One More Roadblock for Small Business
Today the U.S. Senate is back at work, and one of their early agenda items is to work on the bill just passed by the House last week dealing with “carried interest.” This is pretty much a Wall Street term for some of their profits, and “carried interest” has always been taxed at the capital gains tax rate. The bill just passed by the House raises that tax rate from 15% today to about 35% on this profit.
Since this increased tax rate would apply to some Wall Street profits—who wouldn’t want to stick it to Wall Street? Unfortunately, this bill also includes Venture Capitalists in the mix. This means that “carried interest” (a portion of the profits taken from an IPO or merger) would be taxed at the higher rate, instead of at the capital gains rate.
If the bill becomes law, every Venture Capitalist will be taking a harder look at every potential investment, and will likely only invest in the most promising “cream-of-the-crop” deals. When factoring in additional expenses from higher taxes, VCs are not going to make any deals other than sure things.
Why should they? There are other places VCs can invest their fund money, e.g., hedge funds. Yes, hedge funds would also be taxed at the higher rate, but they also promise faster returns with less risk than founding businesses. Of course, hedge funds do not create new businesses or jobs.
I don’t know, maybe higher taxes on “carried interest” would be a fair and equitable thing—it has been discussed for many years in Washington. But could it be implemented at a worse possible time than right now?
The very politicians who proclaim that small business is the primary avenue to economic recovery for the U.S., turn right around and pass a bill that makes it harder for new businesses to start up and create new jobs. Venture-backed startups added over 13,000 new jobs in the first quarter of this year—why damage that kind of progress now?
VCs have lobbied to have their industry exempted from the bill, but of course the House members turned a deaf ear…and we’ll have to wait and see what the Senate does.
So, if anyone out there is working on an upcoming new business that will require venture capital funding—you had better get busy and let your Senator know that this new bill could make it much more difficult for you to start your new business. You may also want to let your Congressman know that they have likely jeopardized your chances at venture capital.
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