Encourage entrepreneurship and increase investment by eliminating capital gains taxes



    VANCOUVER, March 8 /CNW/ - Eliminating capital gains taxes will encourage
entrepreneurship and increase investment in innovative new ventures, says a
new study from independent research organization The Fraser Institute.
    In The Economic Costs of Capital Gains Taxes, Niels Veldhuis and his
co-authors explain how entrepreneurs typically accept low pay so earnings can
be reinvested to meet the needs of their growing companies. In return,
entrepreneurs expect to be compensated when their business matures and is
taken public or bought by another company. Capital gains taxes reduce the
return that entrepreneurs receive from the sale of their businesses and
therefore discourage them from starting and investing in new ventures.
    "Capital gains taxes have a negative impact on the number of
entrepreneurs and risk-takers," said Veldhuis, who is also Director of the
Centre for Tax Studies at The Fraser Institute.
    "Eliminating capital gains taxes will increase entrepreneurship and
result in a more dynamic Canadian economy."
    Entrepreneurial activity is critical to a successful economy.
Entrepreneurs challenge the status quo, develop new products and services,
advance technology, create jobs, and increase wealth. Policies such as capital
gains taxes that discourage entrepreneurial activity, ultimately lead to a
less dynamic and prosperous economy.
    The study also found that capital gains taxes cause investors to hold on
to their current investments, even if more profitable opportunities are
available - a result known as the 'lock-in' effect.
    For example, an investor who wishes to sell an asset and reinvest the
proceeds in a new project will have the amount of money earned from the sale
of the asset reduced by the capital gains tax. New investment projects that
are unable to compensate for capital gains taxes and provide a reasonable rate
of return will go unfunded even though they may be more profitable than
current investments.
    "Capital gains taxes impede the movement of capital from older, less
profitable investments to those with higher rates of return. Given that these
new ventures are the engines of productivity and employment growth, capital
gains taxes reduce the well-being of Canadians," Veldhuis said.
    In addition to hindering the reallocation of capital, capital gains taxes
also have a significant impact on the amount of capital in Canada. Because
capital gains taxes make capital investments more expensive, less investment
takes place.
    Veldhuis points out that numerous studies from both academia and the
government show that personal capital income taxes (including capital gains
taxes) impose substantial costs on the economy. Recent estimates from the
federal Department of Finance show that a $1 reduction in personal capital
income taxes increases society's well-being by $1.30.
    Veldhuis said governments in Canada raise very little revenue from the
tax, pointing out that in 2005/06, the federal and provincial governments
raised approximately $3.5 billion in total from capital gains taxes -- less
than one per cent of total federal and provincial government revenues.
    "Given the damaging economic costs of capital gains taxes and the fact
they raise less than one percent of overall government revenues, federal and
provincial governments should eliminate their use of capital gains taxes," he
added.

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    The Fraser Institute is an independent research and educational
    organization based in Canada. Its mission is to measure, study, and
    communicate the impact of competitive markets and government intervention
    on the welfare of individuals. To protect the Institute's independence,
    it does not accept grants from governments or contracts for research.
    Visit www.fraserinstitute.ca




For further information:

For further information: Niels Veldhuis, Director, Centre for Tax
Studies, The Fraser Institute, Tel. (604) 714-4546, Email:
nielsv@fraserinstitute.ca; Jason Clemens, Director of Fiscal Studies, The
Fraser Institute, Tel. (604) 714-4544, Email: jasonc@fraserinstitute.ca; Dean
Pelkey, Associate Director of Communications, The Fraser Institute, Tel: (604)
714-4582, Email deanp@fraserinstitute.ca

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THE FRASER INSTITUTE

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