Georgia is all about economic growth. But economic growth and economic freedom are not one and the same. Private investors have been calling for reforms to make Georgia more friendly toward capital formation for years now, the venture capital and angel investment that is key to fueling Georgia’s growing entrepreneurial community. So one has to wonder why the Georgia General Assembly spent the 2013 Session getting into the venture capital game itself, rather than reforming the tax environment so that private capital that wants to invest in Georgia is encouraged to do so? Is it a case of misplaced priorities, antipathy to economic freedom or simply being misinformed about how the private sector works? When Georgia had the chance to teach a man to fish—reform the rules in order to bring about long-term economic growth via new investment—in 2013, they famously handed him a fish and patted themselves on the back through the creation of the “Invest Georgia Fund”. The fund, created by House Bill 318, calls on the State of Georgia to provide $100 million dollars over five years for state government to make direct investments into qualified securities in the private sector. In other words, government became a competitor to private investment rather than an impartial arbiter of it.
The real threat to the capital formation that would support Georgia’s thriving entrepreneurial class is Georgia’s punitive state capital gains tax; our short and long-term rate currently rests at six percent. The State competes in a region where the same tax is either lower or non-existent – Alamaba (5%), Florida (0%), Tennessee (0%). When you add this to our national rate of 15-20%, depending on income, and you have a concoction that kills investment faster than bleach on mold growth.
Capital gains tax rates are at the heart of economic growth. Harvard Economist Dale Jorgenson estimates that half of all economic growth in the United States from 1948 to 1980 came from capital formation. Even John F. Kennedy realized in 1963 what our own Georgia General Assembly refused to acknowledge this year, that “…the tax on capital gains directly affects investment decisions, the mobility and flow of risk capital…[and] the ease or difficulty experienced by new ventures in obtaining capital…”
Simply put, capital gains taxes are taxes on profits from investments. In practice, they discourage future investment and economic growth activity by penalizing the financial profit that is realized from the investment. And they are a case of double taxation. When a corporation realizes a capital gain, they must first pay Georgia’s six percent corporate rate, then, extract another six percent from your individual investor gains prior to issuing you a dividend check. Worse yet, allowances are not made for inflation in the current federal capital gains tax rate so you may be taxed on “non-real gains”. If the inflation rate outstrips the investment growth rate during a given investment period, the investor may realize a “nominal gain” while experiencing a “real gain” of zero or less. In this case, the investor may actually be on the hook for a capital gains tax on a net loss on his investment. At a minimum, the capital gains tax should be indexed to inflation in order to avoid this nightmare investor scenario.
Georgia’s capital gains tax is hurting capital formation in Georgia. We will only embrace economic freedom when we prioritize capital gains tax reform over the creation of a government money pool that exacerbates the problem of attracting private investment to Georgia as the real fuel for innovation and entrepreneurship.