How about tax incentives for investing in social enterprise?

Image by John-Morgan via Flickr

Lots of people are looking for ways to increase investment in social enterprise, especially since the White House Social Innovation Office doesn’t seem that interested.  Investments, of course, are necessary for driving growth of the sector.  Here’s an idea: use the tax system as a big carrot.

There are a number of possibilities, some targeted at investors, others at companies.

–A lower capital gains and dividend tax rate that can prove somehow–probably through the use of performance standards or legal structure, more about this below–that they are creating a public benefit.  You’d also get two for the price of one, according to Andrew Kassoy, co-founder of B Lab: “The good thing about this idea is that it would help attract investments and also create incentives for longer- term investment horizons.”

–A lower corporate tax rate for these companies, as long as they can prove they provide a real, measurable social benefit.

–Tax credits for social enterprise companies that would make them more attractive to investors, modeled on new market and low income housing tax credits.

Of all these ideas, the one with the most potential is probably the lower capital gains rate. That said, there are a lot of details to iron out here. The biggest is establishing a credible standard for what constitutes a social enterprise, as Lee Zimmerman, co-founder of Evergeen Lodge, a triple-bottom-line company near Yosemite, recently pointed out to me.  (His lodge runs an internship program for disadvantaged youths). Such a standard would involve federal and state legal and tax implications and, thus,  could take a while to be hammered out.

One possibility is creating a standard based on the B Lab rating system.  Another is using a new legal structure. Some states are working on creating an official legal structure for social ventures. Any company that fits would automatically be considered a legitimate social enterprise . Or, perhaps there’s another way. If so, I’d love to hear about it.

In any case, there’s a lot of potential here worth exploring.