The Carried Interest Debate Continues – Forbidden Planet or Key to the Cabinet?
The subject of carried interest and whether the U.S. government should tax it has come up again recently.
Proponents of this increased taxation argue, in part, that it is a good way to raise additional revenue for the government and that it is a technique to further align the interests of investors and managers.
Here is a link to a Reuters article which explains that under current law, profits earned by investment fund managers at hedge fund and private equity firms are taxed as capital gains, a 15 percent tax rate, instead of as ordinary income, which would subject them to the highest 36 percent marginal income tax bracket.
To learn more about carried interest you can visit this bizarre website put up by Representative Eric Cantor from the Seventh District of Virginia. While it seems Representative Cantor’s heart might be in the right place by showing us the adventures of Seth, Jason and Caitlin to protect “America’s retirement resources at risk” via this educational resource the introductory warbly robot voice, odd graphics, and grainy pictures remind me of those sci-fi movies of the 50′s like Forbidden Planet. Eerie to say the least. America’s tax dollars at work….
Those against this tax argue (as does law professor Darryl Jones in the clip below) that the hedge fund manager is performing services and not investing capital so the capital gains tax rate should not apply to the management fees earned by the hedge fund.
One of the key questions, from a purely tax perspective, is whether carried interest is truly ordinary income. Here is a nice discussion about this point on Forbes.com.
Those who point to the fact that this tax has not gained much traction is due to the large political donations made by hedge fund managers.
Here is a CNBC clip in which Daniel Mitchell of the Cato Institute and Darryl Jones discuss the issue. My favorite quote from Mr. Mitchell is, “we have to take the keys to the liquor cabinet away from the alcoholics.” It is unclear to me who Mr. Mitchell is calling an alcoholic – investors, the U.S. government or hedge fund managers?…
