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Originally posted by Tyrone Slothrop - So fund managers get to pay a low tax rate that is supposed to provide incentives to risk-taking investors, even though they aren’t investors and they aren’t taking risks.
I haven't paid attention to this issue at all. Can someone explain to me why this -- particulary, his last sentence -- is wrong?
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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.
