The Wall Street Journal reported on August 3 that venture capital investment in business start ups increased by a record 45% during the second quarter of 1999, outdistancing the record increase of 30% in the first quarter.

Make no mistake, there is a tight connection between venture capital investment and capital gains taxes. Obviously, the more you tax the returns on venture capital investment, the less venture capital investment you get. And in fact, that relationship is quite clear over the past two decades.

The reduction in inflation starting in the early 1990s and the cut in the nominal capital gains tax rate in 1997 have combined to steadily and dramatically lower the real capital gains tax rate over the past decade. In turn, this has resulted in a major increase in venture capital investment. According to various industry estimates, for example, real venture capital investment hit its recent low in 1991 at $1.62 billion (1998 dollars), and has steadily risen to hit a new high of $12.5 billion in 1998.

Reducing the capital gains tax rate will further spur entrepreneurship, investment, economic growth and job creation.