Tax Story: VC Carry vs Founder Equity
Readers regularly email to pick apart my support for changing the tax treatment of carried interest from capital gains to ordinary income. Almost all of the correspondance now relates to venture capital, as buyout and hedge fund managers seem to have accepted that their loophole is closing. Here's a recent email from reader Bill: “One can argue whether or not preferential capital gains tax treatment, in general, is a good idea, but to split hairs and say that one set of managers (entrepreneurs) deserve it, but another set of managers (VC, PE guys) do not, evidences not just a fundamental lack of appreciation for what financial managers do within the context of a modern economy but also a willingness to sustain a clearly illogical and contradictory position in order to maintain some romantic, populist and dated notions about the relative social value of different kinds of labor. Therefore I challenge you: If you truly believe that investment GPs should have their carried interest taxed, then take the next logical step and declare your opposition to the favorable tax treatment for corporate managers' equity stakes.” Bill articulates the single stickiest wicket in my argument for changing carried interest tax treatment. And it’s one I’ve wrestled with a bit this morning. Here's what I've come up with so far:
