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Here is my simple but logical reasoning. I am not a legal expert nor a tax expert, so I am going from “first principles”

1) A VC or PE partnership’s job is to manage money. They invest other people’s money. This is essentially a passive investment. they don’t start companies or run them, or design products or invent things, or make and sell products. They are simply an investment vehicle for other’s money.

2) Given the above, then what they get paid for doing that job is simply a salary. Nothing else. The fee is their base pay and the carry is their performance bonus.

3) If the investment results in a capital gain i.e. a start up company goes public or sold or a PE company gets sold then this gain which should be treated as Capital Gains must go to the investor who risked that capital. The investors who risked their capital are the LPs.

4) Therefore, only logical person or entity that can get the Capital Gains treatment is the actual source of money – i.e. the endowment or the pension fund or any other LP.

5) Definitely not the Fund-of-Funds. They are simply middlemen or brokers or intermediaries. The partners put none of their capital at risk

6) The only other people who get Capital Gains treatment are the Founders / Management who purchase low priced stock (or have options to do so) and risk their career and salary to build or fix a company.

7) Therefore the actual sources of money and the Founders / Management / Employees who own equity must get the capital gains treatment. This is critical and vital for the economy and for growth and for motivation to “fix ailing companies” i.e. that the sources of investment and the employee-owners get Capital Gains treatment. The middlemen or the “intermediaries” to use Warren Buffet’s term should simply get ordinary income (salary and bonus).

The intermediaries (VC and PE GPs) can invest their personal money in a company and get a capital gains treatment. They cannot invest OPM and get capital gains treatment. In this structure, they are also LPs. And the return on their LP investment can and should get Capital Gains treatment.

In the above logical and economically, socially and morally correct reasoning, there will be no dearth of funding sources. The actual people or entities with the money – i.e. the real LPs are still motivated to make risky investments. Just not with greedy “used car salesmen” as the middlemen. There are plenty others with good qualifications who will gladly be the middlemen without a Capital Gains treatment of the carry, as the source of these funds are motivated to invest and the world has a ton of educated professionals who will settle for a high salary and very large bonus, even if it is not Capital Gains.

These new managers will be working for the real investors on a salary and bonus which by any stretch of the imagination is very lucrative. Therefore, there will be highly qualified takers. This is a competitive world.

In summary the government will receive extra funds from the elimination of Capital Gains treatment of the carry and should

a) Reduce Capital Gains to 10% for the real source of money and for real equity holders such as employees / founders / management

b) Tax the salary and carry as ordinary income. This extra tax will pay for the reduced Capital Gains

Thank you

So, VC’s are just like anyone else: money IS more important than societal issues.

Please see Anatole France, Les Dieux ont Soif, for a blow by blow account of the last time the VC tax was introducted in the French Republic.