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Can Opportunity Zones and Adam Smith Spur Economic Growth in America?

Monday, July 08, 2019

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             Opportunity Zone investments have the potential to unshackle billions of investment dollars from Wall Street and create working capital funds for main street USA.  This lucrative tax shelter offers a winning combination of smart tax planning and decreased regulations-- a perfect match to maximize capital gains and increase long-term wealth. Additionally, investing in an opportunity zone fund directs capital into distressed communities who benefit the most from economic growth. But to receive the tax write-offs, investors must commit.

              Investing in the next 18 months provides the best long-term return, and assets are at the lowest cost they will be for these investments. Yet, too many people are waiting for others to take the lead. Community leaders need to identify projects and set up an Opportunity Zone fund as soon as possible otherwise this program will return more regrets than growth.  

               Even before the 2008 downturn, the US economy did not have equal geographic growth. Now, after recovering from the downturn, only 15 regions have experience full recovery and are growing. The other regions in the US suffer economic blight, stagnating wages and persistent poverty. Adam Smith meet Opportunity Zones.

               Adam Smith championed the use of wealth to reduce poverty. He argued that a nation’s true wealth and measure of humility comes from the successful reduction of poverty. According to Smith, unbalanced wealth is not healthy for a country.  

               Agreement exists about the eradication of poverty, and two sides have formed: private investment vs government incentives. A growing economy must be fed cash.  Either the money is left in the hands of taxpayers so they can invest or taxpayers send money to the government to be redistributed.  Both sides of this argument believe their system is the fairest and most efficient. Opportunity Zones investing may be the vehicle that brings both sides together. 

               Opportunity Zones have the potential to prove that the free market system, when coupled with smart government policy, can bring tremendous economic growth. This investment vehicle may be more than a smart investment, it may be a test of our humanity. Are investors willing to back distressed communities rather than chase high-risk, high-growth start-up companies?

“What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”

The Wealth of Nations, Adam Smith

               Laissez-faire supporters argue that government intervention restricts the economy. According to this economic camp, the government should simply protect individual’s rights and let the market forces drive profit, growth and economic expansion. Opponents to Laissiez-faire theory believe that individual ambitions and greed cloud the judgement of investors and therefore government-backed programs with clear objectives are the most fair. Opportunity Zones offer common ground for both sides to plant their flags.

               Earlier this year, Opportunity Zones were approved in all fifty states specifically to communities with high poverty who have lagged behind the rest of the country in economic recovery.  So to the government interventionist, the program supports the belief that a “light touch” is needed to guide the invisible hand.

               The Opportunity Zone funds allow investors to roll over capital gains from other investments to avoid capital gains tax. Additionally, if the investments are held for 10 years, the tax savings will be very positive. This investment vehicle invites the free market proponents to choose the community and investments that most closely match their philanthropic goals.

               So here is a program targeting communities who can benefit greatly from economic growth and may not otherwise receive the investments; and at that same time, the program offers a lucrative tax advantage to investors. But, will investors actually move their money from Wall Street funds to main street opportunities? Popular economic theories suggest the program will be successful. But human nature is complicated.

               Opportunity Zones should not become missed Opportunity Zones. This program has the potential to unwind the geographic economic inequities. Distressed communities have argued for exactly this type of investment program, and Opportunity Zones offer local and institutional investors a chance to gain a favorable return AND invest in American communities.

               With any change there is uncertainly and risk.  I argue that Opportunity Zone funds give investors the chance to take a page from Andrew Carnegie and John Rockefeller and build America up by betting on the entrepreneurship of Americans. Opportunity Zones are not just about smart investments in targeted communities; these funds are about having the courage to support local innovators and developers.  These funds are about leveling the playing field so we all do better. 

Category: Blog, Opportunity Zones

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