What are the startup or hacker implications?
More wanking over "oh noes I might not invest in your startup now that my payday would be taxed slightly more", followed by handwringing about a perceived slide into socialism, but nearly no change in investment behavior. Maybe a few people cash out earlier than they would have to avoid the tax increase.
If you invest $100k in a startup, it goes well and you walk away with a million ($900k profit), are you really going to cry when the tax man comes and gets his $34,200? I guess you might, but it didn't suddenly make the investment not worth it.
Then again, those people aren't likely the ones complaining. It's the people who have a hypothetical model in their head of what "investors" are like and want to use it as a talking point to attack health care reform.
With this out of the way, your argument seems completely wrong to me. In reality nobody can consistently get 1000% returns, or anywhere near it, from the startups they invest in. (If that was possible, everyone would want to invest in startups and the valuations would go up until the returns got more in line with other investment vehicles with the same risk profile.) In reality, for every startup where you invested $100k and walked away with $1M, there are many where you invested $100k and walked away with zero. On average the returns can't be much different from what you get elsewhere, I'm guessing I won't be off by much if I say 10% before tax and before inflation. And 4% difference in tax burden will also mean about the same it means for other investments, which is to say it's not insignificant. Think of the lenghts people go to in order to put a little more money in a tax sheltered part of their portfolios. Or, think of the risks many people with stock options grants took to convert their short term capital gains into long term (and many of them got burnt very badly when the dot com bubble burst).
But my point was for those upper echelon's of VC/Angels who actually make money. PG has pointed out in the past that there really are only a handful of VC/Angels that actually consistently make money (and more importantly in the case of VCs make money for their investors). You're right that my case was idealized, but investment losses can also be used to offset gains for tax purposes, and this is an industry of lawyers, so I doubt the tax effects are as clear cut as either of us paints them to be. And I still maintain my overall point that 3.8% isn't going to suddenly kill the startup scene. If it was that tax sensitive, it wouldn't be in California to begin with.
Please save this and come back and read it after you write a check (one or multiple) to the US government for millions of dollars after you struggle for 5+ years and literally risk everything you have to make a business successful.
I like to hack and I like building things for customers, but last week I spent most of the week filling out government forms. Another 3.8% on investment income (plus the proposed 5% cap gains increase for a total of 8.8%) won't kill me, but it's starting to feel like the straw the broke the camel's back. I'll probably do the next startup. At the same time, I angel invest in 3-4 companies a year. I like to find kids who were like me at some university labs, invest in their ideas, and what them create cool companies. I may give that up.
Since this isn't a political forum, I won't say which side I'm for. But I will say that I'm angry at both sides for the $1T giveaway to the investment bankers and now to the way the CBO numbers have been gamed.
(tmp acct, b/c I don't want to discuss my tax issues under the regular acct)
I also angel invest. Thus far, those companies aren't that old, but my marginal contribution is worth at least several jobs.
When they make it a hassle to create startups and to invest, I spend less time building startups and more time chilling at home. When they make it more expensive, I do less angel investing. It's hard to quantify--I can't tell you how much impact it has on me personally (though it definitely has some). But when instead of looking at me individually, you look at the expected values across aggregates, economists show real, substantial effects.
And, time many, many hours I've wasted on forms, letters, arguments, etc recently are all time that could have been spent coding or with customers.
This one was actually pretty simple. An acquirer filed a 1099 in the incorrect category. We submitted an amended one, but the IRS wants to tax at teh higher rate. And, with giants penalties and interest. You basically have to a) pay the amount they incorrectly claim you owe plus the interest and penalties up-front. Then beg for your money back and b) pay lawyers to try to get them to actually respond. Once the IRS has your money, it's pretty much impossible to contact them and argue. The actual form we filled out, the 843, is pretty simple.
[As an unrelated point, if you're in CA, the current cap gains rate is 15% federal + 9.3 CA income + 1% CA mental health=25.3%. If if goes to the proposed 20% federal + 3.8% medicare + 9.3% CA income + 1% CA mental mental health=34.1%, that's a 34% increase on the taxes on startups in the course of a year... Granted, I care more about the hassle, but it's made me think.]