In a follow-up to a post in December, on April 3, 2009 a new proposal hit the House floor for the treatment of carried interest, the proposal would result in a significant tax hike for the ever unpopular hedge fund and private equity fund managers. Representative Sandy Levin (D-MI) reintroduced a new version of the carried interest reform bill originally introduced in 110th Congress on a message of fairness.
Rep. Levin marches through various "Myth" vs. "Fact" scenarios, many of which were presented in the prior post. One such "Myth" surrounds the impact of the change on union and state pensions. In the past, many investment professionals would have disregarded the change in taxation as immaterial, arguing incentive compensation fees would increase correspondingly. The current macroeconomic environment is not doing the investment professionals any favors and unfortunately for all but a select few, fees are more likely to decrease than increase. Levin is correct, it is "questionable" if the change in taxation will have any impact on "mom and pop."
While carried interest probably does not have enough "sweat equity" characteristics to be considered in the same light as that of pure entrepreneur, it does not have the same feel as pure incentive compensation either. All too often in the wake of a crisis, politicians over-react and the pendulum swings far past neutral. It probably is not a coincidence that Rep Levin is from the economical troubled state of Michigan, where many affiliated indirectly and directly with the auto companies (UAW pensioners) will be some of the most impacted voters from the current crisis. The bill is in its infancy, but similar legislation was included in Obama's budget, and investment professionals are far from in the good graces of Capital Hill. As such, one can reasonably assume that some change to the current tax policy will be enacted. Here's to hoping congress acts in manner that is truly "fair" and not just popular.
“This is a basic issue of fairness,” said Rep. Levin. “Fund managers are receiving compensation for managing their investors’ money. They should not pay the 15% capital gains rate on their compensation when millions of other hard-working Americans, many of whose income is performance-based, pay ordinary rates of up to 35%."The full bill, "To amend the Internal Revenue Code of 1986 to provide for the treatment of partnership interests held by partners providing services" (HR 1935), has not been received by the Government Publishing Office (GPO); however, it appears the entire carried interest will taxed an ordinary income rate of 35%. The prior Economic Policy Review, posting "Carried Interest - Long-Term Capital Gains or Ordinary Income", highlighted multiple options for taxing carried interest, concluding the a hybrid taxation policy would be a good comprise, for example treating the carried interest basis as a non-recourse loan from limited partners.
Rep. Levin marches through various "Myth" vs. "Fact" scenarios, many of which were presented in the prior post. One such "Myth" surrounds the impact of the change on union and state pensions. In the past, many investment professionals would have disregarded the change in taxation as immaterial, arguing incentive compensation fees would increase correspondingly. The current macroeconomic environment is not doing the investment professionals any favors and unfortunately for all but a select few, fees are more likely to decrease than increase. Levin is correct, it is "questionable" if the change in taxation will have any impact on "mom and pop."
While carried interest probably does not have enough "sweat equity" characteristics to be considered in the same light as that of pure entrepreneur, it does not have the same feel as pure incentive compensation either. All too often in the wake of a crisis, politicians over-react and the pendulum swings far past neutral. It probably is not a coincidence that Rep Levin is from the economical troubled state of Michigan, where many affiliated indirectly and directly with the auto companies (UAW pensioners) will be some of the most impacted voters from the current crisis. The bill is in its infancy, but similar legislation was included in Obama's budget, and investment professionals are far from in the good graces of Capital Hill. As such, one can reasonably assume that some change to the current tax policy will be enacted. Here's to hoping congress acts in manner that is truly "fair" and not just popular.
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