Forbes on the 'Carried Interest' Tax

http://www.futureofcapitalism.com/2010/06/forbes-on-the-carried-interest-tax

Forbes publishes a column calling for an increase in the "carried interest" tax of managers of venture capital, real estate, private equity, hedge fund, and oil and gas partnerships.

The lobbyists are howling that raising taxes on investment managers' profit shares will discourage investment.

Oh, but private equity saved Dunkin' Donuts! This argument is a derivative of the old, discredited supply-side argument that investment will be fostered by greater rewards for the winners, except that these taxpayers are merely the managers of the winners.

Managers should not be conflated with investors or entrepreneurs. Entrepreneurs are guys whose wives divorce them for betting the house on the business, not guys who have serial trophy wives as consumption items. Entrepreneurship isn't messing with other people's money for huge fees....Ordinary income taxation might have the salutary effect of getting some of these guys out of the investment management business, which would be no bad thing, as indicated by investor complaints that they are being asked to pay big fees for returns that are no better than the indexes.

It's amazing that Forbes, whose Steve Forbes was a leading spokesman of the supply-side argument that this columnist claims is "discredited," would be running this stuff.

What does someone's wife have to do with how they should be taxed? And on what basis does this columnist generalize about the wives of fund managers?

If investors are complaining about "being asked to pay big fees for returns that are no better than the indexes," no one forced them to invest in the first place, and no one is forcing them to stay invested (with the exception of the funds that put up withdrawal gates, which is another story.) They are all sophisticated investors who knew perfectly well that they had the option to invest in lower costs index funds yet chose instead to invest in these funds with different fee structures. It's one thing for them to force the closure of funds by pulling their money out, another thing entirely for the government to close the funds by changing the tax rules.

The kicker is that the Forbes columnist, Lee Sheppard, is identified as "a contributing editor of Tax Notes, a Washington-based weekly tax journal." As we've reported here, here, and here, Tax Notes is a "non-profit" organization that doesn't pay any corporate income tax at all and that even benefited from a $15.5 million tax-exempt bond issue for its new headquarters. Using the tax-exempt platform of Tax Notes to call for higher taxes on fund managers is just unbelievably hypocritical. If they don't believe in the "discredited" argument that "investment will be fostered by greater rewards for the winners," why don't they try financing their headquarters with taxable bonds and see how the lower after-tax rewards for investors in those bonds affects the willingness of potential investors to purchase the bonds?

by Ira Stoll  |  Jun 1, 2010 at 8:49 am Related Topics:  Non-Profits, Press, Taxes receive the latest by email: subscribe to the free futureofcapitalism.com mailing list