A Wilsonian Dissent on Carried Interest

I’m beginning to wonder if this carried interest debate is a bit like steroids in baseball. A number of industry people seem to support a tax change, but don’t want to speak publicly about it (for fear of ostracism). So kudos to venture capitalist Fred Wilson, who is like a smaller and less noxious version of Jose Canseco.

Today, Fred wrote the following (go here for full post):

“I strongly believe that long term capital gains should be taxed differently than short term capital gains. And I also strongly believe that capital gains should be taxed differently than ordinary income. The counter argument is that the economic incentives to take risk with your capital should be enough and you don’t need additional tax incentives. I don’t buy that. Human nature being what it is, most people are going to want to be conservative with their capital. Taking a risk with your capital, particularly on new business initiatives (whether it’s a new restaurant in the neighborhood or a cure for cancer), is something we need to encourage. And many of the developed countries in the world agree. In some countries, capital gains are not taxed at all. I don’t think we need to take the economic incentives that far.

But, and this is a big but that will annoy most if not all of my colleagues in the VC and private equity businesses, if you are generating those gains with other people’s money (OPM), then that is a fee you are being paid and it should be taxed as ordinary income. I really don’t see how anyone can argue otherwise with a straight face.

If Congress is successful in taxing carried interest as ordinary income, it will massively increase the amount of taxes I pay. So be it. Someone has to pay the taxes to keep our troops equipped, our borders secured, our schools modernized, and our children healthy. It might as well be me and my wife.”

I’ve heard this from lots of other PE Week Wire readers, but all of them have included the postscript: “Please don’t use my name.” The vast majority of you, of course, supports a continuation of existing tax policy, and have put forth dozens of strong arguments in support of your case (see here and here). But some small cracks are beginning to show in the solidarity.