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.