Trying To Stimulate Innovation with Tax Cuts

When one reads the Economist’s Special Report on The Collapse of Manufacturing, Tom Friedman’s book Hot Flat and Crowded, the Booz and Hamilton book on Manufacturing – Make or Break, or the Obama Administration’s Agenda Paper – it becomes obvious that US industry is going to need an extra heavy dose of innovation and entrepreneurship to cope with problems in energy, envirionment, health and manfacturing . This proposal is designed to encourage both.The idea is to make the initial sales of shares for a startup company a bit sweeter for initial investors:1)the first capital gains applicable sale of the start up shares will be at 0%; thereafter shares will have the regular capital gains rate apply;2)the startup must be in an industry approved by Congress;3) a secondary offering of 0% capital gains shares based on 1/2 of the original number of shares sold will apply ; any additional shares issued beyond this secondary offering will not be eligible for inital 0% capital gains.Given that capital gains tax rates start at 5% but can climb to 35% – the cost to the US Treasury will still be relatively small; but to start ups seeking capital this extra boost can be very helpful in attracting investors.Again small but simple and targetted will hopefully work better than trickle down tax cuts for the rich. However, the broader issue is how to cultivate both investment and innovation in industries that are going to create jobs. I remember the 1964 Worlds fair in New York where the projections were that people would work less with gobs of leisure time as more jobs were automated. Now the problem worldwide is to create enough well paying jobs so that everyone can earn a decent living wage. In fact steady, reasonably paid jobs for your populace is the most precious resource valued by politicians of every persuasion.But as you can see from the table below existing capital gains held for a long term – “more than one year” will have a 0% rate. So the problem remians on how to foster projects that generate good jobs. Conclusion – there is not a lot of tax room to work with.

Capital Gains Tax Rates

Type of Capital AssetHolding PeriodTax Rate
Short-term capital gains (STCG)One year or lessOrdinary income tax rates up to 35%
Long-term capital gains (LTCG)More than one year5% for taxpayers in the 10% and 15% tax brackets (zero percentstarting in 2008)
15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets
CollectiblesOne year or lessSTCG tax rates up to 35%
CollectiblesMore than one year28%
Small Business Stock Gains (Section 1202)More than five years28% on the gain not excluded
Real Estate Main HomeOne year or lessSTCG

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