AIER’s Laura Williams reflects on Americans’ freedoms since 9/11.
A poorer country than the U.S. would have had to parcel out its resources more carefully in response to 9/11. Instead, the U.S. was distributing taxpayer checks to heiresses and hedge-fund managers because they happened to live in the vicinity of downtown.
The fiscal debacle of 9/12, to me, would come to seem of a piece with the fiscal debacle of ObamaCare, the fiscal debacle of climate policy and, in crescendo fashion, our Covid response.
Our globe-girdling society produces complex policy challenges. It has a hard time producing intelligent policy responses. In their place, we get bankrupting spending extravaganzas in which politicians demonstrate their caring by how much money they set on fire, facilitated by the accident of the world’s seemingly bottomless appetite for U.S. debt.
Jefferson famously said if forced to choose between living without newspapers and living without government, he’d prefer the latter. But the press no longer plays the role he expected, policing government policy failure—say, by discovering that the Affordable Care Act produces insurance so unaffordable nobody would buy it without a subsidy, or that green-energy handouts reduce emissions only in an imaginary world where energy consumption is capped.
It took two decades, but something new has come into the world perhaps to alter the path I trace here from Sept. 12. A voter can ask a large language model whether government policy makes sense and get a nuanced answer. I may be alone but I don’t see doom coming from AI. I see better decision-making, at last.
Economists keep warning politicians that incentives matter, and the latest teachable moment concerns taxation and innovation. New research suggests how sensitive investors in start-up companies are to changes in tax policy, and what this means for the economy.
In short: A big tax break for investment in new companies, introduced in 2009, resulted in more business unicorns. In a working paper published by the National Bureau of Economic Research, Murillo Campello and Guilherme Junqueira of the University of Florida track the effects of changes to the Qualified Small Business Stock (QSBS) tax break, which Congress made significantly more generous after 2009 and 2010.
Previously the law had offered a trivial tax break for investments in small companies. The changes eliminated capital-gains taxes on qualified investments—meaning newly issued shares in C corporations with assets of less than $50 million in certain industries.
This allowed the economists to compare investment decisions and performance in the relevant industries before and after that change. The researchers also distinguish between different kinds of investors with different incentives, such as “angels” investing their own money, venture-capital firms pooling money from many investors, and corporations that can’t benefit from the QSBS break. It adds up to a sample of 158,000 investment deals from 2004 to 2022, tracking those deals from initial investment to exit or failure.
The central insight is that by improving the return investors can hope to achieve, this capital-gains tax cut encouraged more risk-taking. After the tax cut, venture firms (the investors most sensitive to the tax break) were 81% more likely to invest in the earliest development stage of a new company. They were also more likely to invest in startups that already carried debt, or where the venture firm had no previous experience in the industry—all markers of higher investment risk.
Many of those bets didn’t pay off. The rate of failure for firms that received venture funding was 71% higher after than before the 2009 tax cut. But those that succeeded did so in spectacular fashion: Valuations for successful exits after 2009 were 131% higher than before, and startups whose investors were eligible for the tax break were twice as likely to become unicorns with valuations exceeding $1 billion.
The economic intuition here is straightforward. In order to take more risks, investors require higher returns. By allowing investors to keep their gains, this capital-gains tax cut increased the expected return of successful investments, encouraging venture firms to swing for the fences. The counterintuitive benefit of the tax break may be that it makes investors more tolerant of potential failure.
