Innovation will continue with or without capital gains tax hike

TORONTO–There is a book that should be read by all those contending that the capital gains tax rate is a critical factor in driving innovation, and that its planned increase announced in Budget 2024 will lead to a massive brain drain, a freeze on funds to finance emerging tech companies, and a much poorer country. This book shows that discovery and innovation is a far from simple process with the capital gains tax—at best—of minor importance. The innovation process is much more complicated, and it is doubtful that most of those pursuing deep innovation research and commercialization pay little—if any—attention to what their future capital gains tax might be if they succeed. Innovation is about the relentless pursuit of knowledge, the ambition to solve problems, and the possibility of coming up with a new product or way of doing things. The book, Breaking Through, is by Katalin Karikó. She was born in Hungary in 1955 when the country was under strict communist control. Her family lived in poverty in a one-room house with no running water. Yet she went to school, excelled in chemistry, and was able to go on to university. While still an undergraduate she began studying a new field, mRNA (messenger ribonucleic acid), pursuing its potential as an antiviral medicine. When her funding was canceled she, with her husband and daughter, moved to the United States where she expected much greater opportunity. That was not to be the case. While she continued her research for the next three decades she, as a reviewer wrote, "found her work to be consistently undervalued or ignored, her pay poor, her tenure insecure and the family’s domiciliary status always under threat." She ended up at the University of Pennsylvania medical school where her research attracted no funding and she was demoted. Even when she and colleague Drew Weissman succeeded in synthesizing a safe form of mRNA, there was no interest. This only changed in 2013, when her work was recognized by a small German company, BioNTech, where she went to work. Her work helped develop the technology that led to COVID-19 vaccines, and in 2023, she shared the Nobel Prize in Medicine with Weissman in recognition of her role. This may be a more extreme example of the discovery process—one that led to immense benefits for society and huge capital gains for investors. Yet it is true that there is something much bigger than the impact of the capital gains tax on discovery and innovation success. It is doubtful that anyone pays much attention to the capital gains tax implications while working to accomplish something with great potential. It’s unlikely that Bill Gates, Jeff Bezos, Steve Jobs, Mark Zuckerberg, or Larry Page and Sergey Brin—or any of their early-stage investors—were fixated on the capital gains tax rate at the time they launched their businesses. Duncan Rowland, founder of a Toronto financial services start-up, is among those who reject the contention that a higher capital gains tax will dry up funding for start-ups. Writing in the Globe and Mail, he argues that “people don’t start companies because of the capital gains inclusion rate. They want to solve a problem or build a great product.” When the capital gains inclusion rate was cut from 75 per cent to 50 per cent in 1999 there was no great surge in start-ups and, Rowland maintained, if there were a cut in the inclusion rate to 25 per cent today, “I don’t think there would be a wave of new companies or new investors.” The current scare-mongering on capital gains is a needless distortion when the need for investment, innovation-driven productivity, and stronger growth is where our attention should be focused. This doesn’t let Finance Minister Chrystia Freeland off the hook in her Budget 2024 change to the capital gains tax. Her action appears to have been driven by an opportunistic move to find money right away for more pre-election spending without breaking her deficit limit promise, or risking Canada’s AAA credit rating and not by a considered review of the tax system. Our tax system is a framework that has to meet many different and even competing needs: it should encourage economic growth, reward innovation, and foster investment. It should be an instrument of income redistribution and fairness. It should generate sufficient revenue so that government can meet the various roles we expect government to play. But the tax system should also advance important goals, like the need in the current context to incentivize the transition to net-zero emissions with a green energy system. Overall, for a tax system to function effectively, there must be a broad consensus that it is a fair system for all and not the instrument of special interests. It must be based on trust. It’s clear that as we move into a world increasingly driven by investment and ownership of intangibles, including intellectual property, with highly disruptive changes in the world of work and the nature of jobs, the growing pressures of an aging society and the urgency of addressing climate change, that we need a fundamental review and overhaul of the tax system. This is all the more urgent because we need more economic growth and much better productivity performance while also dealing with inequality, social stability, and environmental sustainability. Focusing on the capital gains tax, in isolation from the many other elements of the tax system, will not help us achieve the 21st century tax system for all that we need. Instead, we need a fundamental review of our tax system, with wide public input, based on the various roles of this system to achieve—with compromise and trade-offs to meet competing needs—a tax system we can all trust and live with as we pursue growth, fairness, and sustainability in a 21st century world of highly disruptive change. In the meantime, a month after Budget 2024, both the S&P/TSX Composite Index and the TSX/Venture Index are at higher levels than pre-budget 2024. Doomsters, take note. David Crane can be reached at crane@interlog.com. The Hill Times

Innovation will continue with or without capital gains tax hike

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Innovation will continue with or without capital gains tax hike

It’s unlikely that Bill Gates, Jeff Bezos, Steve Jobs, or any of their early-stage investors were fixated on the capital gains tax rate when they launched their businesses.

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