Venture capital firms are already facing tough times with poor returns and limited exits. And now, if a Democratic proposal working its way through House wins approval, venture capital profits could take a bigger hit.

Bloomberg News reports that Democratic leaders are looking to double the taxes on private equity, hedge fund and venture capital managers, boosting the current 15 percent tax rate on "carried interest."

Bloomberg's Ryan Donmoyer reports:

Managers typically are paid 2 percent of fund assets as an annual management fee and 20 percent of the profit earned for investors above certain levels. While the management fee is taxed as income, the incentive fee, called carried interest, is treated as a capital gain. The action would force managers to pay ordinary income tax rates instead of capital gains rates on their share of profits. The top ordinary rate is 35 percent and is scheduled to increase to 39.6 percent in 2011; the capital gains rate is 15 percent and will rise to 20 percent in 2011.

The National Venture Capital Association has offered some detailed information on the carried interest debate over the past 12 months. And, as you can image, it doesn't like the idea of higher taxes. The lobbying group also argues that it should not be lumped in with hedge funds and private equity firms.

The NVCA writes on its Web site that venture capital firms -- unlike hedge funds and privae equity firms -- "do not encourage their companies to engage in financial engineering or use leveraged structures."

The organization also notes that VCs should not be punished for helping to build new companies.

When a venture capitalist earns carried interest, it is because he or she was successful in building a business that did not exist before. If the business is not successful, then (unlike regular jobs) the venture capitalist receives no carried interest. These businesses create jobs and revenues for our economy. This is the very type of investment Congress has tried to encourage through capital gains tax policy over the years. Raising the venture capital tax rate on carried interest will discourage investment resulting in fewer companies funded and fewer jobs created. The new Administration and Congress should look closely at tax fairness and ensure that it doesn’t harm the start-up community.