Taxes

[scottw]

crickets...OK

first, while I would absolutely agree with you that there ought to be a simplification of the code and may even agree that all of the various forms of income ought be "treated the same" when a tax rate is applied....there are simply no facts to back up your statement that "income is income" because the various incomes are derived very differently and as such have been treated historically very differently with regard to taxation....it may just be a wishful "vote them all out" of type generality but we both know that neither are very likely to occur any time soon....

so if we are talking about the reality today...the two are very different, both in how they are derived, categorized.. as well as how they are taxed...

Romney is subject to various tax rates on various forms of income and expenditures just as you are subject to various tax rates on the same...you have differing rates on income, savings and investments depending on your income and investments and can take advantage of certain investments to avoid or defer taxes....seems that many jump on the "tax everyone the same bandwagon" up until they examine their own situation closely and consider what their liability might be now and in the future if they were to pay a flat rate with no deductions, tax shelters or incentives to invest

it is absolutely "blurring the line" to complain that Romney is paying a lower rate on income which is defined by the IRS as something entirely different than your own earned income(salary), which is exactly what has been said...noone has complained that Romney pays a lower rate on his investment income than they do because they pay the same and probably less...it is just disingenuous...apples and oranges...as is often said here

someome mentioned carried interest...which is 30% of Romney's income in the two years taxes that he released and derived from his time at Bain Capital, the rest is from other investments....you can certainly argue that carried interest ought to be taxed like earned income(but show me and example where earned income can be construed as a long term investment and an earner is willing to wait 1-5 years to receive the benefits of the income)

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.

.... there are stipulations that come with the derivation of carried interest that differ from traditional earned income that make them very different and more to the point, changing the way that carried interest is taxed would do precious little to improve the country's economic situation but I guess it might make a few people feel better and would still leave the Romney types paying 15 or so % on the other 70% of his income

if you want to argue for a 15% flat tax for all Americans on all income...I'm sure that Romney would be quite happy to support that


read this...she gets into the nuts and bolts of the topic pretty well...she is an advocate of taxing all income equally and is pretty thorough in her assesment of the whole situation

Raising carried interest tax won't solve problem

[scottw]

a little more on the subject...



Understanding Carried Interest

Is there a tax loophole that benefits fund managers?
By Alan D. Viard

Mitt Romney’s release of his tax returns has pushed the arcane issue of “carried interest” — the share of an investment fund’s profits given to its managers as payment for their services – back into the headlines. Critics have renewed their calls to tax the carried interest as ordinary income. Unfortunately, the populist rhetoric used by some critics can obscure the facts about how carried interest is actually taxed.

Some critics assert that all carried interest is taxed at the lower 15 percent that applies to capital gains and dividends. They complain that these funds are able to “turn” ordinary income into capital gains and dividends by paying managers in carried interest rather than salary, and that the funds are exploiting a special loophole not available to other firms. Looking at how carried interest works reveals that none of these things are true.


A private-equity, venture-capital, or hedge fund may earn various types of income — interest, short-term and long-term capital gains, dividends, and profits from non-corporate business holdings. These funds are organized as partnerships, with both the managers and the investors as partners. As a partnership, the fund is not directly taxed on its income. Instead, each partner is taxed on his share of the fund’s income — whether or not he removes it from the firm.

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. The tax rate depends on the kind of income the fund earns — not all carried interest gets the 15 percent rate.

But, should any of it get that rate? Critics point out that, if the fund had paid its managers a straight salary, the salary would have been taxed as ordinary income. They argue that the fund should not be allowed to “turn” ordinary income into capital gains or dividends simply by paying the managers carried interest rather than salary.

But that’s not what’s going on. The way the fund pays its managers can’t change the total amount of capital gains and dividends or the total amount of ordinary income the fund has earned. Paying carried interest rather than salary simply reallocates the two types of income among the two types of partners — it gives managers more of the gains and dividends and less of the ordinary income while giving the investors less of the gains and dividends and more of the ordinary income. Nothing gets turned into anything else.

To be sure, this reshuffling of income usually produces net tax savings. The managers pay less tax because they get more of the lightly taxed gains and dividends. And the investors are often pension funds that don’t have to pay tax no matter how much ordinary income they’re given.

Critics don’t explain, though, why these tax savings are improper. The funds and managers aren’t exploiting a special loophole — they’re following the same tax rules that apply to everyone else. Because all partnerships may choose how to allocate their income among their partners, any partnership is free to allocate gains and dividends to partners who work rather than those who invest. The funds certainly have good business reasons to pay carried interest rather than salary — that arrangement gives managers the most powerful incentives to maximize performance. And managers who receive carried interest face the same risks as the investors.

These complicated issues could be avoided under a consumption tax or a better-designed income tax. Starting from today’s system, it’s hard to identify a single “right” rule for how partnerships should be allowed to allocate income. But critics have failed to make a good case for imposing special restrictions that would prevent private-equity, venture-capital, and hedge funds from using the tax rules that apply to other industries. Any tax changes that are adopted should apply throughout the economy and should be based on facts rather than populist rhetoric.

[spence]

Originally Posted by scottw

And the investors are often pension funds that don’t have to pay tax no matter how much ordinary income they’re given.

You should have put this line in bold as it's the most important one in the entire piece.

