Timmy G has said multiple times that he intends/expects/prays the fiscal deficit will be reduced from its current level of around 13% of GDP to 3%. That is a massive gap to fill and the government's math is already working against itself. This year's budget assumed an unemployment rate of 8.1%- which it was for about 15 seconds. But it's at 9.4% now and climbing and that isn't good news for tax receipts. So the government needs to find somebody to pay for their ridiculously optimistic economic assumptions. One potential candidate is VC firms.
The carry VC firms make is currently taxed at the capital gains rate of 15%. Mark Hessen, the president of the National Venture Capital Association, says there is a risk of this jumping to the ordinary income rate of 38%.
Mr. Heesen said that carried interest is now under threat because last week, Charles B. Rangel, chairman of the House Committee on Ways & Means, indicated that over the next two months, the committee would look everywhere possible to find money to help pay for health care reform. President Obama's budget also proposed that carry be taxed as ordinary income.
"If we lose this battle on tax and carried income, it's going to be disastrous for this industry," said Dixon Doll, co-founder and general partner of the venture capital firm DCM. He called the fight "one of the battles of our lives."
At some point the Washington braintrust is going to have to admit that their fiscal budget assumptions were not all typos and, if humanly possible, engage in a healthy debate on how to fix the problem. Until that point it seems like rewriting the tax code on an ad-hoc basis will have to do.
Venture Capitalists Fight for Carried Interest [NYT]