Under the title of a jobs bill Democrats propose Giant increase in tax on venture capitalists

Venture capitalists provide the seed money for new corporations. So Dems have an idea: let's raise their Federal tax rate from 15 percent to about 35 percent. This tax was already set to increase to 20 percent next year with the sun setting of the Bush tax cuts, but Dems decided that wasn't enough of an increase. With a straight face Dems are arguing that this won't impact investments. At best, Dems don't understand that who pays the tax is not the same as who bears the burden of the tax.

The House of Representatives passed a bill today that would raise the taxes that venture capitalists and other investment managers pay on carried interest — their share of the profits from a successful start-up investment.

The Senate will vote on the bill after the Memorial Day recess.

The bill, which is called the American Jobs and Closing Tax Loopholes Act of 2010, would extend unemployment benefits and lending and tax relief for small businesses. But venture capitalists are upset about the provision that would raise taxes on their carried interest.

A typical venture capital firm collects carried interest of 20 percent of the profits when a start-up company goes public or is acquired. Today, that is taxed at the capital gains rate of 15 percent. But the bill would require that 75 percent of investors’ carried interest be taxed as ordinary income.

Opponents of the change in taxation say that the capital gains tax rate rewards taking big, long-term risks on young companies. Proponents of the change say that because venture capitalists mostly invest other people’s money, they do not need to be rewarded for taking investment risks. . . .

A little more of a discussion is available here.

Some predictions on whether this change will raise any money.

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