Taxes

[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

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

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

BRILLIANT!!!! complain about the unfairness that a tiny minority supposedly enjoy and solve it by screwing EVERYONE...

sounds like Jimmy's AMT conundrum


didn't ignore anything...it makes the point that the "complaint" In 2007, the favourable tax rates on "carried interest" attracted political controversy.

[It was said that cleaners paid tax at a higher rate than the private-equity executives whose offices they cleaned....

the solution to end this incredible unfairness enjoyed by the "uber-rich paying cash for Porsches unfairly gotten as a result of carried interest" was to raise the capital gains tax on EVERYONE from 10% to 18%......apparently to make things fairer for those not getting the carried interest benefit????...somehow??? victory???

although carried interest continues to be treated as gains and not income

[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....