Pearls of Wisdom: Too Special to Pay Regular Taxes?

In Bloomberg, we read that some people think that the American economy will totally fall apart if venture capitalists are required to pay the same income tax rates the rest of the working population.

Now, we don’t have precise information about how much venture capitalists are paid, but some data was made public when Ellen Pao sued Kleiner Perkins for gender discrimination.  Owners (called general partners) of venture capital firms do not get wages or salary in the same way that many working Americans are paid. Rather, they get a portion of their firm’s profits. It turns out that last year that number (for the junior most general partners) was about $2.6 million.

Looking only at federal income taxes, a person who makes $2.6 million would pay federal income tax of about $985,770 or 38%, leaving him or her with $1,614,230. A person who made $2.6 million, but all long-term capital gains, would pay total income taxes of only $493,600 or 19%, resulting in take-home pay of $2,106,400.

This does not even take into account the benefits of Internal Revenue Code section 1202 (basically a venture capitalist who invests in a new company gets a zero tax bracket for the first ten million dollars of profit!).

Their argument, essentially, is that when the person who was used to getting $2.1 million dollars in take-home pay, is faced with the dire prospects of getting only $1.6 million, he would rather stop working or go into another line of work… or something.

I do not believe that argument.

If Congress finds that there are potential investors in the venture capital industry who are unable to hire any managers, then Congress could create a special incentive to become venture capitalists. That is if you actually believe that there could be a fund manager shortage – give me a call to reaffirm my belief in the infinite gullibility of the American people.31

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