Of course not.  Money managers deserve to be taxed at the same rate as everyone else.   Chris Dixon of Hunch and Founder Collective notes the following [1]: > Steven Schwarzman is the CEO of the Blackstone Group, a multi-billion dollar money management…

No, this sentiment is just smoke and mirrors.  Most VCs, hedgefunds, and money managers actually pay some of the lowest tax rates in industry, far lower than average working American.  (i.e. 15% vs. 35%) Why the disparity?  Well they were better at lob…

I think everyone should pay the same tax rates. This means I wouldn't agree with the reverse version either: people with smaller salaries and such paying less tax than those with bigger ones. That leads to lazyness in the grand scheme of things, because then you're not motivated to earn more, so the resulting growth of the economy should be lower.

I couldn’t agree with you more: carry is like common shares that entrepreneurs buy at a nominal price. In a venture capital fund, it is capital that is “loaned” to the General Partners to invest in companies. The GPs have to give back the capital and can keep the profits, which should be taxed at the appropriate capital gains rate (short-term or long-term), just like the common shares of the entrepreneur.

What made you change your mind?

To be clear, I tend to side more with my friend Jim Robinson’s position and less with my friend Fred Wilson’s on this topic. I believe that the proposed changes will have unintended consequences. We live in a nation with many creative lawyers, and the folks who make astronomical amounts of money (large PE funds and hedge funds) will find ways to restructure their activities and get around the extra taxation.

The category that will get hurt is going to be the small venture capitalists, the ones who don’t make a lot of money off their management fees, and who work hard to foster company creation and seek long term success. These investors will be tempted to raise larger pools of capital to generate more fees (management fees would now be taxed like carry, after all) and will as a consequence invest only in larger deals. This is the wrong incentive, in my opinion.

The right way to do this would be to adopt a finer filter. Why not tax where the money is, and not risk breaking what has proven to work. Tax the larger funds but leave the smaller funds alone. This will have the positive “unintended” consequence to create an incentive for smaller fund formation, to invest in smaller companies and be very motivated to create long-term success.

Your 'smart people' argument asks government to treat money managers differently because they are 'smarter'.

I am not a money manager. I worked in a hedge fund for some time and quit to pursue my passion, scientific research. I feel like I am as smart as the next guy. Your arguments apply, without modification, to me. It follows that they are therefore bad arguments for why money managers should be treated preferentially by the tax system.

Sure, for large funds, and virtually all PE, LBO & hedge funds, that is absolutely true.

As a friend and large hedge fund manager once said to me… “Robinson, when are you going to wise up and raise a much larger fund. You'll make tons more money on the front end, and if the deals work, so much the better”.

Maybe he was right. But I would have had to move too far up the food chain where I have much less passion.

Sounds like you have VC experience, so you can do the math. We currently have a $300 mil fund, several years in, tail kicking in (meaning reduced fees). 17 People. Until a few months ago two offices (NY & Silicon Valley). 6 GP's. Global travel bills. Get the picture? Listen, we earn a good living, sure. but 'pocketing gains'? Um, no. Any real money made is on realizations from carried interest. Not like we're going public anytime soon.

Incidentally, it is only for this specific type of venture firm that I am arguing another side to the carry debate. Certainly not for larger firms where what you say is absolutely the case.

More importantly, what you're arguing is for lower taxes. I get that. What Chris and Fred (and I agree with) are arguing is for tax fairness, that carried interest isn't really a capital gain because it's other people's money.

I think that the macro-economic environment seems to be the major driver in venture capital fund formation.

I like the idea of putting the full GP commit into the first round as an offset to higher carried interest taxes. It's a creative approach. I just wonder if LPs will be put off by it since interests will not be aligned as closely. LPs may be concerned that some funds will follow-on in weaker companies just to protect their GP position. I don't think most funds would act this way because they would be putting their long-term viability at risk, however, LPs are sure to raise it as a potential issue.

that would be good for a bunch of reasons, including allowing us to get cap
gains treatment on the most highly leveraged of the rounds we do

we do it that way at USV, but we do it pro-rata across all of the rounds not
just in the first round

I would like to see Congress make a distinction between smaller funds, particularly those focused on seed and early stage, where the managers aren't getting rich from management fees. In fact, there are quite a few $25-$150 million venture funds where the partners earn the same or less in annual comp than VC-backed CEOs. Higher taxes on risk capital for a group of seed/early stage investors that act as a linchpin for the innovation economy feels like the wrong move at the wrong time. Parsing out the smaller funds would have little to no impact on the govt's tax receipts but would preserve a system that's working just fine.

Overall, I don't think there's a right or wrong on this issue but a more nuanced thought process should be considered to avoid damaging a healthy part of the economy.

