Vinod Khosla is right about your taxes

The second-biggest tax break in America buys nothing

My Take:

A founder I put a modest check into just had his exit. It’s his first. I remember that feeling. Watching somebody who spent five years eating shit sandwiches and rolling the boulder up the hill finally stand on top of it never gets old. It’s a feeling I like to live vicariously through. Unfortunately, because of our tax system, my bank account gets to live vicariously through his success too. At the expense of nearly everybody else.

This is a story about capital gains and equity. And it starts in an unlikely place: a yellow dinner table in 1970s Albuquerque.

I sat at that table every night for eighteen years while my mother crowed on, as if to the Greek chorus made up of her husband and her five children: “The rich keep getting richer. How do they do that?” I didn’t have the answer then. But as a scholarship kid who ate beans and rice while my classmates went home to gated communities and swimming pools, I was determined to find it.

It took a few decades and a couple of my own exits. I have it now.

It’s called capital gains. And it started as a pretty good idea.

In 1921, Congress looked around at a broke country. The First World War had been expensive, and it had been paid for in no small part by taxing the country’s highest earners at a rate of 73%. At those rates, nobody was selling anything. Capital was functionally frozen solid, right in the teeth of a postwar recession. So Congress drew a distinction between the money you earn and the money your money earns. The logic was sound: you want people moving money, and you want them moving it into new ventures, a far riskier proposition than a government bond. Most of the time you’d lose it. But every so often it would rain, and you’d keep a real chunk of what came down. In 1921, that was exactly what the economy needed. And it worked. The freeze broke, and the economy grew 42% over the decade that followed.

But it’s 2026. Look around. Capital today is not frozen in government bonds, desperate to be coaxed out of hiding. It’s the opposite. Private-equity and venture funds alone are sitting on more than a trillion dollars of “dry powder”, money already raised and committed that they can’t find enough good places to spend.

And the break on capital gains is still the second-largest tax expenditure in the entire federal code. The Treasury scores it around $156 billion a year; the Joint Committee on Taxation puts it closer to $225 billion. All of it to incentivize behavior that is already in record oversupply.

So here’s what that looks like. The nurse, the electrician, and the engineer pay up to 37% on what they earn. Capital pays 23.8%, and we give up as much as $225 billion a year to keep it there, made up by everyone whose income lands on a W-2. That is not a growth policy. It’s a transfer, from the people who do the work to the people who already own. Strip the euphemism and it’s a simpler thing than that. It’s extraction. It just happens to be legal.

When my founder called about the money, he thanked me effusively. So I did the honest accounting. What did I actually do for this man? About six thirty-minute advisory calls over the course of the prior four years. Some texts. I’d like to think it was useful, but it was hardly tectonic. If anyone on that call owed anyone gratitude, it was me owing him.

And yet when the wire clears, he and I hand the IRS the same percentage of our gains. So, by the way, does the limited partner in the fund of funds who has never heard this founder’s name and never will. Meanwhile the engineer who wrote the code the whole company was built on pays ordinary income on her salary, every payday, at the labor rate.

So the tax code has inverted the very thing capital gains was invented to reward: risk. It now gives its gentlest rate to the people who took the least of it: the passive check-writers, the fund fifteen layers back, me. And its harshest to the people who took the most.

Labor gets fucked. Capital compounds.

If you missed Vinod Khosla’s interview with the Wall Street Journal this month, go read it. He makes a detailed case on exactly this. We need, he says, to “tilt the seesaw towards labor … not towards capital.” His fix is the right one: if you tax gains like income, you kill the carry and the buy-borrow-die loop, and take the bottom 125 million earners off the tax rolls without losing a dollar.

I’m all in on Vinod’s proposal. And a little research turns up something worth knowing: we’ve done exactly this before. In 1986, under Ronald Reagan, the Tax Reform Act taxed a dollar of capital gains at the very same rate as a dollar of wages: 28 and 28, owning and working treated as equals.

It’s the only time in modern history the code did that (during the administration of Ronald Reagan, the free market prophet of the Republican Party), and we unwound it within a decade. Which is exactly the point. This is a choice. And right now, that choice is adding up to a $225 billion redistribution of wealth directed at those who already have it.

So let me be very clear. My friend the founder, with his glorious first exit — I want him to have every last benefit of capital gains. He put a ton on the line, and he earned it. He grew GDP with his own blood, sweat, and tears. Me, and my fellow investors, on the checks we wrote from the sidelines? We helped. But he’s the one who slayed the dragon, not us.