6 ms·

Missing for those in technology hoping to sell the company they build: Capital Gains Rate is likely to increase from 15% to 23.8%

by curt 14y ago

MartinCron 14y ago
From historically very low to merely historically low. I don't think this will be enough to dissuade people from building and selling things.
- curt 14y ago
  It's not that it will discourage founders, it will discourage investors since they'll need a higher return to achieve the same after tax profits. What's more likely is investors will require a larger percentage reducing the founding teams ownership stake.
  - zanny 14y ago
    I don't buy this, investors will still take as much ownership stake as they can get in the market to maximize profit regardless of how much they are taxed. Since interest rates are so low, the only real way to grow money in through investment and capital gains anyway.
    - curt 14y ago
      Sorry, but this is how I was taught and how I've seen a lot of VC's do it. They take their assumptions which include revenue projections, required rate of return, risk premium, future dilution, and of course the tax rate. They then plug those into a model to tell them what percentage / valuation they need. Of course this doesn't work well for seed stage since there's not enough information.
      - zanny 14y ago
        Don't be sorry, but think about it. Your goal as a VC is always to maximize profit. If the US capital gains tax rate goes up, that doesn't change your outlook on US based investment on a per-case basis, it just makes all of US investment look "worse" compared to other countries with lower tax rates. And honestly, that would probably not even be that bad. One of the major reasons techies talk so much about immigration reform is that people with ideas want to go to the US because that is where all the money is because nobody wants to invest outside the borders due to a combination of many factors, but tax rate is always one of them. A higher capital gains tax rate makes other markets more appealing, and I don't have the exact numbers on what other markets would be most appealing at what % hikes, but I can't imagine taking the tax rate up to even 40% would drive investors out of US markets just on the basis of how convenient America is for tech entrepreneurialism already, it reduces a ton of the risk factors involved you described.
  - markkanof 14y ago
    Investors in startups are looking for a potential 10x-30x return on their investment. We aren't talking about razor thin margins in this equation. While it is of course true that they will have to make more pre-tax to come out with the same amount post-tax, I don't think it drastically changes investors motivation to invest. Also, where else will they invest their money. The capital gains tax applies to lots of types of investments, so the risk/reward balance versus other types of investments is still the same.
kayoone 14y ago
double that and u get what a german founder would have to pay when selling the company he built. You guys dont realize that you still pay very little taxes compared to most!
- cfn 14y ago
  Here in the UK it can be as low as 10% if you qualify for "Entrepreneur Relief" or a high as 28 otherwise. It is a good deal if you qualify.
gavanwoolery 14y ago
If you sell a company for $100 million, that's almost $9 million more down the drain. Yes, countries XYZ and have it worse, but that does not necessarily make this a good thing. In general, tax hikes are bad, because the government caries little responsibility (look how reckless they have been with our budget/deficit to date). Giving more tax money to the govt. is like giving a loan to someone with a horrible credit score. Also, this technology agenda is horrible. It is not the government's job gamble tax-payer money on business ventures (even ones as appealing as "green tech") - leave that to VCs and free markets.
- r00fus 14y ago
  That's not $9M down the drain - it's $9M used to pay the US Government as your startup requires all the infrastructure, legal framework and military protection provided to get where it is (feel free to move your startup to Somalia, where I hear the taxes are close to zero). That the investor/owner portion of the tax burden will go up slightly from historically low levels doesn't belie the fact that the average American and small business owner pays even more in %. Remember - during the roaring 90s we had a much higher rate - did that stop the Googles, Yahoos, Akamais, etc?
  - curt 14y ago
    All those things you listed that a start needs from the government, they only account for about 26% of the budget. So... $6.6M down the drain.
  - uvdiv 14y ago
    it's $9M used to pay the US Government as your startup requires all the infrastructure, legal framework and military protection provided to get where it is (feel free to move your startup to Somalia, where I hear the taxes are close to zero). I think a few here would feel free to move their startups to -- Germany, with less than 1/3rd of the US' military expenses per capita [0] -- or Hong Kong, where mass transit is privatized [1] -- or Canada, where the number of lawyers per capita is 1/15th that of the US [2]. I dare say some have a positive view of all three of these statistics, despite them being technically "more Somalia-like". Not to say (not at all!) that militaries, infrastructure, and legal systems are useless and shouldn't be funded; but perhaps that they can be less funded (by taxpayers) with a net social benefit. And that the statement "we should pay more to government agencies for the benefit of startups" is not immediately obvious. [0] https://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures#SIPRI_military_expenditure_database https://en.wikipedia.org/wiki/List_of_countries_by_military_... [1] https://en.wikipedia.org/wiki/MTR https://en.wikipedia.org/wiki/MTR [2] https://www.law.harvard.edu/programs/olin_center/papers/pdf/Ramseyer_681.pdf https://www.law.harvard.edu/programs/olin_center/papers/pdf/...
prostoalex 14y ago
I'll refer you to Ken Fisher's Debunkery http://www.ken-fisher-debunkery.com/ http://www.ken-fisher-debunkery.com/ But the gist is that when you plot the capital gains rate and stock market curves on the same graph, there's no dependency, which is counter-intuitive. However, 1) Endowments, pension funds and 401k's don't care about capital gains tax rate as they're shieleded at 0% 2) Foreign buyers are exempt from US rates as long as they pay their home country rates and there's a double-taxation agreement in place 3) People don't choose to buy less, people just choose to sell less. Combined with fairly stable demand generated from (1) and (2) the price of quality assets actually tends to grow faster in high-capital-gains-tax years than in low-capital-gains-tax years. What's correlated with higher capital gains taxes is brokerage profits - sellers don't sell as frivolously.
- curt 14y ago
  Your entire premise is flawed since they all apply to companies in the stock market not a company sale. It's unrelated to my original statement but.... Investment vehicles, such as a 401k, do pay capital gains taxes just not on the sale they pay when the individual pulls the money out of the account. You're arguing for less liquidity in the market? Liquidity is a good thing because it allows the market to more efficiently deploy capital. PS... correlation does not equal causation otherwise the amount Chocolate eaten per capita has direct effect on the number of Nobel Prize winners.
  - prostoalex 14y ago
    > all apply to companies in the stock market not a company sale Nope. First off, companies in the stock markets sell, too. Second off, tax-free vehicles are used for investments in private equity, venture capital, real estate, etc. > Investment vehicles, such as a 401k, do pay capital gains taxes just not on the sale they pay when the individual pulls the money out of the account. Nope. It's all treated as regular income at the time of withdrawal, so former and current capital gains rates have no effect. I agree with your argument on liquidity - I don't argue for it, I'm just saying that net effects from increased capital gains are far more subdued than apocalyptic scenarios people usually attach to them. Excess liquidity also generates bubbles, so there's a fine line you have to walk where even though you can get a no-documents loan to buy up dozen of new real estate properties, you probably shouldn't.
deleted 14y ago
[deleted]

