Tax Increase for Founders

A note from our editor, Elizabeth MacBride

When the pandemic hit two years ago, I was staying at my friend Dina’s apartment in Boston. I switched my plane ticket to go home early and laid on the couch that night, sleepless. I’d just launched Times of E, with about four to five months worth of funding. If the world economy shuddered deeply, how would I feed my kids? I decided to write every story myself for a few months to conserve my capital. I did that, and the company survived.

I believe fundamentally that people who start companies should be able to earn a reward for the risk they take. I also believe the government has a right to tax people for the services and support it provides. Thank God for vaccines.

Those fundamental ideas aren’t necessarily at odds, but in our divided society, they are coming to be. Right now, Congress is considering a measure that would reduce the current exclusion on capital gains tax available to all employees, founders and investors. The new measure would exclude those earning more than $400,000 per year.

I think it’s interesting that for purposes of this part of the tax code, investors, and entrepreneurs are treated the same way. I see this often. In a two-sided conversation — government v. capital — the nuances get lost.

In our current divided political conversation, entrepreneurs and investors are being lumped in together, as “capitalists” or “private owners.” Indeed, Silicon Valley and tech entrepreneurship arguably grew up because a new form of finance, venture capital, shared some of the risk of company-building with founders – and the government provided the financing for the whole industry.

Much has changed since the middle of the 20th century. The financial services sector has exploded in size – some estimates have it as high as a quarter of the world economy. We have rich incentives already built into the tax code for investors (consider the capital gains tax in general).

Meanwhile, more than 80% of entrepreneurs receive no outside funding at all, and the banking sector has consolidated so much that it’s increasingly expensive and difficult for entrepreneurs to access basic financial services even after they have thriving companies.

As we’re thinking about how to fix the financing system for entrepreneurs, it’s worthwhile to separate the roles financiers, investors and entrepreneurs play in the system. We need more investors, but we need more entrepreneurs most of all.

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We’re in an anti-capitalist moment – that’s one of the themes we’re exploring at our first event, Challenges Met, Opportunities Ahead, for university entrepreneurship professors, professionals and students. More info here: https://timesofe.com/events/.