Business

A dollar & a dream

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A tax policy gadfly believes he’s spotted a $1 trillion deficit buster.

Victor Fleischer — the corporate attorney turned academic who wrote a paper that prompted lawmakers to propose raising taxes on private-equity barons — is now targeting the tax treatment of founding entrepreneurs.

Fleischer is finishing up another paper that argues founders of startups should pay the ordinary income tax rate of 35 percent when selling their stock instead of the much lower capital gains rate of 15 percent.

Fleischer told The Post that this tax loophole costs Uncle Sam roughly $100 billion a year — a whopping $1 trillion over 10 years.

Founders of startups usually take common stock as a large portion of their pay. Getting founders’ stock allows entrepreneurs to defer paying tax and — just as important — allows them to pay the lower capital gains rate.

Fleischer points out that most of the Forbes 400, the annual list of the richest Americans, gained their wealth through founders’ stock. Politicians, business leaders and academics have all defended this favorable tax treatment, arguing it encourages entrepreneurship and innovation.

“[Fleischer] really has a knack for finding tax inequities,” said David Miller, an attorney at Cadwalader, Wickersham & Taft, who participated in a forum on Fleischer’s paper last week at NYU. “I have no doubt this will be just as explosive as the carried interest paper.”

In 2007, Fleischer, then an untenured professor at the University of Illinois, wrote a paper arguing that partners at private-equity firms should pay ordinary income tax on commissions made from buying and selling businesses, given that they risked no money in their investment funds.

Congressional staffers took notice and soon saw changing the treatment of “carried interest” as a good way to offset a rollback in the alternative minimum tax. Since then, the House has voted to change the tax treatment of carried interest three times, although it has yet to become law.

Fleischer said that after the paper got traction, partners at PE firms argued to him they should pay only the 15 percent capital gains rate and not the 35 percent ordinary income rate because founders like Bill Gates also pay 15 percent. That got him thinking that perhaps Gates should not be paying a capital gains rate when selling shares.

While entrepreneurs are perhaps more sympathetic than private-equity fund managers, Fleischer’s paper argues that they should still pay tax on their labor income at a rate equal to that of doctors, schoolteachers, firefighters and cops.

Cadwalader’s Miller has a different solution.

He believes those such as Google co-founder Larry Page, who take $1 in salary and then borrow money against their appreciating stock, should pay taxes on the amount their shares appreciate.

Right now Page and other founders pay no personal income tax on the money they borrow against their shares even though that essentially replaces their salary.

Fleischer believes people who want to become entrepreneurs would not be deterred by a higher tax rate.

“There are more effective methods of subsidizing entrepreneurship than by providing an unjustified tax break to the wealthy,” he said. jkosman@nypost.com