Missing for those in technology hoping to sell the company they build: Capital Gains Rate is likely to increase from 15% to 23.8%

by curt 14y ago

Missing for those in technology hoping to sell the company they build: Capital Gains Rate is likely to increase from 15% to 23.8%

MartinCron 14y ago

From historically very low to merely historically low. I don't think this will be enough to dissuade people from building and selling things.

curt 14y ago
It's not that it will discourage founders, it will discourage investors since they'll need a higher return to achieve the same after tax profits. What's more likely is investors will require a larger percentage reducing the founding teams ownership stake.
- zanny 14y ago
  I don't buy this, investors will still take as much ownership stake as they can get in the market to maximize profit regardless of how much they are taxed. Since interest rates are so low, the only real way to grow money in through investment and capital gains anyway.
  - curt 14y ago
    Sorry, but this is how I was taught and how I've seen a lot of VC's do it. They take their assumptions which include revenue projections, required rate of return, risk premium, future dilution, and of course the tax rate. They then plug those into a model to tell them what percentage / valuation they need. Of course this doesn't work well for seed stage since there's not enough information.
    - zanny 14y ago
      Don't be sorry, but think about it. Your goal as a VC is always to maximize profit. If the US capital gains tax rate goes up, that doesn't change your outlook on US based investment on a per-case basis, it just makes all of US investment look "worse" compared to other countries with lower tax rates. And honestly, that would probably not even be that bad. One of the major reasons techies talk so much about immigration reform is that people with ideas want to go to the US because that is where all the money is because nobody wants to invest outside the borders due to a combination of many factors, but tax rate is always one of them. A higher capital gains tax rate makes other markets more appealing, and I don't have the exact numbers on what other markets would be most appealing at what % hikes, but I can't imagine taking the tax rate up to even 40% would drive investors out of US markets just on the basis of how convenient America is for tech entrepreneurialism already, it reduces a ton of the risk factors involved you described.
- markkanof 14y ago
  Investors in startups are looking for a potential 10x-30x return on their investment. We aren't talking about razor thin margins in this equation. While it is of course true that they will have to make more pre-tax to come out with the same amount post-tax, I don't think it drastically changes investors motivation to invest. Also, where else will they invest their money. The capital gains tax applies to lots of types of investments, so the risk/reward balance versus other types of investments is still the same.

