Just when I think the arguments against reforming the tax subsidy to venture capitalists — aka "taxing carried interest as capital gains" — can’t get sillier and more cynical, they do. If you recall, the essence is that VCs are taxed at lower levels on gains from investing money that isn’t theirs because … it’s a cool loophole that they have happily exploited. Sure, mutual fund managers, corporate sorts, and others who do the same thing don’t get that same benefit from investing money that isn’t theirs, but who cares, at least if you’re a VC.
I and others think this is dumb. We are perpetuating a series of myths, while letting live a nonsensical subsidy. Among other things, we are acting as if VCs are somehow precious flowers, who, if unable to earn money at a lower tax rate would gather up their term sheets and go play somewhere else. This is, to use the technical term, bullshit. Most VCs are unemployable outside venture capital, so the idea that they will go find something else that pays as much for so little effort is absurd.
Further, whether they stay or go, the only credible argument in favor of subsidizing venture capitalists is that they are so important to our economy that we must have more of them than would be the case if they were taxed in a fair and equitable way. While VCs play an important role, so do many other financial intermediaries, most of whom create jobs too, and none of whom get favorable tax treatment for investing money that isn’t theirs. (Keep in mind that the purpose of favorable tax treatment of gains from capital invested is to encourage providers of capital to provide it, not to encourage fee-sucking intermediaries to suck more of it. There is a difference. And the providers of capital will still get favorable tax treatment after carried interest tax reform.)
There is a particularly absurd example of this VC uber alles dreck in a story I spotted today at the SF Chronicle, via Business Insider. The author cobbles together an award-winning list of specious, self-serving and misdirecting bleats in favor of lower carried interest tax, including that VCs create "great companies", that we should want to see more wealthy VCs, and that VCs will exit the industry if they pay higher taxes, And then there’s my favorite, that turncoat VCs in favor of more equitable tax treatment on gains from money that isn’t theirs are actually thinly-disguised oligopolists trying to kill off VC competitors and thereby earn themselves outsize profits. The first three bleats are just PR spin, while on the fourth one this nitwit manages to be both wrong and offensive.
This entire carried tax argument is long past its expiration date. Let’s end it. Taxing carried interest as ordinary income is right, equitable and overdue. People who argue otherwise are selling something — and it’s pretty obvious what that is.
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