Funny, because after a presidential campaign that fixated on Mitt Romney's taxes, the debate on carried interest has been largely absent from negotiations over avoiding the fiscal cliff. Funny, because the reference wasn't to the tax rates paid by hedge fund and private equity managers, but rather to levies on venture capitalists.

And funny because a minor Twitter skirmish erupted over it.

Writing in PandoDaily, Sarah Lacy went to bat for the venture capital industry, arguing that VCs shouldn't be grouped in with hedge funds or private equity firms in the debate over carried interest, that raising taxes on VCs seems "egregiously unfair," and would negatively affect the companies VCs fund—an argument that found a ready combatant in New York magazine's Kevin Roose:

So who's bogus, and who's twisting facts? First a quick refresher course:

Venture capitalists, like their hedge fund and private equity manager brethren, typically charge investors a 2 percent fee on assets under management, and another 20 percent on profits they generate. The 2 percent management fee gets taxed like regular income, along the same rate structure that the rest of us pay. The 20 percent "carry" is often treated as investment income and taxed as capital gains, which is to say, at a much, much lower rate.

Taking a page of the National Venture Capital Association playbook, Ms. Lacy argues that taxing carried interest as capital gains makes sense:

Capital gains is there to reward long term, high risk investment, which venture capital is by definition. ... 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.

Which is, we suppose, is how you might look at it if you were a VC—or a journalist trying to curry favor with VCs. (If you were that type of journalist, you might also attribute the impulse to eliminate the carried interest tax break to "anti-business forces in the government.")

Another way to look at it would be to point out that VCs invest other people’s money, and earn fees as compensation for services rendered—it’s not their capital at risk, and it’s not their money tied up long-term—and so it's unclear why carried interest should get taxed as capital gains. Also: However well-aligned their interests, VCs are money managers, not entrepreneurs, right? Right.

Marc Andreessen, hardly a tax-and-spend liberal, argued as much this spring in an appearance on CNBC:

My personal view is that there's no question carried interest should be taxed as ordinary income, it is in fact a fee for service, it's an incentive fee against somebody else's capital, so I don't think there's any logic to the current tax treatment.

And Fred Wilson made a similar point a couple of years ago, blogging that higher taxes on VCs wouldn’t prevent pension funds, endowments and institutional investors from investing in startups, but might lead him to spend more time investing his own capital.

That’s a much less dire impact than the one Ms. Lacy foresees:

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.

Of course, those trends are already underway, making us wonder when and why the PandoDaily editor-in-chief decided to appoint herself lobbyist for the venture capital industry.

At issue are two tax loopholes, "carried interest" and "founder's stock." President Obama wants to close "carried interest" tax, estimating that it could raise $20 billion over the next decade.  Congressional Republicans refuse. In The New York Times, Nicholas Kristoff says "carried interest" wins the grand prize for "Most Unconscionable Tax Loophole," adding, "This loophole has nothing to do with creating jobs and everything to do with protecting some of America’s wealthiest financiers." While he's at it, he'd like to do away with the loophole for founder's stock too.

NetNet's John Carney has a very different take on founder's stock, writing, "It’s not some unique bizarre scandalous loophole in the tax code. It actually coheres quite well with the way we tax a lot of other returns on entrepreneurial activity."

Considering Union Square Ventures' stake in Zynga's upcoming IPO and the number of New York start-ups counting down to their S-1 filing, here's what you need to know.

As Mr. Kristoff points out, combined the loopholes subject hedge fund managers' performance bonuses, typically 20 percent or more of profits, carried interests or "the profit-based quasi-bonus that VC partners earn from their investments," and founder’s stock, the shares founders own in companies they started, to lower capital gains tax (15 percent if it's held longterm) as opposed to higher personal income tax of 35 percent.  (Capital gains are the growth in the value of an investment that's not realized until an asset is sold):

This carried interest loophole benefits managers of financial partnerships such as hedge funds, private equity funds, venture capital funds and real estate funds — who are among the highest-paid people in the world. John Paulson, a hedge fund manager in New York City, made $4.9 billion last year, top of the chart for hedge fund managers, according to AR Magazine, which follows hedge funds.

. . . This tax loophole is also intellectually vacuous. The performance fee is a return on the manager’s labor, not his or her capital, so there’s no reason to give it preferential capital gains treatment.

. . . One important proposal has to do with founder’s stock, the shares people own in companies they found. Professor Fleischer has written an interesting paper persuasively arguing that founder’s stock is hugely undertaxed. It, too, is essentially a return on labor, not capital, and shouldn’t benefit from the low capital gains rate.

We'll leave aside, for a moment, the vast difference between the returns pocketed by a hedge funder and the average venture capitalist or founder and get to Mr. Carney's rebuttal. His read is that its the founder's labor that creates capital, making the case for continuing to levy the lower capital gains tax since that's the same way hedge funds are treated. (Admittedly, somewhat circuitous argument):

When explaining this to people around New York City, I often find it useful to point to the ownership stakes in venture capital funded tech start-ups owned by founders. The labor of the founders is often what makes the value of these companies grow. But the tax code doesn’t treat these gains as ordinary income—it treats them as capital gains.

Founder's stock, in that way, is just like the “carried interest” of hedge fund managers. It's value that is created by the work of its owner but gets treated like capital.

With budget talks getting desperate, it looks like it's time to pick a side.