Thursday, January 26, 2012

The Special Interest Tax Break on "Carried Interest"

Here are excerpts from a Bloomberg article on "carried interest" tax rates.  You can find the whole article here ---

Most international investors say a tax break allowing private equity and hedge-fund executives to pay lower tax rates than many average Americans isn’t warranted, according to a Bloomberg survey.

As the release of Republican presidential candidate Mitt Romney’s 2010 tax return heats up debate over a 15 percent top rate on so-called carried interest, two-thirds of those surveyed in the Bloomberg Global Poll say the tax break is unjustified.

Sixty-six percent of poll respondents worldwide said the break isn’t justified, compared with 21 percent who said it is and 13 percent who said they had “no idea.” Among those living in the U.S., 67 percent said the lower rate isn’t justified, versus 27 percent who said it is.

The survey bolsters the position of Democrats who have pushed for years to eliminate the special treatment of carried interest. Romney’s use of the break has renewed scrutiny as President Barack Obama makes economic fairness a theme in his re-election campaign and studies show that income inequality has grown dramatically over the past quarter-century.

Democrats have won high-profile allies on the issue, including billionaire Warren Buffett, Blackstone Group LP co-founder Pete Peterson and New York City Mayor Michael Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP. Obama invited Buffett’s secretary to the Jan. 24 State of the Union address to highlight the Berkshire Hathaway Inc. (BRK/A)chairman’s comments that he shouldn’t pay a lower tax rate than his employees.

Taxing carried interest as ordinary income would produce about $22 billion over a decade, according to the nonpartisan Congressional Budget Office.

Christian Thwaites, president and chief executive officer of Sentinel Investments in Montpelier, Vermont, scoffed at complaints that a tax increase would be a blow to the private-equity industry.
“I’m sure they’d scream bloody murder and say this is the end of the world, but I just can’t believe it,” said Thwaites.“There’s plenty of reasons to be in private equity other than just the fact that you get a 20 percent tax improvement.” There are “still going to be pretty decent returns available” even if the tax rate is raised, he said.

Others said they don’t think it makes sense to treat carried interest as anything other than income subject to regular rates.

“It is used to pay bonuses to general partners, and I see no reason why bonuses should not be treated as income,” said Don Lindsey, chief investment officer for George WashingtonUniversity in Washington.

John Boland, co-founder of Maple Capital Management in Montpelier, Vermont, said “if it looks like a duck and quacks, calling it a chicken does not change the fact it is duck, to paraphrase Ronald Reagan.”