Carried Interest?

[jaybags]

Let me preface this thread by saying i would not pay more in tax than i have to and dont think ol Willard should either, but........

can someone explain to me why carried interest is a good idea? So basically private equity managers and hedge fund gurus get to be taxed at 15%? Why are they taxed less than i am? What is they special thing they are doing to pay lower taxes?

"Much of Romney's fortune likely qualifies as what is known as "carried interest," a share of profits earned by private equity managers taxed at the 15 percent capital gains tax rate rather than the maximum 35 percent wage rate. Private equity managers, some hedge fund executives and venture capitalists benefit from carried interest.

Campaign officials said Romney had carried interest of $7.4 million in 2010 and $5.5 million in 2011.

Critics say the 15 percent rate for carried interest is an unfair tax break because investment managers, as Romney was, are providing a service that should be taxed at the higher rate paid by wage earners. "

 

[g5000]

Newt thinks capital gains taxes are preposteroulsy high. He wants them not to be taxed at all.

 

[jaybags]

for reference

Q+A: What Romney's taxes reveal - and what they omit - Yahoo! News

Romney Paid 13.9% Tax Rate on $21.6M Income - Bloomberg

 

[deaddogseye]

Let me preface this thread by saying i would not pay more in tax than i have to and dont think ol Willard should either, but........

can someone explain to me why carried interest is a good idea? So basically private equity managers and hedge fund gurus get to be taxed at 15%? Why are they taxed less than i am? What is they special thing they are doing to pay lower taxes?

"Much of Romney's fortune likely qualifies as what is known as "carried interest," a share of profits earned by private equity managers taxed at the 15 percent capital gains tax rate rather than the maximum 35 percent wage rate. Private equity managers, some hedge fund executives and venture capitalists benefit from carried interest.

Campaign officials said Romney had carried interest of $7.4 million in 2010 and $5.5 million in 2011.

Critics say the 15 percent rate for carried interest is an unfair tax break because investment managers, as Romney was, are providing a service that should be taxed at the higher rate paid by wage earners. "

As with all tax policy there really is no right or wrong to it although you can argue that all day -- its just how much you take and who you take it from.

 

[jaybags]

Let me preface this thread by saying i would not pay more in tax than i have to and dont think ol Willard should either, but........

can someone explain to me why carried interest is a good idea? So basically private equity managers and hedge fund gurus get to be taxed at 15%? Why are they taxed less than i am? What is they special thing they are doing to pay lower taxes?

"Much of Romney's fortune likely qualifies as what is known as "carried interest," a share of profits earned by private equity managers taxed at the 15 percent capital gains tax rate rather than the maximum 35 percent wage rate. Private equity managers, some hedge fund executives and venture capitalists benefit from carried interest.

Campaign officials said Romney had carried interest of $7.4 million in 2010 and $5.5 million in 2011.

Critics say the 15 percent rate for carried interest is an unfair tax break because investment managers, as Romney was, are providing a service that should be taxed at the higher rate paid by wage earners. "

As with all tax policy there really is no right or wrong to it although you can argue that all day -- its just how much you take and who you take it from.

sure, but this "carried interest" was enacted in 2007. Why? What is the legimate reason Congress suggested to tax these funds at 15%? Why shouldnt they have kept being ordinary earnings?

seems to me lobbyists earned their money on this one. score another for the oligarchy.

 

[g5000]

can someone explain to me why carried interest is a good idea? So basically private equity managers and hedge fund gurus get to be taxed at 15%? Why are they taxed less than i am? What is they special thing they are doing to pay lower taxes?

The special thing they do is risk other people's money.

If they make those other people a profit, they get a performance fee on top of their normal fees. The performance fee is the "carried interest".

For example, if I give a hedge fund manager $1 billion to invest, he is going to charge me a management fee. He gets this regardless of whether or not he earns me any money on that $1 billion.

If he does earn a profit on the investments he makes with my money, he gets the peformance fee. That is the "carried interest" income that is taxed as capital gains, and for good reason, because that fee is paid from capital gains.

That means a hedge fund has to make a huge profit on investments since they get a management fee right off the top, and then they skim off a performance fee on top of that. If the capital gains earned by the investments are less than the average market returns after the management and performance fees are skimmed off, no one would invest with them. So they have to outdo the market by a substantial margin.

Since the fund manager's performance fee comes from those capital gains on investments, then it is capital gains income.

 

[Toro]

The original concept of taxing carried interest at capital gains rates was a good one, at least in theory. The idea was let's say you have a really good idea but have no money. If someone invests in your company but you do all the work, working 18 hours a day, every day of the year for years, and you strike it big and your company grows tremendously and makes you very rich, then the guy who invested in your company gets taxed at a lower rate than you do, even though he didn't lift a finger and you put in all the "sweat equity."

The problem is that it has been perverted. In reality, most of what we know as carried interest in the investment world is really equivalent to a performance fee, no different than any other worker who is paid a bonus. This skews economic behavior, as it encourages people to enter finance into more - well, let's be honest - productive activities.

A compromise might be to tax the first $5 million cumulative of carried interest at the capital gains rate then the rate of income thereafter.