House Backs Tax Increase for Venture Capital

By CLAIRE CAIN MILLER, 28 May 2010 -- The House of Representatives passed a bill today that would raise the taxes that venture capitalists and other investment managers pay on carried interest — their share of the profits from a successful start-up investment.

The Senate will vote on the bill after the Memorial Day recess.

The bill, which is called the American Jobs and Closing Tax Loopholes Act of 2010, would extend unemployment benefits and lending and tax relief for small businesses. But venture capitalists are upset about the provision that would raise taxes on their carried interest.

A typical venture capital firm collects carried interest of 20 percent of the profits when a start-up company goes public or is acquired. Today, that is taxed at the capital gains rate of 15 percent. But the bill would require that 75 percent of investors' carried interest be taxed as ordinary income.

Opponents of the change in taxation say that the capital gains tax rate rewards taking big, long-term risks on young companies. Proponents of the change say that because venture capitalists mostly invest other people's money, they do not need to be rewarded for taking investment risks.

Mark Heesen, president of the National Venture Capital Association, the industry's lobbying group, said in a statement today that legislators failed to recognize that the bill could have serious economic consequences.

"It is both ironic and disconcerting that legislators can profess commitment to creating jobs — and then discourage the type of long-term investment which has been a proven job creator for the last century," he said.

The House has passed similar tax increases in the past but they have never passed the Senate, and venture capitalists are now lobbying senators for an exemption.