Quote:
Originally Posted by scottw
it's really income Spence....
these were the important points...do you have to wait typically 5 years for your efforts at work to pay out and hopefully pan out before you can whip out cash for your Porsche...or anything else?
The managers pay the same tax rate on income from the fund as they would pay if they had earned the same income on their own — channeling the income through the partnership doesn’t change the tax rate. Managers pay 15 percent tax on any carried interest that reflects long-term capital gains or dividends earned by the fund, as they would on any long-term gains or dividends they might earn on their own.
But managers pay ordinary income-tax rates on any carried interest that reflects short-term gains, interest, or non-corporate profits earned by the fund.
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Suppose a venture capital firm raises a $100 million fund from outside investors. The fund's manager charges an annual fee - typically 2 percent of the fund's assets - to find and monitor investments and cover its overhead. The manager pays ordinary income tax on this fee.
Once the fund has made enough money to repay investors $100 million plus the annual fees, the manager keeps 20 percent of additional profits and the outside investors get 80 percent.
This 20 percent is the carried interest. It is considered a long-term capital gain and taxed at 15 percent as long as the fund's investments are held more than a year.
On a typical fund, it takes at least five years before the managers begin to collect carried interest, says Emily Mendell, a spokeswoman for the National Venture Capital Association
The tax rate depends on the kind of income the fund earns — not all carried interest gets the 15 percent rate.
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I understand all that.
But consider that management of funds over 5 years is part of their job. It's not like they're earning the income, paying taxes on it, then reinvesting and getting the long-term capital gains rate. No...actually they're short circuiting the system and getting the lower rate on profits from money (i.e. risk) that wasn't theirs.
These people are in partnerships and will likely be doing this for some time, there's always another 5 year investment to back up the last one.
They should treat all carried interest profits as income, unless the profit comes from money they're investing at their own risk. Otherwise they're shorting the taxpayer out of Federal revenues as well as Medicare taxes.
I do think this issue will be very problematic for Romney in the general election.
It looks like Romney's executive retirement package allows him a very substantial share (we're talking 27 Million in 2010 alone) of Bain profits (10 years after he left!) which Romney has no capital stake in. The carried interest rule here means Romney doesn't have to treat these as income even though he hasn't made any investments nor has he been granted a stock with a tangible value at the time of issuance.
This is something only the uber-elite get to do. It may be legal under current code but that doesn't mean it's right.
-spence