On both sides of the Atlantic, governments are considering increasing taxes, especially those faced by investors. Among the proposals are increases to capital gains tax — the taxes that accrue on increases in the value of investments when they are realised. Added to that are proposed changes in the tax treatment of carried interest — rewards to investors who successfully invest funds entrusted to them by large institutions.
Not surprisingly, these suggestions have caused concern in the venture capital community. Moreover, evidence suggests that taxing the investors and entrepreneurs who are funding the next generation of start-ups is a counterintuitive move by policymakers who are also seeking to drive innovation and economic growth. Based on US evidence, when capital gains goes up, investment in start-ups declines.
That said, political reality suggests that capital gains increases are almost inevitable. So a different question is how this moment might be used to drive venture capital towards outcomes that matter most for our societies. What if we maintain lower rates for investment activities that drive innovation?