September 24, 2007
Here's an excerpt from the National Venture Capital Association, talking about compensation and economic growth. Can you guess what [x] is?
Without a doubt, [x] [is] an important part of a successful formula. Venture-backed companies, steeped in the culture of shared ownership, have had an enormous impact on the American economy. ... In the current shower of negative press over the excesses of a few, it is important to keep our eye on the real economic prize and the role that [x] [has] played in maintaining economic growth.
As we can see from the troubles in many economies, here and abroad, growth in jobs and GDP cannot be taken for granted. ... Just as [x] [has] been an essential part of the engine that has driven America's entrepreneurial leadership and economic growth over the last decade, [it] can be a key to a brighter future for many more. ...
But the U.S. does not have a monopoly on [x]. We see an example of the need to be prudent in the technology area, which has serious competitors outside the U.S. Taiwan, for example, has built great technology companies on the foundation of [x]. ... These strong Taiwanese companies have been built with American engineers and managers who joined them in part because of more favorable [x] treatment in Taiwan. The Peoples Republic of China is also beginning to build a technology industry with the help of [x]. Several European nations are revising their accounting rules to encourage the use of [x]. The world has taken notice of our economic success and has discovered the importance of [x] as a competitive tool.
So .. can you guess what [x] is? Hint: It's not carried interest.
It's stock options. The NVCA lobbied heavily against the proposal to record stock options as an expense on the income statement, arguing that the accounting change would substantially harm the technology industry. The accounting change was eventually made a couple of years ago, and yet the sky has not fallen, and Silicon Valley has not moved to Taiwan.
The same goes for carried interest. Changing the tax treatment of carried interest will not cause the sky to fall, I promise.
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1. Posted by Jake on September 24, 2007 @ 20:15 | Permalink
Agree
2. Posted by M. Hodak on September 25, 2007 @ 13:41 | Permalink
I agree in the sense that our economy is resilient enough to withstand most policy changes of this nature, but these two examples are very different in their economic impact.
The stock option rule didn't change the economics of any firm, large or small, only the way the economics were reflected in the financial statements. Changes in accounting rules that have no cash flow implications at the firm level should have no economic impact at the macro level. That's what we saw with FAS123R.
A change in tax rules has a decided economic impact. It basically begins a transfer of value from owners to the government. The owners will change their behavior (i.e., the pattern or nature of their investments) to avoid that tax penalty, which change will surely have macro-economic consequences. The only question is how big, and neither you nor I are smart enough to determine that for certain. (I'm saying this as someone whose job includes finding alternative pathways for investment so as to maximize after-tax returns.) If this tax change costs tens of billions of dollars to the economy (which it could conceivably do), it may not be visible at the macro level--so one can end up saying, "See, no big deal"--but would still be a huge economic waste.
3. Posted by Vic on September 25, 2007 @ 15:31 | Permalink
Fair point, but begs the question of what the behavior change will be. The tax change impacts fund managers a lot, but investors only a little (i.e. to the small extent that fund managers can shift the incidence to them), and I'm skeptical that fund managers will throw out the business model in order to reduce their personal tax bill. Fund managers will act to maximize their after-tax income, not to minimize their taxes, as you know.
But you are surely right that there is an economic cost on the margins, and I'm willing to be persuaded that this cost is large. I'm just saying that I'm skeptical because these sorts of claims are a scare tactic, and the NVCA has little credibility.
4. Posted by M. Hodak on September 25, 2007 @ 20:46 | Permalink
"There is an economic cost on the margins"
That's exactly it.
"The NVCA has little credibility"
Deservedly so.
