Photo: Randy Stewart
The US is preparing to tax venture capitalists with a ~37% income tax rather than the ~15% capital gains tax they pay right now.Some private equity managers are screaming about the proposed new rule, but Union Square Ventures partner Fred Wilson says bring it on.
Reached for comment, Fred referred us to his 2007 post on the topic and said, “[I] haven’t changed my mind since then.”
Here’s the relevant bit from that post:
I strongly believe that long term capital gains should be taxed differently than short term capital gains. And I also strongly believe that capital gains should be taxed differently than ordinary income. The counter argument is that the economic incentives to take risk with your capital should be enough and you don’t need additional tax incentives. I don’t buy that. Human nature being what it is, most people are going to want to be conservative with their capital. Taking a risk with your capital, particularly on new business initiatives (whether its a new restaurant in the neighbourhood or a cure for cancer), is something we need to encourage. And many of the developed countries in the world agree. In some countries, capital gains are not taxed at all. I don’t think we need to take the economic incentives that far.
But, and this is a big but that will annoy most if not all of my colleagues in the VC and private equity businesses, if you are generating those gains with other people’s money (OPM), then that is a fee you are being paid and it should be taxed as ordinary income. I really don’t see how anyone can argue otherwise with a straight face.
If congress is successful in taxing carried interest as ordinary income, it will massively increase the amount of taxes I pay. So be it. Someone has to pay the taxes to keep our troops equipped, our borders secured, our schools modernized, and our children healthy. It might as well be me and my wife.
But the capital that we invest directly in the funds we manage should be treated the same as if we had made the investment directly. When I put the Gotham Gal and my personal capital at risk and keep it as risk for years (sometimes it’s longer than 10 years), that should be treated very differently than ordinary income. It’s not ordinary income. It’s a capital gain. And as I stated earlier in this post, let’s not throw the baby out with the bathwater in the hunt for a more equitable tax code.