kayoone 14y ago

double that and u get what a german founder would have to pay when selling the company he built. You guys dont realize that you still pay very little taxes compared to most!

cfn 14y ago
Here in the UK it can be as low as 10% if you qualify for "Entrepreneur Relief" or a high as 28 otherwise. It is a good deal if you qualify.

gavanwoolery 14y ago

If you sell a company for $100 million, that's almost $9 million more down the drain. Yes, countries XYZ and have it worse, but that does not necessarily make this a good thing. In general, tax hikes are bad, because the government caries little responsibility (look how reckless they have been with our budget/deficit to date). Giving more tax money to the govt. is like giving a loan to someone with a horrible credit score. Also, this technology agenda is horrible. It is not the government's job gamble tax-payer money on business ventures (even ones as appealing as "green tech") - leave that to VCs and free markets.

r00fus 14y ago
That's not $9M down the drain - it's $9M used to pay the US Government as your startup requires all the infrastructure, legal framework and military protection provided to get where it is (feel free to move your startup to Somalia, where I hear the taxes are close to zero). That the investor/owner portion of the tax burden will go up slightly from historically low levels doesn't belie the fact that the average American and small business owner pays even more in %. Remember - during the roaring 90s we had a much higher rate - did that stop the Googles, Yahoos, Akamais, etc?
- curt 14y ago
  All those things you listed that a start needs from the government, they only account for about 26% of the budget. So... $6.6M down the drain.
- uvdiv 14y ago
  it's $9M used to pay the US Government as your startup requires all the infrastructure, legal framework and military protection provided to get where it is (feel free to move your startup to Somalia, where I hear the taxes are close to zero). I think a few here would feel free to move their startups to -- Germany, with less than 1/3rd of the US' military expenses per capita [0] -- or Hong Kong, where mass transit is privatized [1] -- or Canada, where the number of lawyers per capita is 1/15th that of the US [2]. I dare say some have a positive view of all three of these statistics, despite them being technically "more Somalia-like". Not to say (not at all!) that militaries, infrastructure, and legal systems are useless and shouldn't be funded; but perhaps that they can be less funded (by taxpayers) with a net social benefit. And that the statement "we should pay more to government agencies for the benefit of startups" is not immediately obvious. [0] https://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures#SIPRI_military_expenditure_database https://en.wikipedia.org/wiki/List_of_countries_by_military_... [1] https://en.wikipedia.org/wiki/MTR https://en.wikipedia.org/wiki/MTR [2] https://www.law.harvard.edu/programs/olin_center/papers/pdf/Ramseyer_681.pdf https://www.law.harvard.edu/programs/olin_center/papers/pdf/...

prostoalex 14y ago

I'll refer you to Ken Fisher's Debunkery http://www.ken-fisher-debunkery.com/ http://www.ken-fisher-debunkery.com/ But the gist is that when you plot the capital gains rate and stock market curves on the same graph, there's no dependency, which is counter-intuitive. However, 1) Endowments, pension funds and 401k's don't care about capital gains tax rate as they're shieleded at 0% 2) Foreign buyers are exempt from US rates as long as they pay their home country rates and there's a double-taxation agreement in place 3) People don't choose to buy less, people just choose to sell less. Combined with fairly stable demand generated from (1) and (2) the price of quality assets actually tends to grow faster in high-capital-gains-tax years than in low-capital-gains-tax years. What's correlated with higher capital gains taxes is brokerage profits - sellers don't sell as frivolously.

curt 14y ago
Your entire premise is flawed since they all apply to companies in the stock market not a company sale. It's unrelated to my original statement but.... Investment vehicles, such as a 401k, do pay capital gains taxes just not on the sale they pay when the individual pulls the money out of the account. You're arguing for less liquidity in the market? Liquidity is a good thing because it allows the market to more efficiently deploy capital. PS... correlation does not equal causation otherwise the amount Chocolate eaten per capita has direct effect on the number of Nobel Prize winners.
- prostoalex 14y ago
  > all apply to companies in the stock market not a company sale Nope. First off, companies in the stock markets sell, too. Second off, tax-free vehicles are used for investments in private equity, venture capital, real estate, etc. > Investment vehicles, such as a 401k, do pay capital gains taxes just not on the sale they pay when the individual pulls the money out of the account. Nope. It's all treated as regular income at the time of withdrawal, so former and current capital gains rates have no effect. I agree with your argument on liquidity - I don't argue for it, I'm just saying that net effects from increased capital gains are far more subdued than apocalyptic scenarios people usually attach to them. Excess liquidity also generates bubbles, so there's a fine line you have to walk where even though you can get a no-documents loan to buy up dozen of new real estate properties, you probably shouldn't.

deleted 14y ago

[deleted]