Capital Gains Taxes, Innovation and Growth (CRS Report for Congress)
Premium Purchase PDF for $24.95 (15 pages)
add to cart or
subscribe for unlimited access
Pro Premium subscribers have free access to our full library of CRS reports.
Subscribe today, or
request a demo to learn more.
| Release Date |
July 14, 1999 |
| Report Number |
RL30040 |
| Report Type |
Report |
| Authors |
Jane G. Gravelle, Government and Finance Division |
| Source Agency |
Congressional Research Service |
Summary:
The growth effect of cutting capital gains taxes on innovation, where lower capital gains taxes
may
encourage investment in new, "high-tech" firms, has been a subject of continued interest. A recent
Congressional Budget Office study, while concluding a limited and uncertain effect on growth
induced by capital gains tax cuts through normal savings and investment channels, noted a lack of
evidence on the effect through new firm formation.
The belief on the part of many venture capital advocates that the capital gains tax plays an
important role developed because the slump and recovery in the venture capital market in the
seventies and early eighties was associated with a rise and fall in the capital gains tax. More recent
evidence, however, indicates that there is no apparent relationship between venture capital
investments and the capital gains tax.
There are several reasons why the effect of capital gains taxes on growth through investment
in firms would be expected to be small. First, most capital gains accrue to mature firms and real
estate; only a small share is associated with small and new firms. Most formal venture capital is
provided by institutional investors not subject to the capital gains tax. Secondly, a capital gains tax
cut will not specifically favor this type of investment, but will benefit a wide range of investment
opportunities. Indeed, it could actually discourage such investment by reducing the present
differential tax benefit for new stock issues. Nor is the capital gains tax likely to be an efficient
mechanism to encourage acquisition of skilled executives through stock options, since these stock
options are often not subject to the capital gains tax and since only a tiny fraction of gains is
associated with stock options.
It might be possible to devise more targeted provisions, although such provisions tend to be
complex and may, themselves, be relatively unsuccessful in stimulating investment. This report will
be updated as developments warrant.
