A truly astonishing statistic from the SF Chronicle, via Battelle - fully one eighth of California's income tax receipts from last year was derived from capital gains on insider sales of Google stock. Think about that. One company, admittedly an incredibly successful one. But still. One-eighth of the income tax revenues for the most populous state in the country. Astonishing.
Now this takes place in a state that taxes capital gains at the same rate as ordinary income, a top rate of 10.3%. Yet I don't imagine that any of the Googlers who invested time, sweat, or venture capital in Google regrets it, or would have chosen a different investment because of a potential capital gains tax burden.
So when the Republican congress managed to pass $70 billion in tax breaks, headlined by a reduction in the capital gains tax, this past week, it made me wonder...will this reduction really mean more investment in new companies and new jobs?
Despite high tax rates in California, entrepreneurs continue to put their companies here, and VC firms and their partners continue to live here and pay our state taxes. The initial Google investments were made long before the initial passage of the tax cuts congress just extended.
I'd love to hear from some of the VCs out there - if an entrepreneur comes in with a borderline investment proposition...almost good enough, but you're just not sure, will the lower capital gains tax rate make you pull the trigger on a deal you'd otherwise pass on? Somehow I doubt it.
Now, I'm sure that people investing in a wide range of areas will balance their portfolio based on such things as returns, risk, and the tax rate on those returns. Perhaps this will mean that such investors will put a marginally larger share in private equity investments, and our VC firms will have an easier time raising funds. But I kinda doubt it would be significant. There are an awful lot of investment categories that are taxed as capital gains but don't involve capital going directly to new jobs. Any reduction in the capital gains rate will make all of them more appealing - real estate speculation, day trading, you name it. People with money invest it, and people with successful investments pay taxes.
As an entrepreneur, I aspire to pay massive capital gains taxes, and hope my investors will face the same burden as a result of my company's success.