NVCA: Helping Startups Should Be Focus of Tax Reform –

A bi-partisan panel appointed by President Bush is holding meetings across the country to gather input on reforming the U.S. tax code to make it simpler, fairer and more growth-oriented.

The NVCA has been active in the discourse surrounding recommendations to the president’s Advisory Panel on Federal Tax Reform. Robert Grady, managing director of The Carlyle Group and chairman-elect of the NVCA, recently testified before the panel on behalf of the country’s entrepreneurial community.

While the discussions have largely focused on personal income tax reform, the NVCA asserts that it is critical that greater attention be paid to the tax code for our country’s emerging growth companies. These startups, many of them venture-backed, play a vital role in U.S. job and revenue growth and innovation.

Companies backed by venture capital since 1970 were responsible for 10.1 million jobs and $1.8 trillion in revenue in 2003, according to econometrics firm Global Insight. That equates to almost 10% of U.S. GDP on less than 2% of invested capital. These companies traditionally have outperformed the rest of the economy in sales, job and wage growth. According to National Science Foundation statistics, the share of U.S. research and development performed by companies with less than 500 employees grew from 5.9% in 1984 to 20.7% in 2003. The result: the creation of new industry sectors such as life sciences, software, semiconductors and online retailing, which not only fuel our economic growth but improve our quality of life and standard of living.

Simple Is Better

As venture capitalists, we are best served by viewing tax reform from the entrepreneurial perspective, since an environment conducive to startup companies is fundamental to our industry’s viability. First and foremost, that means simplifying the tax code. Not only do complex tax provisions distort capital flows, but most startups have modest finance departments. These organizations are already burdened with increased compliance and accounting costs. Simplification would allow emerging companies to grow in a manner that is dictated by market forces rather than the tax code.

True tax reform must also examine where incentives lie and how they are used. Policymakers have historically targeted entrepreneurs and startups as the focus of special tax incentives. Yet entrepreneurs often do not or cannot take advantage of those tax provisions because they are so complex and cumbersome. Smaller enterprises do not have the accounting and legal resources or the time to make them workable in everyday business.

Lower, Lower

Lowering income tax rates for individuals and corporations will help attract companies, capital and people to the United States. Private, emerging growth companies are often valued on after tax net income. Lower rates translate into higher company valuations and ultimately to more job creation. Also, we should explore a tax system that is based more on an international service economy as opposed to what we have today, which is a system that is based on income and a manufacturing economy.

If the existing system cannot be substantially changed, then we must be sure to protect the availability of risk capital in the United States. The U.S. venture capital system has been one of the key drivers of U.S. economic leadership over the last 20 years. Our venture capital industry, which today manages 72% of the venture capital in the world, expanded greatly after the capital gains tax cut proposed by the late Rep. William Steiger of Wisconsin was signed into law in 1978. It is critical that capital formation in the U.S. continue. Making permanent the current capital gains tax rate of 15%, alternative minimum tax reform, and partnership tax simplification will go a long way to ensuring an environment conducive to investment.

With technology and capital flows continuing to become increasingly cross-border, the United States will find itself competing more and more to retain its position as the global economic leader. Historically, our country has maintained its competitive edge by enacting regulation and legislation that strengthens the foundation of risk taking and capital formation. We once again have an opportunity to further fortify our position by restructuring the tax code in favor of entrepreneurs and those who take the risk to fund them. In a decade characterized by reforms that focused on every stakeholder but small businesses, it is time to stand up and be counted.

Mark Heesen is President of the National Venture Capital Association.