Wealth Transfer

I happen to deal with Venture Capital. Once you have seen the entire widget you cannot unsee it.

The whole thing is a merry-go-round of money and everyone has a godfather. The ultimate godfather is the taxpayer.

My greatest learning from macro-economics is that it is important to make sure that the taxpayer has no knowledge that he/she is paying for all the parties

I was watching a ridiculous transaction go through and wondering. Would this investment have ever happened if both these people had not, at some point, slept in the same dorm?

• Pre-revenue - Check
• Pre-product - Check
• Already invested upon - Check
• Previous product failed - Check
• The company had trashed its old product because it did not take off AND it is raising an even bigger round!

A new story and a new round.

Just a week ago, I had been sitting with another founder

• The product was already on the market
• Had generated USD 300,000 in revenue
• Had bootstrapped it all the way
• Just happened to come from some nondescript college in Madurai.

He was told that the thesis did not seem convincing enough and that maybe with a little more traction he might find investment.

Venture Capitalists are people who themselves raise money based on an investment thesis. The people who invest in Venture Capital funds are called Limited Partners (in that they do not have any day-to-day involvement). They find the thesis compelling enough and hope that the VC can find enough companies that fit the thesis.

Limited Partners are mostly what is described as a fund of funds. They raise capital to deploy into other funds with differing theses and promised returns. A pension fund, for instance, has a huge amount of capital running, often tens or even hundreds of billions. They need to allocate these funds to various investment vehicles and seek a return. They act as funds of funds and invest in other debt or equity funds, bonds, etc.

Most of the large fund of funds are sovereign funds, pension funds or government funds. Then you have large private equity funds. The insanely wealthy have family offices and route their money through these vehicles.

Sovereign funds and government funds are built out of taxes. Except for the Gulf countries, all of these funds are tax monies. Pension funds are money belonging to the salaried class - Have you ever heard of a rich person drawing a pension?

A huge portion of direct taxes are paid by salaried individuals. If you are in the upper-middle bracket, the juice is worth the squeeze, so far as the government is concerned.

The poor really cannot pay taxes, most can barely fend for themselves. The rich can lobby.

Personal income tax (PIT) now contributes more to the central government tax collections than that paid by corporations. In 2024-25, the government expects to earn Rs 10.43 lakh crore, or 3.18% of GDP, through corporation tax, and Rs 11.56 lakh crore, or 3.53% of GDP, through PIT.

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Now, consider more recent aggregate data of more than 5,000 listed companies. The PBT of these companies went up 128% from 2018-19 to 2022-23. But the corporation tax paid by them went up just 35%, in turn pushing up PAT by 186%.

So, what does this mean? First, the income tax system, which needs to be fair before anything else, now favours corporations over individuals. Second, the collection of personal income tax has increased primarily because those in higher income bracket have had to pay significantly higher surcharges on their income.

Source: Deccan Herald

The rich funnel their monies through corporations and thus the tax code is favourable to the corporations. The US is an extreme when it comes to this.

Americans with less than five-figure incomes pay an effective payroll tax rate of 14.1 percent, while those making seven-figure incomes or more pay just 1.9 percent.

Source: American Progress

The recent beeline, West Coast investors were making to Miami was because the effective tax rate including state taxes on those earning a 1 million dollars or more is the lowest in all of the USA. Jeff Bezos also moved to Miami for the same reason.

The salaried class pays most of the taxes in most countries. They keep the wheels of the government turning. A decent part of VC funds is financed by these taxes whether it comes from pension funds, sovereign funds, IFC or SIDBI. The VCs then allocate this money based on class filters.

The dorm room is essentially an elitist filter meant to check status. Were you able to afford to go to that school?

And like that, the salaried class finances the well-to-do. This is one of the ways how wealth transfer takes place.