November 14, 2017 / 7:30 PM / a year ago

Breakingviews - Private equity deserves U.S. tax hit, not startups

The dome of the U.S. Capitol Building is reflected in a puddle on a rainy morning in Washington February 2, 2012. REUTERS/Kevin Lamarque

WASHINGTON (Reuters Breakingviews) - A plan to hit U.S. startups 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. Ending a loophole on investment profit for buyout barons would bring in more.

Silicon Valley has got tangled up in the Senate’s quest to scrape up every bit of tax revenue it can. Republicans in that chamber can pass their wider tax reforms 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 startup worker could get a tax bill without even benefiting from stock proceeds. Fred Wilson of Union Square Ventures, who has been urging his fellow techies to sound the alarm in Congress, also argued the provision will hurt the competitiveness of the U.S. 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 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 startup workers versus private-equity partners may be politically expedient, since tech executives largely donate to Democrats, while buyout investors usually back Republicans. Still, the GOP faces accusations that its tax plans, such as breaks on the estate tax, partnership and limited-liability companies, benefit the ultra-wealthy first and foremost. Against that backdrop, closing the carried-interest loophole makes for a better target.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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