Bloomberg News has an update on the state of the effort by President Obama and some in Congress to raise taxes on the "carried interest" of fund managers. The wire reports: "The Senate plan under discussion would tax fund managers' profit shares at about 33 percent for assets held less than seven years, and about 31 percent for assets held longer than that, the aide said late yesterday. The House adopted a tax rate of about 35 percent on May 28, with no special rates for long-term assets."
There's already a tax advantage for investors on capital gains of assets held for at least a year. The Bloomberg article doesn't get into the logic of the Senate plan, but if the intention is to reward long-term investment, it's hard to see how raising the tax rate from the current 15% to 31% amounts to a reward. It all seems in keeping with the approach to taxation that characterizes this entire effort. It started out as an effort to tax people based on who they are rather than what they did -- higher rates on long-term capital gains for managers of private equity, hedge fund, venture capital, real estate, and oil and gas partnerships, but not for investors in the same partnerships, and not for managers of publicly traded partnerships. Now it has progressed into taxing people not just on who they are, but on how many years they hold their investments.
The logical extension of adding a seven year break-point to the one-year break-point that already exists is a system of gradual progressive taxation, where, if you trade in and out of a stock in a fraction of a second, the tax rate is 99%, while if you hold it until you die, the tax rate is 0%, or 1%. There may be a policy case for this in terms of the concept of shareholder democracy and encouraging people to "buy" stock in a company rather than "rent" it, but implementing it will sure provide a lot of work for accountants and tax lawyers.
The bottom line is that rather than simplifying the tax code, the lawmaker-lobbyist combination is yet again making it more complex.