So Justplgit's pension gives me 100 dollars to invest, I turn it into 120 dollars through my market savvy, give him his 100 dollars back + some interest we already agreed to. I keep the rest, but since it's all profit it's treated as capital gains...Justplugit's pension pays nothing as pension funds are exempt from taxes.

Now I would think you could argue that the beneficiaries of the pension funds are also getting a tax break...and they are.

I also understand that when you add it all up it doesn't fix the tax revenue problem, and that to change the tax code just a narrow part of the population doesn't make a lot of sense.

But if not technically a loophole it sure does sound like some hedge fund and private equity managers are able to get out of paying A LOT of taxes on what is really income when they whip out the cash for that new Porsche...all for taking risks with other people's money.

-spence

[scottw]

Originally Posted by spence

You should have put this line in bold as it's the most important one in the entire piece.

But if not technically a loophole it sure does sound like some hedge fund and private equity managers are able to get out of paying A LOT of taxes on what is really income when they whip out the cash for that new Porsche...all for taking risks with other people's money.

-spence

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.

..............
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.

[spence]

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.

..............
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.

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

[scottw]

Originally Posted by spence

I understand all that. not sure that you do
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

not only is it not just "current code"...but apparently not all that unusal....nor are the simplistic attempts to feign unfairness

United Kingdom

In 1987, the Inland Revenue and the British Venture Capital Association (BVCA[3]) entered into an agreement which provided that in most circumstances gains on carried interest were not taxed as income.

The Finance Act 2003 widened the circumstances in which investment gains were treated as employment-related and therefore taxed as income. In 2003 the Inland Revenue and the BVCA entered into a new agreement which had the effect that, notwithstanding the new legislation, most carried-interest gains continued to be taxed as capital gains and not as income.[4] Such capital gains were generally taxed at 10% as opposed to a 40% rate on income.

In 2007, the favourable tax rates on carried interest attracted political controversy.[5] It was said that cleaners paid tax at a higher rate than the private-equity executives whose offices they cleaned.[6] The outcome was that the capital-gains tax rules were reformed, increasing the rate on gains to 18%, but carried interest continued to be taxed as gains and not as income.[7]

sound familiar?...you'd think those enlightened Brits would have stomped out such unfairness and declared "all income" to be "income"...regardless


this is pretty good......http://www.uschamber.com/reports/ana...tes-us-economy

[spence]

Originally Posted by scottw

not only is it not just "current code"...but apparently not all that unusal....nor are the simplistic attempts to feign unfairness

The existing tax code is a jumble of provisions lobbied for by business interests trying to influence legislators so the super rich can stay super rich. I think we'd both agree that a lot of what's presently "legal" isn't necessarily right.

United Kingdom

In 1987, the Inland Revenue and the British Venture Capital Association (BVCA[3]) entered into an agreement which provided that in most circumstances gains on carried interest were not taxed as income.

The Finance Act 2003 widened the circumstances in which investment gains were treated as employment-related and therefore taxed as income. In 2003 the Inland Revenue and the BVCA entered into a new agreement which had the effect that, notwithstanding the new legislation, most carried-interest gains continued to be taxed as capital gains and not as income.[4] Such capital gains were generally taxed at 10% as opposed to a 40% rate on income.

In 2007, the favourable tax rates on carried interest attracted political controversy.[5] It was said that cleaners paid tax at a higher rate than the private-equity executives whose offices they cleaned.[6] The outcome was that the capital-gains tax rules were reformed, increasing the rate on gains to 18%, but carried interest continued to be taxed as gains and not as income.[7]

sound familiar?...you'd think those enlightened Brits would have stomped out such unfairness and declared "all income" to be "income"...regardless

You're ignoring your own cut and paste...The UK decided instead to nearly double their capital gains rate on EVERYBODY.

this is pretty good......http://www.uschamber.com/reports/ana...tes-us-economy

All a carried interest correction would do is ensure that partners pay a similar tax rate for their labor as other investment advisers already do for basically the same job. If anything, it's a more simple and consistent tax code.

But, I guess if I had a golden goose I'd want to protect it as well.

-spence

[scottw]

Originally Posted by spence

I do think this issue will be very problematic for Romney in the general election.

-spence

no doubt...class warfare and racism are easy arguments to fire up and tough to defend...we're already seeing the wheels of both turning and it will get very ugly without question....

[justplugit]

Originally Posted by spence

...Justplugit's pension pays nothing as pension funds are exempt from taxes.



-spence

That's because it's an incentive for companies to provide for their retired
employees. They also need to file an annual report to the Labor
Dept as to insure having enough funding for everyone in the plan.
Don't know for sure but there must be penalties if they fall below a
certain level. There is risk.
The Govt still does well as the employee pays taxes on the pension $
as regular income.

Spence, can you give me the name of this savy market guy you speak of
who can turn my$100 into $120???? With these market conditions I'd be happy
to take $5 of his $20. I thought Madoff was in jail. LOL

[spence]

Originally Posted by justplugit

Spence, can you give me the name of this savy market guy you speak of who can turn my$100 into $120???? With these market conditions I'd be happy to take $5 of his $20. I thought Madoff was in jail. LOL

Come on, I think you can manage better than 5%!

-spence