You will probably see Silicon Valley’s Sand Hill Road, center of the nation’s venture capital industry, turn to the right during the next elections.
Senator Hillary Rodham Clinton has just become the last of the main three Democratic presidential candidates to announce her support for ending a tax break that has enabled venture capitalists and other investors to enjoy taxes of 15 percent on their profits, instead of the income tax level of 35 percent.
We’ve covered this story as it has developed. Congress is considering passing legislation to end the break.
“Don’t get me wrong,” she was quoted in today’s NYT as saying in New Hampshire, in response to a question about whether this would harm the support of entrepreneurship. “Private equity and venture capital play important roles in our economy, and we should continue to support the entrepreneurial spirit that makes America great.”
But she went on, “We can close this loophole that unfairly benefits some of the best-paid people in America, while continuing to encourage investment in innovative, young companies.”
VC Kate Mitchell has argued that VCs are putting their money at risk along with the entrepreneur, citing her own example: She has invested her own savings into start-ups, and then waits many years for returns that may or may not come. The shortcoming to this argument, of course, is that alongside her own money, she is also investing money her firm gets from institutional investors. She partakes of profits returned on both her own savings and on this other institutional money that is not hers. [Update: Indeed, the VC tax being discussed would be applied to this latter portion, and so her argument about her own savings may be irrelevant, as the commenter below suggests. We’re checking the details on this.]
Mitchell also argues VCs are different from buyout and other investors, in that VCs support entrepreneurship and nurture young companies that tend to add jobs and contribute to economic expansion.
Update: Oh, and look at what buyout firm Blackstone is doing. Effectively, avoiding paying $3.7 billion in taxes. Makes the head hurt.