silent_hysteriaSomething a little strange is going on.

For years now anti-business forces in the government have pushed to change the rules around carried interest. What that means — in terms of practical realities for most of the people reading this post — is VCs’ upside they make as a part of their portfolio companies’ returns would be taxed as ordinary income, not capital gains as it is now.

This may seem like boring accounting speak, but it’s been no less a battle between Silicon Valley forces and the government than immigration or the 500 shareholder rule. It has been a very real specter that the National Venture Capital Association has fought against since at least 2007. And, the NVCA has won so far. (More on that in a second.)

But many have quietly expected it to come up again, as everyone tries to use the hysteria around the Fiscal Cliff to force a given agenda — particularly considering that we just came off an election where the evils of private equity were front and center. I mean, “discussed regularly on Jon Stewart” kind of front and center. This is no longer an obscure issue.

It hasn’t — astounding even those like Dan Primack who has covered this a hell of a lot closer than I have. No one wants to talk much on the record about it. As no one wants to tempt fate here, there’s little upside in bringing it up. The view that I hear off the record is that carried interest may be too complicated of a fix to enact in the shrinking timeline around the issue. The bullet may have just been dodged.

But sources see this as merely a pause in the greater battle. The people I’ve spoken to assume it’ll come back up during tax discussions next year, and they are girding for that battle. The NVCA and Silicon Valley machine will fly into action.

I expect the NVCA to follow the same playbook that’s worked so far: To only argue the VC’s case — not deal with real estate investors, private equity guys or hedge funds who are also wrapped up in the carried interest debate.

Because of the nature of what VCs do, it’s an easier argument to make. Capital gains is there to reward long term, high risk investment, which venture capital is by definition. Many of the other industries that fall into this “alternative asset” bucket have much more liquidity than venture capital. So the NVCA and VCs can argue that an investor is more aligned with the entrepreneur — the two of them both forgo any real return until there’s a big exit and an entrepreneurs’ proceeds are most definitely taxed as capital gains. Why should a VCs’ return on the same effort, risk, and timescale be different?

There are of course differences between VCs and entrepreneurs, particularly given the increase in pre-IPO liquidity options and the fact that VCs are leveraged across many bets and entrepreneurs have their eggs all in one basket.

The better argument is the one that almost always wins in Washington: VCs are job creators. There is just no way to counter that spin credibly. If VCs are doing their jobs — even remotely — they are starting new companies that become very, very large over a short period of time. That’s the entire reason they exist. There’s never been a big venture-style home run that didn’t employ a lot of people.

That’s the opposite of the trendy stigma against private equity.

The potential downside this time around for the NVCA? Everyone has caught onto this, and everyone is now a job creator. As Naval Ravikant discussed at our PandoMonthly, the biggest reason the JOBS Act passed was that someone in some congressional office had the genius idea to call it the JOBS Act and hobble together an acronym that made remote sense. There’s much thinner evidence that anything in that act created jobs compared to the existence of a thriving big-boy venture ecosystem.

Sadly for VCs, even if you actually are a job creator, that argument has started to lose its novelty and heft.

The other thing that makes the NVCA’s argument a challenge is showing a clear worst case scenario if the change is enacted. After all, VCs aren’t going to starve if the change is made. And many of them have already made good money; they do this job, because they love to help entrepreneurs build huge companies. Doubling the taxes on them would feel egregiously unfair, but the idea that venture shops will close down is hard to believe.

In the short term, that is.

But pretending there wouldn’t be very real ripple effects is just as naive as pretending the whole industry would fall into the sea overnight. It could well put pressure on the consolidation already underway; it may attract a different kind of person to the industry in the future; or it could push a shorter return time horizon at a time when the big home runs are taking longer and longer to get to an IPO. That could mean fewer Series A investments, as individuals without institutional obligations take over seed deals, and the rest of the industry pushes towards later stages that take less time to mature.

And no one funding technology, whether public or private, was ever helped by being financially incentivized to think shorter term.

[Image courtesy ClickFlashPhotos / Nicki Varkevisser]