Loading...

U.S. Government Financing of Innovation – A Radical Approach

0
0

Cullen in the thread linked here (where I asked about a rational federal budget process), you said in part:


So I would position the govt around making wise investments. If I were the King of the USA I would take about 20% of the budget every year and auction it off for venture capital projects. I would hire reputable VC firms, cap their fees at 100 bps and tell them to go out and find the best new projects to finance. 90% of them will fail. But 10% of them will do amazing things that transform our world.

I’m wondering if the U.S. government could achieve the same effect by fully implementing your view that holding stocks and bonds is not truly investing, but rather allocating savings.

So:

Returns from stocks, bonds, and other related instruments that are currently considered to be “investments” are taxed as regular income (or near that rate).

Returns from truly risky investments are taxed at a very low rate, say 5%. So, when people put their money truly at risk, they are greatly rewarded.

I’d consider all pre-IPO investment to be in this category, from angel investing on up. I think you’d also want to allow stock purchases at the IPO to get the same low tax rate, partly because it’s still a bit risky, but mainly becuase you want the early investors to be assured of as big a payoff as they can get. After that (one week post IPO?) purchases are taxed at the full rate.

Perhaps index funds might arise where ordinary citizens could get a small piece of the action, spreading their risk across thousands of startups. Maybe having some small percentage of your portfolio in such a fund would become a recommended practice to provide upside potential.

It seems to my fairly unsophisticated understanding of our monetary system that this could provide vast amounts of capital to fund innovation. And the government would not be in the position of deciding who the favored venture capitialists are, a situation that could invite backroom deals with politicians to gain access.

In essence, the government takes the hit on the tax receipt side, so is still investing in innovation.

Would this work?

Marked as spam
Posted by (Questions: 14, Responses: 8)
Posted on 12/30/2017 9:57 AM
95 views
0
Private answer

Scowei,

Yes, that’s something I’ve proposed many times over the years. There is literally no reason to incentivize secondary market saving with favorable tax treatment. Smart savers will allocate to stocks and bonds no matter what. The things we should incentivize is the real risk taking venture financing that generates innovation and that huge multiplier effect. Anyone who understands venture capital knows that this is a losing proposition 90% of the time, but you’re not trying to win more than you lose. You’re trying to hit those 10% of home runs that totally change the game.

Marked as spam
Cullen Roche Posted by (Questions: 10, Responses: 1855)
Answered on 12/30/2017 2:22 PM
0
Private answer

Such an arrangement is in effect in the UK. The tax arrangements for Venture Capital Trusts.

Marked as spam
Posted by (Questions: 22, Responses: 345)
Answered on 01/01/2018 10:45 AM