A Tax Increase for Venture Capital? Maybe...

Filed in archive Law on June 27, 2007

A number of people in the venture capital corner of the blogosphere at the moment are unhappy with Congressman Sander "Sandy" Levin (D-Michigan). The congressman has proposed a bill that would change the way profits from venture capital projects get taxed.

I am not an expert on tax law; but the simple version of the situation is this. At the moment, venture capital profits are taxed as though they were a form of capital gains. A capital gain is a sum of money you make from an investment. So, for example, if you buy some stock for a thousand dollars and sell it for fifteen hundred, the five hundred dollars you made is a capital gain. If, while you owned it, the stock paid a dividend (an ordinary dividend), that dividend would be ordinary personal income. The capital gains would be taxed in America at the moment at 15% while the dividend would be taxed as personal income at a rate determined by your tax bracket.

Congressman Levin's bill, if it becomes law, would take most venture capital profits out of the capital gains category and make them ordinary personal income. That would mean that the taxes individual investors pay on those profits in the US would double or triple in most cases.

Several bloggers have expressed their thoughts on the matter. Among them: Tim Berry at Planning, Startups, Stories, Fred Wilson in two different blog posts on Carried Interest Taxation (blog 1 and blog 2), Sam Huleatt (who rebuts Fred) at Leveraging Ideas, LTRBTB (whatever that means) at Friends of Americans for Tax Reform, Nick Denton at Valleywag, Bill Burnham at bee, and Mark Feinstein at The Fein Line (just to name a few...)

The New York Times supported the change in a June 25th editorial. Dr. Chadblog concisely sums up the position of those in favor of the change with this question: "Why should a single mother pay twice the rate of a fatcat money manager???"

My personal thoughts? I think that if the law makes it through the House and into the Senate, that may be the end of it. And I suspect that President Bush will have a hard time signing it into law unless it is so tangled into the tax code that it can't be separated. We'll see. But most of those who make their living at venture capital will continue to do so if the bill does become law; they'll just grumble about it for awhile...