President Joe Biden’s pledge to pay for his comprehensive child care and infrastructure packages by raising taxes on the wealthy is creating battle lines among venture capitalists.
Even before a specific bill has been formally introduced, some Silicon Valley venture capitalists and other large investors outside California have mobilized to protest the president’s plan to raise the capital gains tax, which investors pay when they sell financial assets. The opposition has started with the industry’s largest lobbying group, the National Venture Capital Association, which has publicly opposed raising capital gains. That move is already setting off a clash between an industry that overwhelmingly favored candidate Joe Biden over then-President Donald Trump.
“Policymakers have realized time and again that in order to get what we want in this economy — risk-taking, challenges to incumbency, new technologies, etc. — we have to try to encourage the allocation of capital away from the short-term bets,” said Justin Field, senior vice president of government affairs at the NVCA. “The best way to do that is to make it relatively more attractive to make it longer-term activities.”
Capital gains taxes apply to wealthy individuals whose earnings are based on investment rather than salaried labor. The new White House plan would now tax capital gains as income for those making over $1 million annually. At its highest, the capital gains tax rate is only at 23.8 percent — a near-historic low — while the top income tax bracket sits at 37 percent. Biden is also proposing raising the highest income tax rate to 39.6 percent.
These proposals have set off a chorus of disapproval among some venture capitalists. David Stewart, a Texas-based venture capitalist, tweeted recently that a higher capital gains rate “could neuter America’s entrepreneurial ecosystem.”
But a small vocal minority of venture capitalists, with plenty of data to back them up, say they are comfortable with raising the rate. A 2018 study by the nonpartisan Congressional Research Service concluded there was no strong relationship between low capital gains taxes and greater innovation.
“Although arguments are made that lower gains taxes stimulate innovation and entrepreneurship, there is little evidence in history to connect periods of technical advance with lower taxes or even high rates of return,” the report states.
However, some investors, like Vinod Khosla, a prominent Silicon Valley billionaire and investor, say they don't mind if their taxes go up.
“It's time lower taxes not be key criteria for ethical folks,” Khosla tweeted earlier this month. “Sharing the benefits of capitalism is not terrible.”
Khosla and others say America needs a substantial boost for Biden’s American Families Plan.
“For investors and VCs, it’s time to pay up,” said Nihal Mehta, a founding general partner at Eniac Ventures. “The investment in human capital is going to outweigh the delta in the tax that we are paying.”
Lisa Calhoun, the founding general partner of Valor Ventures and the first woman to start a venture capital firm in Georgia, echoed the same view.
“For myself, I didn’t start a VC firm because I would have a tax privilege,” she said. “I got into venture capital to change the world. For those that lobby that the best and brightest are going to leave over a tax rate, I say goodbye. Generating wealth is a byproduct of wealth of hard work and opportunity, not a tax rate.”
Fundamentally, the question of how much capital gains taxes will rise remains a political one. For Biden Democrats, the political realities are not terribly different, and perhaps even slightly better, compared to the last time such a tax proposal was advanced, nearly a decade ago.
President Barack Obama’s White House put out a proposal similar to the one Biden’s White House is now offering, according to Steve Wamhoff, the director of federal tax policy at the Institute on Taxation and Economic Policy, who formerly worked on tax policy for Sen. Bernie Sanders, I-Vt.
“Biden proposes to eliminate that break for millionaires. Income over $1 million would be taxed at the same rate no matter what form it takes under Biden’s plan,” he emailed. “Obama’s proposal technically left the capital gains breaks and all other tax breaks in place, but then would impose another provision on top of all of it that would say a millionaire must pay an effective rate of at least 30 percent.”
Nearly a decade ago, the White House said about 55,000 taxpayers pay a lower tax rate than “millions of middle-income taxpayers” and that this arrangement is “fundamentally unfair.”
During the Obama administration, this disparity was dubbed the “Buffett Rule,” after celebrity investor Warren Buffett, or “the basic principle that no household making over $1 million annually should pay a smaller share of their income in taxes than middle-class families pay.”
However, then as now, the political realities of getting such a bill through Congress is not a sure thing: It would require unanimous support from all 50 Democrats in the Senate.
“The party is only as progressive as Manchin,” Mehta, of Eniac Ventures, said, referring to Sen. Joe Manchin of West Virginia, widely viewed as the most politically conservative Senate Democrat.
In 2012, the Buffett Rule bill did not survive a filibuster in the then-51-Democrat Senate when it came up for a vote. Critically, Democrats did not hold the majority in the House of Representatives at that time, so there was practically no chance of having it pass against a staunch Republican opposition.
Any new Biden-supported tax bill could conceivably pass the Senate this year under an expedited process known as budget reconciliation, which circumvents the filibuster and would not require any Republican votes.
Omri Marian, a tax law professor at the University of California, Irvine, said the political hurdles remain very real. He also said he didn’t buy claims that venture capital and other types of investment would slow if Biden’s new tax plan were to be enacted.
“These people are not going to stop being entrepreneurs just because they’re going to keep less of their profit,” Marian said.