I'm a big fan of VC investment, but this taxation issue is pure rent-seeking by the VC industry.
Perform the following thought experiment: if the VC industry didn't receive cap gains treatment for carry, would there be a strong policy case to create an exception? I really doubt it. And even if there were a public policy case to be made to subsidize VC, would we choose to do it in the area of partner compensation? I doubt that even more.
The principle involved is pretty simple: to receive cap gains treatment, you must have capital at risk. To the extent that VCs are investing and profiting on the upside of investments made with other people's money, they don't have capital at risk. Income treatment is appropriate, just like it is for everybody else in the economy who receives a bonus contingent on business outcomes.
VC will work just as well when partners are taxed fairly. Have no fear. Fairness in the tax code is a justifiable end in itself.
A useful counterexample here would be the success since the late 1980's of closed game systems.
Nintendo, Sega, Sony & Microsoft platforms all share a common characteristic: software developers need platform owner permission to do nearly anything, and all developers tithe back a fraction of their revenue to the platform. No 'open' gaming platform has been able to put a dent into this model, not even the well developed and otherwise successful PC-based gaming market.
In the balance of forces, the closed systems have sacrificed a large measure of innovation and diversity in favor of standardization, editorial control, and cross-subsidization. When performed skillfully, all three of these things add value for the consumer. For example, via their monopoly platform vendors force the few, chosen developers to invest particularly large sums into game production, sums that probably wouldn't be feasible in a more competitive market. It's central planning, to be sure, but in this limited case it's been done well enough to defeat the open system competition, especially as the platform guys have proven themselves to be 'fast followers' to innovation coming from the PC side.
Techdirt has not posted any stories submitted by David Feldman.
No capital at risk = no capital gains treatment
I'm a big fan of VC investment, but this taxation issue is pure rent-seeking by the VC industry.
Perform the following thought experiment: if the VC industry didn't receive cap gains treatment for carry, would there be a strong policy case to create an exception? I really doubt it. And even if there were a public policy case to be made to subsidize VC, would we choose to do it in the area of partner compensation? I doubt that even more.
The principle involved is pretty simple: to receive cap gains treatment, you must have capital at risk. To the extent that VCs are investing and profiting on the upside of investments made with other people's money, they don't have capital at risk. Income treatment is appropriate, just like it is for everybody else in the economy who receives a bonus contingent on business outcomes.
VC will work just as well when partners are taxed fairly. Have no fear. Fairness in the tax code is a justifiable end in itself.
Game consoles: economically successful, very closed
A useful counterexample here would be the success since the late 1980's of closed game systems.
Nintendo, Sega, Sony & Microsoft platforms all share a common characteristic: software developers need platform owner permission to do nearly anything, and all developers tithe back a fraction of their revenue to the platform. No 'open' gaming platform has been able to put a dent into this model, not even the well developed and otherwise successful PC-based gaming market.
In the balance of forces, the closed systems have sacrificed a large measure of innovation and diversity in favor of standardization, editorial control, and cross-subsidization. When performed skillfully, all three of these things add value for the consumer. For example, via their monopoly platform vendors force the few, chosen developers to invest particularly large sums into game production, sums that probably wouldn't be feasible in a more competitive market. It's central planning, to be sure, but in this limited case it's been done well enough to defeat the open system competition, especially as the platform guys have proven themselves to be 'fast followers' to innovation coming from the PC side.