[FoRK] Private equity, venture capital, entrepreneurs, and tax policy

Jeff Bone jbone at place.org
Tue May 6 09:11:40 PDT 2008

On May 6, 2008, at 10:41 AM, Lawnun wrote:
> Jeff:
> Interesting stuff, and your little tutorials have, at least for me,
> clarified quite a bit about what the media seem to be getting  
> wrong.  :-)

That was my hope, anyway!  :-)

> But would you mind elaborating on your third assumption? I'm not  
> wholly
> following how "you can't raise taxes on either PE/VC without raising  
> it on
> entrepreneurs."  Effect, I get.  Taxes though?

It's literally the same economic activity:  in all three cases, the PE/ 
VC/entrepreneur is getting taxed on the sale of equity that they  
received in compensation in essence for their "sweat."  The nature and  
amount of sweat involved clearly differs, I can't think of any  
reasonable way to modify the law to distinguish these w/o generating  
undesirable consequences.  If you simply up the cap gains rate (or up  
it just for e.g., illiquid investments that ultimately pay out) then  
you both stifle investment and directly punish the entrepreneur.

If you break precedent then you can differentiate treatment, at the  
expense of tremendous complication and the probable introduction of  
true loopholes.  If you make a distinction between e.g. PE/VC and  
entrepreneurs on the basis of employment status in the portfolio  
company, then you stifle investment and / or create a situation where  
each PE/VC guy is a "full time" no-show employee of each portfolio  
company, or some other similar nonsense.  In either case the  
entrepreneur suffers again.

IMHO, the only sensible way to make this work is to recognize that,  
ultimately, each of these guys is engaging in a minor variation of the  
same basic economic activity, and it therefore doesn't make sense to  
treat them differently.  Despite all of its flaws, our present tax  
system gets that right, at least, within the framework of its own  
tortured logic.

A reasonable argument might be made that the cap gains rate should not  
consist merely of a single short-term and single long-term rate, but  
rather a tiered progressive structure of rates paralleling the income  
tax structure.  That's definitely arguable.  But I think --- hope ---  
it's clear that any such restructuring is likely to have a chilling  
effect on lots of vital economic activity, including some things of  
special interest to the folks hereabouts.  And in any case, this again  
impacts equally all three of the windfall-driven professions we're  


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