The PATH Act: So…uh…Why aren’t we Paying our Taxes?

I recently discovered the PATH Act, and although I haven’t had time to fully digest it or read the actual underlying tax code, if the headlines hold even a modicum of truth, then the implications are quite dramatic for tech startups.

At first glance, the PATH Act seems completely misguided, out of touch, and just flat out embarrassing for participants in the technology ecosystem.

As far as I understand, the PATH tax credit has two major implications:

  • Startups that generate less than $5M in revenue don’t have to pay payroll taxes for a total credit of up to $250k per year.
  • Startup founders and investors that make an investment in a company with less than $50M in revenue don’t have to pay any taxes (up to a $10M gain) if/when the company exits if they hold the stock for > 5 years.

The first credit seems innocuous enough, but the second one, if true…well…we’ve lost our way.

The main reason cited for these tax credits is to create better incentives for founders to build startups and investors to fund them. This may legitimately help for the average small business, but as far as I can tell, there’s been no shortage of interest from founders or VCs in recent years to build and invest in technology startups. It’s also worth mentioning that the existing tax on capital gains, which founders and investors pay when a tech startup exits, is already 20%, well below the average income tax paid in the United States. Warren Buffet has been rightly outspoken about this issue and has argued that we should raise capital gains taxes, rather than lower them…or in the case of PATH, eliminate them completely.

So how did this happen? My guess is it’s a combination of hubris and greed, but by all means, please opine because I’d love to be wrong on this. Selfishly, and moral arguments aside…you know why greed is bad for the startup community? It creates enemies, and it’s often a sign that the end is near. It’s something specific that folks look back on and say, “That really was the beginning of the end wasn’t it…and well, screw those people anyway, they got what they deserved.” This is exactly what we say now about the employees on Wall Street that figured out all the loopholes in ’08.

So rather than celebrating paying less (or in this case no tax), maybe as a community we take a step back and ask whether or not this feels right. Successful technology startups regularly create many millions of dollars in wealth for founders and investors. Have you ever heard of a startup founder deciding not to start a startup because she has to pay the capital gains tax when she sells her company? I haven’t either.

So then when did it become OK for us to celebrate not paying our fair share? And what should we do about it?