Taxing Carried Interest as Ordinary Income and the Potential Impact on New Venture Fund Formation

21 Pages Posted: 18 Nov 2021

See all articles by John Manuel Barrios

John Manuel Barrios

Washington University in St. Louis - John M. Olin Business School; National Bureau of Economic Research

Yael V. Hochberg

National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business

Date Written: October 1, 2021

Abstract

We explore the potential impact of taxation of carried interest at ordinary income rates on the economic attractiveness of new VC fund formation and its potential impact across US states. Our analysis suggests that changing the taxation regime for carried interest from taxation at (long-term) capital gains rates to ordinary income rates would significantly reduce the attractiveness of forming a new fund for the vast majority of funds in U.S. states other than CA, MA and NY. These funds are predominantly smaller, earlier stage funds, and represent a significant proportion of available VC funding sources outside of the traditional Big 3 VC states. Given the importance of VC funding for U.S. innovation, our findings may serve to inform and aid policymakers in their current deliberations as they consider, design, and implement potential new tax laws that will affect the VC industry.

Keywords: Venture Capital, Taxes, Carried Interest, Capital Gains

Suggested Citation

Barrios, John Manuel and Hochberg, Yael V., Taxing Carried Interest as Ordinary Income and the Potential Impact on New Venture Fund Formation (October 1, 2021). Available at SSRN: https://ssrn.com/abstract=3939267 or http://dx.doi.org/10.2139/ssrn.3939267

John Manuel Barrios

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yael V. Hochberg (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
175
Abstract Views
1,166
rank
241,825
PlumX Metrics