Did you know that if you invest in startups, you pay no taxes on the gain? Zero taxes will accentuate a trend I see just beginning to happen.
Taxes rarely if ever enter into the decision to invest in a startup company. So many fail, that you are more likely to get a tax write off than worry about paying taxes on any gains! But, in the new tax law anyone that buys stock, holds it and sells off a gain got a tax increase of 59%.
Taxes are not revenue generators. They are incentives for behavior.
Because there was a massive increase in taxes on stock investing, it’s going to decrease the amount of risk capital dedicated to stocks. Further, Sarbanes Oxley created poor incentives to publicly list a company, and Dodd-Frank increased the cost to access capital at banks.
Worldwide, investors and companies have seen increased regulation in financial marketplaces by governments. They have also seen increased government interference through higher taxes and poor fiscal/monetary policy. It’s hard to imagine that every government worldwide could be so screwed up, but they are.
Private investors are losing trust in public marketplaces. It’s not because of HFT, that’s a symptom. It’s because they keep getting burned because the structure of the marketplace is so tiered they know they don’t have a fair chance. Governments, through their regulatory policy, have codified the stacked rules of the game.
All this is giving private investors pause and capital is starting to leak out of public markets into the private marketplace which is relatively unregulated. Combine all that with a tax incentive that allows you to keep gains of $10M or 10X (whichever is greater) tax free and the trickle could become a tsunami.
Networks are being established via the internet, so we don’t need personal networks to find and gain access to risk capital. Angellist, Funding Circle, and other internet startups are tapping into this trend. Community banks are going bust, but there are other sources of debt capital emerging to fill the void.
It’s interesting to watch, and nimble thinkers will be able to take advantage of the trend. This is one that won’t go away for a while. The era of big government finance will be here for a long long time.