In 10 years, remember to thank Bush for AQiM.
 

Translation: I hate America and its freedoms.

1) Most private equity fund managers are taking risks. To be sure, primarily with investors' money, but also their own. Indeed, the investors who get the 80% of the gains (that is all gains less the 20% carried interest), are taxed at the k-gains rate.

2) There are reasons for a lower k-gain rate other than providing incentives for risk taking.

Right. And depending on how the deal is structured, there is no guaranty that carried interest will be paid or paid in full.

If they change this, then to be intellectually fair they also should change the tax treatment of ISOs.

All that said, a conversion to a consumption tax would eliminate any of these shenanigans. If a VC or PE guy wants to take the money and buy a yacht, he gets taxed at 35%. If he wants to plow it back into more investments, then zero tax.

1) That's true, but the manager will get the cap gains rate on any gains on their invested money. The manager is also "risking" that the carried interest will be zero--not that they get nothing, because the manager gets 2% off the top, no matter what else happens. However, isn't "risk" more about the risk of losing your investment, which isn't an issue for carried interest?

2) Such as . . .? I can't think of examples that reasonably apply to carried interests other than the lower rate generates more free cash for campaign contributions.

Several reasons, practical and theoretical:

(1) the risk takers bit is laughable - ask the fund managers who got sued for clawbacks after the nuclear winter hit the tech industry - this is a high-risk, high-reward business, and while the rewards seem to be rolling in at the moment, it wasn't that long ago that we were in the middle of a shake-out that ended a lot of careers;

(2) in reality, capital versus asset has little to do with risk versus non risk - capital is relating to investments, which can run from ultra-conservative bonds to wild-ass plunges into speculative start-ups; in this case, the carried interest is a piece of the underlying investment transaction, and is measured by and relates to the return on an investment;

(3) few fund managers have no investment in their partnership interest, though the investment is quite low compared to the interests held by the limiteds; the best argument for this is that it's really income relating to services provided to the investment vehicle, and there is a service component, but there is also an investment component and in many capital gains transactions some services accompany the investment (e.g., I buy a piece of real estate for investment purposes - over the years, I'm going to spend some time and energy managing it and fixing it up, all of which will enhance its value when sold if done right); and

(4) economically, the venture sector has been a driving force in the economy and capital gains have encouraged it; during the Clinton administration, there was very important tax legislation that was specifically designed to further incentive these guys (letting them roll over investments and giving them a preferred rate of return on investments in early stage companies), and that was part of the reason for Clinton's economic successes.

Some of this seems to be about the greedy New Yorkers at Blackstone getting piggy and effectively looking to sell of the future stream of income from these deals to the public; but this bill undercuts some of the most productive investment sectors around.

Rant over.

Can you send this to Krugman, because right now, Chuck Rangel is operating without the benefit of any of even this cursory knowledge. And oddly, I don't think he's just playing to the base here. I think this issue is over most of congress' heads and sounds to a layman very unfair and greedy (see the Times' piece of this morning on how Blackstone structured the IPO to create a tax advantage down the road). And, apparantly, Krugman's.

Nah, he's just advocating a position. He's jealous of the boo-coo dollars his intellectual inferiors are rolling in and wants to see them pay "their fair share".

More free cash for more investment. These guys aren't consuming most of the boo-coo dollars they pull in--they're plowing it back into the market. That's the other major point of low k-gains.

You know, the crazy thing is this may not end up generating any revenue.

Take the basic transaction: A group of people invest $10 million in Company A, hope to realize a 5x return and get $50 million. They're going to split it, with the people who put up $9.9 million will take about 80% of the $40 million gain and the people who managed the fund will take about 20%.

So, pre-bill, there is a $10 million investment and $40 million gain. You tax the $40 million gain at capital gains rates.

Now, you say to the guys managing the investment, wait, we think you're providing services, so we're going to tax your piece (about $8 million) at ordinary rates.

Well, the guys now structure this so they get a fee for $9.6 million. Why $9.6? They gross it up for the difference between about 15% and 35% tax rates. Why do the investors agree? Because they get to deduct the full $9.6 from their ordinary income. So, at the end of the day, there is still $40 million in capital gains, but there is also $9.6 million in ordinary income and a $9.6 million deduction.

There some chance of a gains/income mismatch generating some money, and some chances that the deduction would accrue to exempt orgs that can't use it, but, trust me, there will be ways to make sure the deduction gets used and the gross up occurs so that we end up in pretty close to the same place.

By the way, I think this is just more Pavlov. The R congress enacted a bunch of silly stuff post-Enron because they had to do something; the D congress may just do some of the same. But, if there were a Clinton in the corner office, there would be more thought given to the tax policy issues involved (as there was during his term). And Clinton was very good to the venture boys.

I've never bought this particular argument. I think you can affect the decision on what investment to make by preferring some over others, but I think capital gains rates have relatively modest impact on the saving/spending decision.

In this case, you eliminate an advantage the venture investing currently has over investment banking, and a bunch of investment houses think about emphasizing their fee-based businesses a bit more and their investment businesses a bit less. But the masters of the universe still consume all they want to consume, and will do a fine job of keeping the yacht-builders employed.

Question
 

Good suggestion - I'm going to Chevy's for lunch.

Question
 

He who dies with the most toys is still dead.

Part of the 2% covers the manager's expenses, so it's actually somewhat lower than that.

Of course, that's what pays for office space and related expenses and base salaries for the associates. No one's getting rich on the 2, but no one's going broke, either.