the lower capital gains tax rate because they invest their time and energy to help startup companies develop, grow, hire the right executives, and expand the economy. “It’s not like a passive investment,” Ganesan says. “We go hand in hand in the trenches with entrepreneurs.”
That argument, however, might strengthen the position of some critics that VCs and other wealth managers are essentially workers, like financial consultants or investment bankers, and their compensation should be taxed as income earned through their labor. This would set VCs apart from the long-term investors who contribute capital to venture funds, whose money is at risk, and whose profits from the funds are eligible to be taxed as capital gains.
Ganesan says that VCs on average invest about 3 percent of their personal capital into their firms’ funds. This strengthens their incentive to make profitable investments, because they could lose their own money if they don’t.
But it’s the investors in the venture capital fund, such as pension funds, educational institutions, and wealthy individuals, that put up most of the money at risk. Some critics say the capital gains rate should apply to the investment profits of asset managers such as VCs only to the extent that they have invested their own money in their firm’s funds.
In the prevailing political climate, VCs, private equity firms, hedge funds, real estate partnerships, and other businesses are each making their own case for advantageous tax treatment.
“Unfortunately, large corporations have done a good job of lobbying their case for a lower corporate tax rate,” Ganesan says. If Congress lowers that rate, it will need to find another way to raise government revenues, he says. And that could put a target on the backs of beneficiaries of the current carried interest tax rule.
“Who wants to come across as favoring hedge fund managers?” Ganesan says.
Even if Congress holds the line on carried interest, it’s possible that President Obama, or his successor in 2017, might test his or her administrative powers and simply direct the IRS to change the tax rules. Some tax experts, quoted in a New York Times column, maintain that a president has the authority to do this.
Ganesan says he’s not sure that move would be illegal, but warns that it would be unwise.
“It’s Congress’s role to decide taxes, not the president’s,” Ganesan says. Such an action by executive order would be challenged in court, he says. “It fundamentally questions the checks and balances in our democracy.”
Even if Clinton or Trump were to back away from their campaign commitments to change the tax regulations after taking office, the carried interest question might still be kept alive by Sanders supporters, other citizens’ groups, and politicians. Ganesan says the NVCA is prepared for an ongoing campaign.
“We are in it,” Ganesan says, declaring that he’s optimistic about the outcome. “We’ll keep fighting over this issue.”
