Democrats formally propose higher tax on VCs, others

June 22, 2007 | Matt Marshall | Comments |

levin.jpgU.S. Congressman Sandy Levin (D-Michigan) has finally introduced the bill that venture capitalists were dreading: A higher tax on their profits.

If it passes, and there’s a possibility it may, it will change the tax treatment of “carried interest,” or profit that VCs and other investment professionals get from their investments. The change would tax that profit at a much higher rate — by treating it as ordinary income, rather than as capital gains, which draws a mere 15 percent tax rate.

Here’s Levin’s statement. The jargon can be tough for the uninitiated. Basically, the legislation would apply to any investment professional active in “alternative investments,” which refers to most forms of investment outside of stocks and bonds.

Here’s a PDF of the proposal.

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Matt Marshall is editor and CEO of VentureBeat. Follow him on Twitter at @mmarshall, and follow VentureBeat on Twitter at @venturebeat.

  • Allan Grinshtein
    This is absolutely disgusting.
  • Brian
    How fitting, a senator from a state who's main economy is drowning due to lack of poor management that is also finding themselves becoming targets, is out looking for handouts. Detroit is a great symbol of how Michigan works, the only metro area in the US losing population.
  • Allan Grinshtein comment that "This is absolutely disgusting." as well as the characterization in the posting itself that this bill applies to anything more than the managers of these funds, is what is disgusting. The true "investors" in these funds will not be taxed at the higher rate.

    "The legislation clarifies that any income received from a partnership, capital or otherwise, in compensation for services is ordinary income for tax purposes. As a result, the managers of investment partnerships who receive a carried interest as compensation will pay regular income tax rates rather than capital gains rates on that compensation. The capital gains rate will continue to apply to the extent that the managers’ income represents a reasonable return on capital they have actually invested in the partnership."

    These managers should never have gotten the 15% rate in the first place, they were being paid compensation.

    So stop crying and pay your fair share.
  • BGentry
    If this passes, it would be interesting to know how much extra revenue is gained (or lost) in Washington, and if there are fewer startups being funded because of it. I hope VentureBeat continues to follow the story and the impact.