In past months, there has been a ridiculous congressional controversy brewing around the taxation of private equity salaries, particularly in how private equity managers are taxed capital gains for their take-home portion of the gains (instead of at the higher income tax rate that the rest of us pay). I have heard about hedge funds and buyout firms (what my friends usually refer to as “PE”) rising up in arms, and now venture capital are jumping into this circus too.
Throughout this all, I have frankly never heard any good reason why they deserve this advantageous tax rate. Among those reasons are:
- Excuse: Because PE firms actually have negative years and that not every year is a profitable one, increasing the tax rate would make it harder for them to be profitable over business cycles. My rebuttal: that actually sounds like every other company in the world economy, which should not earn any special sympathy for one of the most lucrative industries in human history.
- Excuse: PE/HF/VCs deserve special tax treatment because they provide amazing benefits to society, and that higher tax rates would discourage them from working so hard at what they do. Rebuttal: that’s explains why we tax teachers and law enforcement at normal income rates, right?
- Excuse: Higher taxes would drive the PE industry would move overseas. Rebuttal: US-based VC and LBO will not move offshore, away from the companies they invest in, and as for US-based hedge funds… I somehow can’t imagine sophisticated hedge fund professionals moving from New York to some sparse island country.
One of the new tricks being used by the VC contingent is to call themselves entrepreneurs and to imply that taxing them would hamper the dynamism of the startup economy. One of the founding executives of my company has written a great response to a NYTimes piece that equated VCs with entrepreneurs. It’s a pretty thoughtful writeup and, actually, it also expresses how proud I am to have ended up doing what I’m currently doing.
