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The Congressional debate about a new tax (see our coverage) on investors kicks off tomorrow (Wednesday) with U.S. Senate hearings.

Venture capitalists are represented by Kate Mitchell (pictured here), a managing director at San Francisco's Scale Venture Partner. Mitchell called us from Washington, to explain what she'll tell the U.S. Senate, and then later at the U.S. House of Rep. in a briefing: That VCs like her have invested substantial amount of their personal savings into small companies, alongside the capital they manage for so-called limited partners. As such, VCs put their own money at risk. Moreover, they also work hard with portfolio companies over a ten-year life of a venture capital firm.

In other words, that risk and hard work means the returns on the investments should continue to be taxed as "capital gains", or at 15 percent, not as income, which is much higher, she explained.

She'll be going up against Mark Gergen, a University of Texas Law School professor, who will argue the opposite. He considers the VC profits part of regular income, and told PE Wire he will urge the panel to adopt a "simple fix" to 702(b)—the relevant part of the tax code—that would encompass not just buyout firms and venture capitalists, but also real estate partnerships and oil and gas partnerships.

Mitchell, by the way, is about as coherent a spokesperson the VC industry could hope for. She speaks well, is engaging and comes across as credible. The National Venture Capital Association made a smart move to offer her up as a spokesperson (it presented a list of people to Congressional staffers, who picked her from the list).

She argues that the so-called "carry," or profit obtained by investors from their investments is not guaranteed until the end of a ten-year fund cycle. She wants to make that clear to Congressional staffers and others who don't seem to understand how VC investing works. She said VCs pay ordinary income tax on the interim fees they get from their limited partners — fees which are used for salary, rent and other costs of doing business. But a VC's profit is only sorted out at the end of the fund's life time, once the VC returns the principal investment and fees to the limited partners.

If a VC firm sees one of its companies go public or get sold for a big profit early on, she said, the venture capitalists at the firm pay a 20 percent tax on those gains, but those gains are never fully realized by the VC until the initial principal is first returned to limited partners. She'll also talk about the jobs and economic growth that VC-funded companies create, and contrast that with other forms of investing, such as leveraged buyout activity, where firms like Blackstone have drawn the attention of legislators for throwing lavish banquets featuring $300-stone crabs. The Senate has even called its bill the "Blackstone Bill."

Mitchell uses the example of a VC fund that her firm started investing in 2004. Mitchell be working on that until between 2011 and 2014 and won't see any returns until then. "I took the savings I have, and money I've made from my career, and invested," she said. "I'm hoping to get carried interest. I haven't seen it yet."

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