Private Equity Taxes 2010

Will 2010 Be the Year Congress Changes Carried Interest?

It’s been a long time coming, but I expect that 2010 will be the year that Congress finally attempts to resolve the debate on carried interest.  In the end of 2009 a bill was passed in the House to raise taxes on private equity and venture capital managers (see this article) but it still has to pass the Senate, which will likely prove more difficult. 

An editorial from the Boston Globe is basically a mandate for Congress to correct the tax loophole.  I think it’s a pretty tough sell, to advocate raising taxes in a bad economy, even on the wealthy because the case will be made that it will curb investment and hurt the businesses which buyouts and venture capitalists fund.

To encourage Americans to invest money, capital gains are taxed at just 15 percent, even as the top tax bracket for income earned on the job is 35 percent. But hedge funds and private equity partnerships, which often manage the resources of numerous investors, have worked out a compensation system in which the bulk of managers’ pay is treated as capital gains for tax purposes. Legislation by Representative Sander Levin of Michigan would fix the inequity – and raise an estimated $23 billion over 10 years for the Treasury.

Supporters of the status quo say raising the tax rate will divert money that could be used for investments that help the economy. But it’s an argument that could apply to any tax proposal. Any privately owned firm – from a medical practice to a restaurant chain – would have more money to invest in facilities, equipment, or even other businesses if its principals paid lower taxes on their earnings. Yet doctors and restaurateurs pay standard income tax rates on what they earn from the services they provide; the same rule should apply to people who derive their income from managing money for others.

Read the full editorial here.

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