On Monday, President Obama, acknowledged the importance of small business by saying, "Small businesses are the heart of the American economy. They're responsible for half of all private-sector jobs - and they created roughly 70 percent of all new jobs in the past decade." He then took steps to encourage more small business by announcing tax and loan incentives. Most attention was focused around SBA loans, but to me the more important portion related to capital gains treatment for entrepreneurs.
Capital gains tax is generally a tax on the sale of stock held for longer than one year. When an entrepreneur sells a business to another company or to the public market through an initial public offering, the gains are typically taxed as capital gains. These exits drive many entrepreneurs to take the risks necessary to start a business.
I'm an entrepreneur. My startup employs 26 people with good jobs. Eighty-five percent of our expenses is salaries. In addition to the jobs we create, we're hiring lawyers, accountants, designers and printers; as well as buying furniture, computers and renting office space. We are still building our product, so we have zero revenue. Sometimes this feels like my own little economic stimulus program.
I know many entrepreneurs. They're smart people with a risk-taking mentality and are very capable of stimulating the economy. Yet they're skiing, sitting on beaches and buying gold in offshore accounts. They e-mail headlines about the dire economy and lecture me on why I should be hedging myself with investments in gold. They have no intention of getting back in the game right now.
Obama proposed a decrease in the capital gains tax for 75 percent of the investment if it were held for five years or more. This is a step in the right direction, but it falls short and it doesn't excite or encourage entrepreneurs to get off the sidelines.
I propose that we create a tax holiday for small businesses created from 2008 to 2010. These entrepreneurs would be exempt … more