Venture capital stimulates economic growth

May 10, 2010

We’ve written before on a recurring thread found in Thomas Friedman’s recent columns:  the importance of keeping the entrepreneurial spirit strong as a uniquely American source of economic prosperity.  While finding ourselves in agreement, in broad terms, we’ve also noted that Friedman seemed to not connect the dots between increasing taxes on venture capital and hurting job growth.

In yesterday’s New York Times, he connects the first few dots in his conclusion.  The “other taxes (to cut) to stimulate growth” ought to specifically include the carried interest.

“My takeaway is that U.S. and European politicians — please don’t laugh — are going to have to get a lot smarter and more honest.

To be the Regeneration, they’ll have to figure out how to raise some taxes to increase revenues, while cutting other taxes to stimulate growth; they’ll have to cut some services to save money, while investing in new infrastructure to grow economic capacity.”

The federal government, searching for sources of revenue, would be making a costly and short-sighted mistake to do it by dramatically increasing taxes on the one asset class – venture capital – that consistently creates high quality new jobs, even in a terrible recession.

UPDATE 5/24/10:

John Rutledge in today’s WSJ – Congress’s Carried Interest Tax Folly

Tax rates matter. And what matters about them is what activities get taxed, not who gets taxed. When you increase the tax rate on an activity, you get less of it. The only question is how much less of it you will get.

Congress should be asking one question: “Is long-term investment something we really want less of, especially now?” Unfortunately, in today’s political climate, tax policy discussions focus almost exclusively upon who, not what, gets taxed. This means singling out specific groups of people—bankers, Wall Street, “the rich,” the owners and executives of insurance, oil and drug companies—to punish for our economic difficulties. This may be politically popular but will have bad consequences for the economy.

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