Something Taxwise This Way Comes

Bill Burnham at Burnham’s  Beat blog summarizes an interesting conference late last week.  This is about proposed tax changes that would affect the tax treatment of some stock earnings by some professional investors. The question at the core is whether it’s fair that people whose normal compensation for their regular job includes shares of companies get taxed at the lower capital gains rate for money those stocks bring in later. Is it part of their regular compensation? Then why not pay regular taxes like everyone else?

I’ve been watching this for months. I haven’t posted on it because it’s still swirling around, nobody seems clear on the implications or even whether or not it’s really going to happen; and even less so on how it affects the classic venture capital model, if at all, or money available for startups.  Bill’s conclusion here is significant.

Look at the key comment. I’m putting it apart from the rest, so you can see it clearly:

This means that entrepreneurs laughing at the sight of "rich" VCs trying to maintain their cushy tax breaks had better stop laughing because you guys are clearly next on the hit list.

And, now that I’ve got your attention (it made me sit up straight), here’s more, including that sentence in its original context:

…it’s clear to me more than ever, that the carried interest debate is just a prelude to eliminating the concept of sweat equity/intangible capital from the tax code altogether.  This means that entrepreneurs laughing at the sight of "rich" VCs trying to maintain their cushy tax breaks had better stop laughing because you guys are clearly next on the hit list. Don’t believe me, just do the math:  would the government generate more revenue by taxing all the profits generated by all the people who get sweat equity stock or all the 20% of the profits generated by VCs who get carried interest?  Before you answer this consider that if you changed the tax treatment for "founding stock" to ordinary income then the Google Founders alone would generate at least another $4BN in incremental taxes on their $20BN+ stake.  Doesn’t take Einstein to figure out what’s the quicker way to fill a $50BN hole.

Hence, the title of this post: something taxwise this way comes. Maybe. And if you don’t get the reference, read more of Ray Bradbury, he’s good for you.

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