VCs have a special stake in this particular debate and find themselves in the minority in an environment when everyone is howling for the heads of all those who manage private equity funds. And "carried interest" does indeed represent a type of gain that probably can be fairly classified as being (1) attributable to the sale of a capital asset and hence eligible for capital gains treatment or (2) attributable to services performed by a GP in managing a fund and not tied in any significant way to capital actually invested by that GP in the asset being sold.

This Congress says the tax is for services rendered and should be paid at ordinary income tax rates (actually, 75% of carried interest will be taxed as ordinary income and 25% as capital gains - and there will be a phase-in to boot, so that the full impact will not hit the VCs for some years). Prior Congresses have disagreed.

Make no mistake, though, that the issue here is not one of merely closing a loophole. This Congress believes philosophically in raising taxes to pay for its expansive spending proclivities, and it is looking to do that in more ways than one. VCs happen to be a big, fat, and unpopular target in this instance. Private entrepreneurs will be next.

For this reason, among other things, this Congress will make sure that it does nothing to block the automatic increases scheduled to go into effect January 1, 2011 (LTCG from 15% to 20% and top bracket on ordinary income from 35% to 39.6%).

Now, any one of us may or may not be bothered by this depending on our particular view of the role of government, the importance of a social safety net, and the part taxes should play in funding these social aims. Indeed, we may see these developments as a positive good in changing the balance between government and private enterprise. That is basically a political and philosophical issue.

But do realize that this sort of expansive view of taxation, as applied here to the VC's "carried interest" gains, could just as easily be applied to founders who put no (or trivial) cash into a company up front and yet profit from the ultimate sale of equity that they get up front as they found their companies and then devote years of service to building its value. While it might be shocking to contemplate, if one were philosophically inclined to do so, there is nothing stopping a future Congress from saying - based on a direct analogy to the logic being applied here to carried-interest taxation - that the gains of such founders are really more attributable to their services than to any capital investment and hence should be taxed at ordinary-income tax rates (or maybe at some hybrid rate such as being applied here to the VCs, such as 75% at ordinary income tax rates and 25% at LTCG rates). In this sense, startup founders typically are no more investing "capital" for their stock than a GP is investing capital for its "carried interest" share.

I realize there is no risk of this type posed anytime soon to founders. But, logically, there is little difference between the two cases and what is regarded as the founder's perk of today might, with passage of time and a new political environment, just as easily become the "loophole" of tomorrow.