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Taxing Founders' Stock

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February 28, 2011 12:45pm - 2:00pm

Room 180
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About this event: Victor Fleischer (University of Colorado) is often credited, or blamed, for writing the academic paper that helped sparked a debate about how to tax carried interest. At this event, Fleischer will present a working paper on the tax treatment of entrepreneurs.

Founders of a start-up usually take common stock as a large portion of their compensation for current and future labor efforts. Getting paid in founders’ stock allows entrepreneurs to defer paying tax and – more importantly – allows them to pay tax at the long-term capital gains rate. Politicians, entrepreneurs, and many academics claim that the favorable tax treatment of founders’ stock is an effective method of subsidizing entrepreneurship. In the paper, Fleischer questions the prevailing view that we should tax founders at a low rate. The economic efficiency case for a tax preference for founders’ stock is weak. And the case for reform, he argues, is compelling. Taxing founders at a low rate is a conspicuous loophole in the fabric of our progressive income tax system, uniquely undermining our shared commitment to equal opportunity and distributive justice. Founders’ stock is often bequeathed to heirs who receive a step up in basis, allowing founders to avoid the income tax altogether, leaving a legacy of dynastic wealth subject only to the rather dodgy application of the estate tax.

Reading Materials: Taxing Founders' Stock by Victor Fleischer

About Victor Fleischer: Victor Fleischer is an Associate Professor of Law at the University of Colorado Law School, where he has taught a range of tax and transactional courses in the past, including Federal Income Tax, Corporate Tax, Partnership Tax, Tax Policy, Venture Capital & Private Equity, and various seminars. He joined the faculty of the University of Colorado in 2006. He has also taught at several other law schools, including UCLA, Georgetown, Illinois, Columbia, and, most recently, NYU.

In 2007, a draft version of his paper on carried interest helped prompt Congress to propose Section 710 of the tax code, which would tax a portion of carried interest as ordinary income rather than capital gain. The paper, Two and Twenty: Taxing Partnership Profits in Private Equity Funds, was later published in the NYU Law Review.

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