Has the carried interest tax debate expanded?
While in Chapel Hill this past weekend, I caught a “state of the VC market” talk by National Venture Capital Association president Mark Heesen. During a section on regulation, Heesen raised the issue of carried interest taxation – but then spent several minutes on the topic without again referencing the term “carried interest.” Instead, he spoke about how a move is afoot on Capitol Hill to eliminate capital gains treatment altogether.
This is a subtle rhetorical shift by the NVCA, which believes that the most imminent tax debate is about much more than venture capital or private equity carve-outs. After all, the issue of carried interest tax treatment becomes irrelevant if there no longer is a difference between rates paid on capital gains and ordinary income.
What remains unclear, however, is if venture capitalists should prefer this broader battle to the old carried interest skirmish.
On the one hand, VCs will be joined by all sorts of interest groups in advocating for a continuation of capital gains tax treatment. Not just institutional investors, but also a goodly portion of regular Americans with stock portfolios that include shares purchased more than a year ago. Not to mention entrepreneurs who currently pay capital gains on their founder’s equity. Strength in sympathetic numbers.
At the same time, however, venture capitalists may find that a broader capital gains debate may introduce the sort of compromise that they rejected when it came to carried interest-specific proposals. In other words, the maintenance of a capital gains differential — but with an increase in capital gains rates to 20% or 25%. I guess there would be a measure of victory in that — venture capital doesn’t get singled out, thus enabling future punishment — but the end game is still increased tax bills.
Continuing the carried interest crusade, on the other hand, has proven to be lonely, but satisfying, work. President Obama campaigned on changing the tax treatment of carried interest, but has failed to do so once in office (despite having had a Democratic majority in Congress during his first two years). In fact, politicians almost seem to favor the status quo as a political football that benefits both sides more than would a legislative “fix.” Democrats get to rail against tax inequity, while Republicans get to fight higher taxes on anyone.
Venture capitalists may not have Joe Investor on its side in the carried interest debate, but so far his presence hasn’t been missed.
In the end, however, I don’t really expect this to be an “either/or” sort of situation, no matter how the NVCA communication strategy may have changed. Ex-venture capitalist (and private equity executive) Mitt Romney is going to be the Republican presidential nominee, which means that both capital gains rates and carried interest taxation are going to become talking points this fall. Particularly once Romney releases more tax returns…
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