US Venture Capital Lobby Reacts To Rangel Tax Plan

by Mike Godfrey, Tax-News.com, Washington

31 October 2007

The US National Venture Capital Association (NVCA) has expressed "deep concern" over provisions proposed in the Tax Reduction and Reform Act that would increase the amount of tax paid on private equity fund partners' carried interest.

In a statement released in response to comprehensive tax reform legislation introduced by House Ways and Means Committee Chairman Charles Rangel (D-NY) last week, the NVCA stated that the proposals would mean an effective 100% tax increase on venture capitalists' carried interest, and raise a significant barrier to investment in start-up companies and new technologies.

“The legislation introduced by Chairman Charles Rangel to alter the taxation of carried interest from a capital gains rate to an ordinary income rate greatly concerns the venture capital community. Simply put, we believe that the current capital gains tax treatment of carried interest for venture capital is the right tax and public policy and that this measure will likely have negative implications for the start-up companies that fuel America’s economic growth," stated Mark Heesen, president of the NVCA, which represents approximately 480 venture capital and private equity firms.

Venture capitalists argue that carried interest should continue to be taxed at the 15% capital gains tax rate, because it represents income derived from investment, which carries with it an attendant level of risk. But Rangel believes that such income is "essentially a management fee or payment for services, which generally are taxed as ordinary income". The bill would, however, continue to tax carried interest at capital gains tax rates to the extent that carried interest reflects a "reasonable return" on invested capital.

Heesen continued: "The US has built an entrepreneurial ecosystem that is the envy of the world and we believe that the consequences of this legislation will be to penalize the very investors who are committed to growing our most critical innovative industries. We believe that seriously jeopardizing an investment model that works so well to create US jobs and foster innovation is not the answer."

Citing a 2007 Global Insight study, the NVCA says that venture-backed companies accounted for 10.4 million jobs and $2.3 trillion in revenue in the United States in 2006.

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