Lowering capital gains tax rate best way to encourage financing for entrepreneurs

Financial Markets, Laws, and Entrepreneurship

Financial Markets, Laws, and Entrepreneurship, a chapter in the recently released book Demographics and Entrepreneurship: Mitigating the Effects of an Aging Population, finds that the preferential tax rate for small businesses does not encourage entrepreneurship, and actually acts as a barrier for small businesses to grow into medium and large businesses, because doing so triggers a substantial tax increase.

Likewise, Labour Sponsored Venture Capital Corporations (LSVCC) have widely been seen as failures because LSVCCs are used largely for their generous tax credits, and often fail to deliver financing to entrepreneurs.

A second related chapter in the book—Spurring Entrepreneurship through Capital Gains Tax Reform—looks specifically at the economics of capital gains and Canada’s current competitiveness.

Among other insights from the chapter, it notes how several developed countries, including New Zealand, Switzerland and Belgium don’t have capital gains taxes. Others including Australia, Britain, Germany and Japan have lower rates than Canada, which in 2015/16, had a top personal marginal capital gains tax rate of 26.5 per cent—higher than the OECD average (25.5 per cent).

Not only do lower capital gains tax rates incentive greater entrepreneurial activity by increasing the potential reward for starting a business, a lower rate also frees up capital and encourages investment in business startups by similarly increasing the potential reward for investors if a new company is a success.