Why Low Capital Gains Rates Punish Family Business Ownership

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This is from the States again, but is another article that translates well:

The hoariest of tax chestnuts is that capital gains need to be taxed at a lower rate than labor to encourage capital formation and grow the economy. Because US economic growth depends on the growth of family businesses and entrepreneurs, rather than international corporations whose stock is publicly-traded, lowering capital gains threatens economic growth not enhances it. Low capital gains rates lower the cost of capital for international corporations by raising the price of publicly-traded stocks. Family business owners and entrepreneurs rely on bank financing to start and usually finance growth from their earnings. Under current law, however, grocery store owners, for example, would pay a 35% income tax on any profits from reinvesting in their own businesses, but only a 15% tax if they invested in one of their large public company competitors like Walmart or Target. This shows the failure of the current tax system.

I know that small enterprises in the UK do enjoy the lowest capital gains tax rates, but that rate only applies at the point of sale. Very few small businesses are created with a sale in mind. It is a distortion resulting from the involvement of private equity in this market that has given rise to the notion that every entrepreneur starts their business with an exit route in mind.

Most are unincorporated and pay tax at rates of up to 40%. Capital gains derived from sharedealing are taxed at 18%.

As has been pointed out in the US article noted above, this makes no sense and must mean that capital is misallocated to sharedealing when it would be better used promoting small business.

That's another good reason why capital gains should be charged at income-tax rates.


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