Racial Red Herrings

Something called the Access to Capital Coalition announced its formation today, in order to argue that taxing carried interest as ordinary income would be particularly burdensome for minority-and-women-owned firms and the entreprenurs they fund.

The group’s members include a variety of trade associates, Robert Johnson of RJL Cos., Willie Woods of ICV Capital Partners, Louis Nogales of Nogales Investors and basketball legend-turned-movie theater mogul Magic Johnson.

They should be ashamed of themselves for injecting race and gender into this conversation. There are plenty of reasons to be against the tax change – and better reasons to support it, in my estimation – but this isn’t one of them.

I spoke to Willie Woods this morning, to understand how a color-blind tax change would disproportionately affect minority-and-women-owned businesses. He said that it would affect all small-and-mid-sized businesses equally, but that more minority-and-woman-owned businesses happen to be small and mid-sized. He said the figure was 99 percent. Even if true, there are two big problems with his argument:

  1. Not nearly all of those 99% are private equity-backed, or even want to be private equity-backed. The majority of small businesses are backed by bank loans or other forms of financing that never involve carried interest. It’s a partial red herring.
  2. There is still no evidence that a change to carried interest tax treatment would significantly reduce the amount of available capital to entrepreneurs. I asked Woods about this, and he said it would come down to a labor issue. In other words, fewer people would go into VC/PE (Woods is a former I-banker who said he shifted jobs for the better tax treatment). What he couldn’t answer, however, was how VC/PE did just fine during the Clinton years, under a much higher capital gains tax rate. The industry hardly had a personnel shortage. Again, red herring.

I wish opponents of the tax change would just be honest: You don’t want to make less money. It may not be the most politically-astute argument, but it’s at least legitimate. The rest is just for show…