Unfortunately too much of the rhetoric on this issue has been portrayed as good vs. evil, us vs. them, entrpereneur vs. VC – and it's a shame.

this is about going after money managers who make millions and pay a lower
effective tax rate than many ordinary workers

the truth is most VCs are making management fees in the millions per year

the carry is on top of that

the financial risks we take and sacrifices we make are not close to what
entrepreneurs take

the best VCs, like you, do work hard and add a lot of value

but many, maybe most, add no value and often subtract it by giving companies
bad advice and firing founders and doing all sort of bad things

the hedge fund, buyout, private equity, and venture industries deserve what
is happening to them. the level of arrogance and hubris has been over the
top. and the compensation has been too.

maybe it is because i live and work in NYC that i am so sensitive to these
issues. the vast amounts of wealth accumulated by money managers in the past
two decades is obscene.

of course i want my taxes to be lower

but more than that, i want to see this country operate a balanced budget

we can't simply keep borrowing money

we have to generate revenues in excess of our costs

Fred clearly states that he believes he can distribute funds better than
govt to charitable causes. If he had to pay higher taxes, it is logical that
some of the charities he funds would suffer. Why is that a good thing? Is
the 'fairness argument' strong enough to balance the lost benefit of the
charities?

This is another bullshit argument; it's a function of Reagan's Big Lie which is that government's intake of funds should ultimately be $0. The fact is that business spends money sometimes efficiently, and sometimes not so efficiently, and that government spends money on things that business won't spend money on.

I don't understand why, in 2010, this should come as news to anyone.

It seems the best way to protect the innovation economy that's so unique in our country is to build a moat around all of the constituents that drive it and protect it as much as possible. One thing I know is innovation works here better than anywhere. We have the best risk capital system on the planet. Why mess with success?

Also, I may just be looking at this through a different lens. From my viewpoint, I'm a partner with my investors and a partner with my entrepreneurs. All of us bring different things to the table to create what is currently the most powerful innovation machine in the world. You can't bake a good cake without all of the ingredients and trying to say one ingredient is more important or should be given a different status seems wrong.

I think that's why a lot of entrepreneurs have been very supportive of fighting the tax changes to carried interest. They may not be vocal on this blog or on twitter but there are many out there that signed the NVCA petition and have reached out to me over the last few months. I even had 2 of the entrepreneurs we backed send me the petition before I was even aware of it.

I like to think the reason they are supporting no changes to carried interest taxation is because they think of me as a partner, not just a guy that moves money around. I've never eaten a $400 crab and don't even like crabs – much happier with a $2 piece of pizza

All the entrepreneurs I work with know I will take a call at 1am to deal with an issue, will fly across the country in a moment's notice to help them close a sale or biz dev partnership, will spend hours both identifying and selling potential recruits to join the company, etc. Many of the VCs I know work just as hard to provide the same type of value. We haven't partnered on an investment but I'm sure you do the same. All of these things build real equity value for entrepreneurs. Why should our contributions not be recognized the same way in the tax system? To me, that seems unfair.

I think Jim stated my thoughts on other people's money very well. Entrepreneurs are also utilizing OPM to create more equity value for themselves, just as VCs do by taking money from LPs. Entrepreneurs use our capital to create products, hire talent, fund sales and marketing, etc.

But by that logic, as most startup companies are built with OPM as well, and asset appreciation is highly-correlated with this money with a few notable exceptions, then, what? Entrepreneurs at these companies should also be taxed at a full amount? Is 'sweat-equity' in just one business truly different than sweat-equity in multiple businesses?

This is the problem with using personal 'risk capital' as the standard; fact is, entrepreneurs are — and should be — paid off the value creation of their stock, though in most cases (at least for the younger ones) they have little in the way of actual 'risk capital' invested. What they do have is a bucket-full of dedication, sweat, hard-work, tears, etc., in the game. As do I. Certainly not anything close to the same amount in any given company, but overall? Absolutely.

A corollary of my argument is this–the higher the tax rates, the less capital there is for startups, and that is a Societal Bad which you need to weigh against your perceived Societal Good of the fairness of higher tax rates on money managers.

But here's my question – if you do believe that you can spend your money
better than govt, then shouldn't you still want your taxes to be lower?

I know it's unfair relative to firemen/teachers – I don't argue with that
point. I also don't argue with the point that the federal budget needs
balancing. But is it ever a good thing to increase taxes? Why not just cut
spending, especially on the expensive military actions that have led to the
massive deficit.

Personally I rather see ordinary income taxed for less – I can't see higher
taxes benefiting too many people. Increasing your taxes might sooth some
hurt feelings amongst firemen, but in the end, the charities and causes
you're donating to could be the ones to lose out, no?

i don't see that the same way at all

they are not investing capital

they are building it

but they don't

they give you 20% of the gains you generate

and that is a fee

i feel that it is better to give the money away to charity, which i do

and the point is that i do it with other people's money

so if they take a little bit more from me, that's ok

Here's the thing… Are we trying to punish people (in which case, let's punish the right people); are we trying to raise taxes to pay for stuff (then let's actually do that, like with a shift to consumption taxation); or are we trying to define fairness (in which case let's completely redraw the lines). My read of the current Bill is it accomplishes none of these objectives.