Industry
Obamas plan to double some taxes on venture firms profits and a Treasury Department proposal for tighter regulation would hurt innovation without raising significant revenue, said Paul Maeder, a partner at venture firm Highland Capital Partners in Cambridge, Massachusetts.
Proponents of the measures, such as Representative Sander Levin, say the tax boost is a matter of fairness, while the Treasury Department says all big investment funds should be regulated to prevent a repeat of last years financial crisis. Venture firms say the changes threaten an industry that has helped create 12.1 million U.S. jobs.
“Youre messing with a formula that has served the country extraordinarily well,” said Jack Lasersohn, a partner at Vertical Group, a Summit, New Jersey-based venture firm that has sold four startups for $9.8 billion since 2007. “People in VC can do other things. I think they will.”
At issue is a government plan to treat venture capital firms profits as ordinary income rather than capital gains, which would increase the tax rate to 35 percent from 15 percent. The venture industrys other complaint is a Treasury proposal that would require firms to keep e-mails for five years, hire compliance officers and be subject to surprise audits.
Obamas Plans
Past efforts to enact the tax increase have died in the House, which voted twice to adopt the proposal. The efforts were thwarted by a lobbying campaign and opposition in the Senate and from the Republican administration of then-President George W. Bush.
Levin, a member of the House Ways and Means Committee, is co-sponsor of the tax bill. The legislation is likely to wait until the House takes up more comprehensive tax reform next year, he said.
The White House hasnt indicated that it will alter its position on tax changes or regulation of venture capital firms, Austan Goolsbee, a member of Obamas Council of Economic Advisors, said in an interview.
“The Presidents view has been that fee income should be fee income and capital gains should be capital gains,” Goolsbee said. “There have been zero discussions about revisiting the question of capital gains.”
During the presidential campaign, venture capitalists were won over partly by Obamas plans for clean energy and more research spending, said Jim Watson, a partner at San Francisco- based CMEA Capital. The California county that includes Menlo Park, Silicon Valleys venture-capital center, voted 70 percent for Obama.
Obama Support
Now venture firms are concerned the administrations plans will hurt an industry thats already suffering from a near standstill in initial public offerings and acquisitions of startups — the two ways for venture investors to make money.
Annual venture-industry returns have slumped to an average loss of 5.2 percent since 2000, from an annual gain of 36 percent in the past 15 years on average, according to Cambridge Associates, an investment consulting firm in Boston. Eight venture-backed companies have gone public in the U.S. this year, down from 86 in 2007, before the financial crisis.
Washington Meetings
To fight the tax and regulation proposals, the National Venture Capital Association sent its 26 directors to Capitol Hill last month after a twice-yearly board meeting in Washington. They met with Goolsbee; the House New Democrat Coalition, a group of more than 60 members from mostly affluent districts with heavy representation of technology jobs; and Department of Energy officials.
Venture firms make money by collecting a share, usually 20 percent or more, of the profit their clients make when they invest in startups — earnings that are known as carried interest. The firms also charge annual management fees, about 2 percent of the money invested.
The tax increase on carried interest would be fair because that profit is a bonus for doing good work for other investors and should be taxed like other commissions or bonuses, said Levin, a Democrat from Michigan. For example, real-estate brokers pay ordinary income tax on commissions when they sell a house, a model that should be applied to the venture capital industry.
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