If the American Jobs and Closing Tax Loopholes Act is passed there will be a lot of unhappy venture capitalists, who say they may stop investing in startups.
The new legislation, co-drafted by democratic senator Max Baucus and democratic congressman Sander Levin, aims to re-classify the returns fund managers and venture capitalists receive as ordinary income and not capital gains, as it has been for much of the last decade. This amounts to a much larger income-tax hit for VCs, jumping from 15 percent to nearly 40 percent.
Proponents of the bill, such as angel investor and blogger Paul Kedrosky, say that since VCs, like hedge fund managers, don’t invest their own money when funding startups, that they should have to pay the same tax rate as the rest of us.
The closing of the tax loophole would appear the expedient thing to do in a political climate where bankers are being besieged over bonuses and the big hand of government is trying to better control the practices of all types of investors.
But VCs are crying foul over a bill that lumps them in with all fund managers and takes away the one incentive they say rewards them for their long-term and high-risk investments in startups.