Private Equity Chiefs Are Better Tax Targets Than Start-Up Workers

Private Equity Chiefs Are Better Tax Targets Than Start-Up Workers

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A plan to hit United States start-ups with an extra tax would be better directed at private equity. Technology firms are understandably upset over a Senate plan to tax stock options and restricted stock units when they are vested. It would raise $13.4 billion over 10 years, according to the nonpartisan congressional Joint Committee on Taxation. But ending a loophole on investment profit for buyout barons would bring in more.

Silicon Valley has gotten tangled in the Senate’s quest to scrape up every bit of tax revenue it can. Republicans in that chamber can pass their wider tax changes with a simple majority only if they don’t add to the deficit after the 10-year budget window. Under a recently passed resolution, they also can’t add more than $1.5 trillion to the deficit within a decade. The current Senate plan falls just under that limit.

Stock options usually vest on a set timetable, whether there is a liquid market for them or not. That means an average worker at a start-up could get a tax bill without even benefiting from stock proceeds. Fred Wilson of Union Square Ventures, who has been urging his fellow tech industry workers to sound the alarm in Congress, also argued that the provision would hurt the competitiveness of the American tech sector.

Congress decided to retain another provision that would bring in a bit more revenue if eliminated, in the so-called carried-interest loophole for private-equity partners. During his presidential run, Donald J. Trump pledged to end it because it allows investment profit to be taxed at a lower capital gains rate of about 23 percent, instead of the personal income rate of about 40 percent. Eliminating the carried-interest provision would raise $15.6 billion in tax revenue over 10 years, the Joint Committee on Taxation said in 2015.

Taxing start-up workers versus private-equity partners may be politically expedient, since tech executives largely donate to Democrats, while buyout investors usually back Republicans. Still, the Republican Party faces accusations that its tax plans, such as breaks on the estate tax, partnership and limited-liability companies, benefit the ultrawealthy first and foremost. Against that backdrop, closing the carried-interest loophole makes for a better target.

Gina Chon is Washington columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

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