5.8 billion. In 1981 the maximum tax rate on long-term capital gains was cut to 20 percent. This resulted in the venture capital pool surging to $11.5 billion. Astonishingly enough—to conventional economists, that is—venture capital outlays rose to $1.8 billion in the midst of the 1982 depression. This was about 400 percent more than had been out-laid during the 1970s slump. In 1983 these outlays rose to nearly $3 billion....In 1982 the U.S. General Accounting Office sampled 72 companies that had been launched with venture capital since the 1978 capital-gains tax cut. The results were startling. Starting with $209 million dollars in funds, these companies had paid $350 million in federal taxes, generated $900 million in export income, and directly created 135,000 jobs.

My take: We often forget that the foundation of the '90s economic and productivity boom seems to have been built in the '80s.


TAGS:
economics
corporate taxes

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