Venture Capital Should Pay Its Fair Share of Taxes, Altman Says

  • Head of Y Combinator says it's `ridiculous' to pay lower rate
  • Presidential candidates call for reforms; Silicon Valley split

In the growing debate over how much investors should pay in taxes on capital gains, a prominent Silicon Valley venture capitalist just weighed in with a counterintuitive take: investors like him should pay more.

Sam Altman, the president of startup accelerator Y Combinator, says it’s “ridiculous” that venture capitalists pay a lower rate on their returns than households do on their income.

The carried interest rule allows managers of funds, including venture capital and private equity, to pay taxes on the returns they collect at the capital gains rate, which tops out at 20 percent -- for gains on assets held longer than one year -- or 23.8 percent with net investment income surtax included. The top rate for regular income is 39.6 percent.  

Pro Reform

Politicians from both sides of the aisle have called for reforms that would eliminate the difference, including presidential candidates Democrat Hillary Clinton, and Republicans Donald Trump and Jeb Bush. President Barack Obama in September also revived his campaign to end the benefit.

“There’s no logical way that I can justify why the returns that we earn managing other people’s money should get capital gains treatment,” Altman said at a Cornell Tech event at Bloomberg’s New York headquarters late Monday.

For his part, Altman said he donates the extra cash from the tax break.

Altman isn’t the first in Silicon Valley to weigh in on the subject. As far back as 2010, after the House passed a tax bill that would have closed the loophole on carried interest, venture capitalists have chimed in, especially as they seek to distinguish their field from private equity. They argued that venture capital by nature creates jobs and encourages entrepreneurship for long-term economic health and growth.

Still, more investors believe that they should pay the normal, higher income tax rate than one would expect, Altman said, without citing any names. 

Fred Wilson, a co-founder of Union Square Ventures, favors taxing carried interest as ordinary income. He considers it a fee for managing other people’s money and that it’s not fair to give a special tax break to certain kinds of fees but not others. A change in the law might also force investors to put more of their own capital on the line, and less of other people’s, giving them “skin in the game,” Wilson wrote in a 2010 blog post. He did not immediately respond to a request Tuesday for comment on his current view.

Jeff Bussgang, a general partner at Flybridge Capital Partners, said in a 2010 blog post that he’d be “willing to and expect to pay higher taxes,” but he thinks levying those at venture capital investments in small businesses is self-defeating, given the prospects for job growth. Instead, he would rather see a carbon tax and/or a gas tax. Bussgang said Tuesday he stands by his earlier comments.

Redistributing Wealth

Government policies should serve to redistribute wealth rather than even out wages, which would impede technology, Altman said. That’s because technology throughout history has increased inequality while boosting total wealth, he said.

“Inequality can’t be stopped,” Altman said. Technology will make society rich enough “that we don’t need people worried about what they’re going to eat and where they’re to sleep, and let’s have government fix the redistribution problem there.”

Backers of newer Y Combinator startups include Willett Advisors, the investment arm for the personal and philanthropic assets of Michael R. Bloomberg, the founder of Bloomberg LP.

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