Item — HN Reader

This is going to hurt startups. (the health care part is theoretically nice, but offset by the tax implications)

Short-term capital gains will be 15% (Fed) + 5% (Fed Increase in 2011) + 3.8% (this) + 10.3% (California). 34.1% capital gains!

This does not compare favorably to anywhere else in the world. For a CA startup founder, capital gains are going to be 1.5-3x higher than most countries.

This is an issue primarily because (half?) of US startups are founded by immigrants. At some point, it becomes more attractive for an immigrant to go to Vancouver, BC (21.5% tax rate, much easier immigration process, better quality of life than SFBA) or even to remain in India or China. The tax advantages might also push for Hong Kong or Singapore startups, with 0% capital gains and very low income tax.

A big number minus 34.1% is still better for an exit than a much smaller number minus a small percentage, but California is definitely not the only place to do a startup.

4 comments

Do you see this hurting startups in some way other than reducing immigration?

I think it will help startups, by allowing small shops to bootstrap without having to surrender health insurance for themselves and for their families.

I think the combined CA + US tax burden might reduce marginal angel investments. It probably won't affect VC investments, but doubling my tax burden on a win means I'd need to double the odds of a win, or the size of the wins, and that might not be feasible as an angel, who could otherwise spend the money on a new boat.

I am unconvinced the health care result of this will be good enough for someone with a family to be comfortable going on relatively inexpensive insurance.

As a healthy, single, 20-40 year old guy with no risk of children, I'm fine with an $80/mo catastrophic plan, and I suspect a lot of people starting startups are the same, or have health care from a spouse's job. A single parent is not in a great position to do a startup for a lot of reasons, and someone with a lot of chronic health issues requiring expensive medical care probably isn't either.

It doesn't take ongoing chronic health issues to become uninsurable. For instance, having an unexplained seizure when you're 4 appears to do the trick, as does having a functioning female reproductive system.

I think there's a lot of room for reasonable people to disagree about whether this bill will help or hurt startups. But I don't think there's room to disagree about whether the status quo retards entrepreneurship. It does. Health insurance could have screwed me out of my company. Health insurance kept at least 3 candidates I can name off the top of my head from accepting a role with us in the early days of the company. There's no countervailing argument about how the status quo encouraged someone to start a company.

The status quo of health care definitely retards entrepreneurship. Increased taxes also retard entrepreneurship (in a historically well documented way, although maybe the effect between 15-23.8% isn't a well tested range).

I am not sure which has a larger effect here.

I definitely would like to see some health insurance changes, just not the ones in this bill, and not by taxing capital to pay for services to individuals. Actually reducing costs would be my #1 approach -- politically unpopular, but I'd be fine with subsidized or free basic care for everyone, but no free advanced care for those without private insurance. Private insurance purchased by individuals, with or without a tax deduction, and totally decoupled from employers.

What's "advanced" care?

I sent you long email describing. Basically I'd like to see public subsidized or free health care at the NHS level (i.e. kind of crap, but good enough), with available free relatively-unregulated private insurance and private care. I figure it would cost $1-2k/person/yr for the public side (excluding old people in medicare, which is another huge problem), which is a lot less than is spent now covering marginally insured people, overhead of medicaid, etc. I'd get employers totally out of the insurance game.

This is politically unpopular (some people WILL get lower quality free care under this plan than they get today, and some people might get lower quality care than under employer-provided care, if they choose to spend the savings on something else like food or education, which might be rational!) Also, I think the US Government is possibly more incompetent in running healthcare (I work in DoD healthcare, so I see this firsthand...) than the UK or Canadians or French.

Your email was great. You should click "edit" on your post and paste the email over your comment. I'll do the same with mine.

In the meantime, my response was: a totally standard appendectomy for a friend of mine cost tens of thousands of dollars. That isn't a quality of care issue, it isn't a freak incident, it doesn't involve preventative care or externalities. Nobody is comfortable starting a company where they will be instantly bankrupt if their kid's appendix bursts.

And for me this bill will allow me to keep holding off college to develop my startup and still keep my parent's health insurance (which I just lost coverage from).

Move to Seattle. Washington state has no income tax or capital gains tax.

I live in Seattle (except I am in Kuwait)

WA kind of sucks for tech businesses due to the B&O tax, which is a gross receipts tax. This doesn't hurt you until you have revenue, but if you're a low-margin business with huge revenue, it means you suffer, even if you're not profitable. (it's something like 0.5% on gross revenue).

NV is probably the best somewhat-viable-for-startup state (Las Vegas or Reno), but I'd rather live in Seattle, Portland, or SF if in the USA.

I kind of prefer Vancouver, WA for a tech startup, too, because then you can take advantage of the huge unemployed market of early-20s developers who moved to Portland, OR for lifestyle reasons, plus all the HP/Intel/etc. talent.

There are a lot of factors other than taxes which affect an individual startup, but taxes affect new business creation in aggregate.

What if you moved to a different state to find a smaller than 10.3% tax in US?

I thought short-term gains were taxed with rates similar to ordinary income. Do you mean long-term capital gains?

LT Capital Gains are taxed at 34.1% in California once this bill passes. 15% + 5% 2010 increase + 9.3% CA + 1% CA Mental Health + 3.8% Health Care capital gains.

ST Capital Gains will be taxed at 39.6% top income bracket + 5% surcharge + 9.3% + 1% + 3.8% once this bill passes. 58.7%. (A $20m sale of a startup in less than 12 months start to finish is kind of unrealistic, but you could easily be a mezzanine investor, or could have operated a business for a long time before formally doing stock, so it is possible, if not likely for an actual entrepreneur)

The correct thing in both of these cases is probably to hold and write options or something against stock, to avoid realizing the gain, and hope that somehow tax rates rationalize in the future.

20-25% all-in capital gains is probably the limit before it seriously disincents investment.