Losing the Carried Interest Debate
May 25, 2010
Everyone knew it was coming. And when it did, the title of the legislation, "American Jobs and Closing Tax Loopholes Act," left little to the imagination. That the proposal to alter the tax treatment on carried interest was floated on the same day the Financial Reform bill passed the Senate only added more weight to it and seemed to crystallize the likelihood that carried interest will one day lose its favored tax status.
The reaction from the industry has been predictably negative. The New York Post reported that some large market firms are reconsidering their $350,000 annual lobbying bill, while the Private Equity Council's Douglas Lowenstein issued a statement, warning that amid the market uncertainty, "now is not the time" to impose a tax hike on the asset class. I suppose he would have preferred this legislation back in 2007, a more tranquil period for private equity when legislators first kicked around the idea.
As it is currently drafted, the proposed legislation wouldn't go into full effect until 2013. In the meantime, as The New York Times' Andrew Ross Sorkin identified last week, GPs have already enlisted their accountant armies to help them sidestep the proposed changes.
One possibility Sorkin cited would have GPs "sell their carried interest to a third party and then use the cash they received to invest directly in the deal." When that "investment" climbs, presto, a capital gain. Another solution Sorkin identified would have LPs "lend" money to the sponsor, who would use the funding to acquire a capital interest. Then there is the less creative offshore option, and even talk that partnerships would be unwound in favor of operating on a deal-by-deal basis, in which sponsors create new entities for each investment, thus introducing founders' shares to the economics.
Bill Burnham, in his blog, argued that carried interest is effectively the value LPs put on a sponsors' "intangible assets." Burnham's solution would see GPs "create more elaborate documentation" of this "implicit" arrangement, in which firms are contributing their reputations, track records and networks.
Umm, yeah... and if that works, I'll use the name on my mailbox as an intangible "home improvement" and add that to the cost basis of my house when I decide to sell.
The argument against alterations to the tax code is that it will send GPs fleeing. John Rutledge, in an op-ed in the Wall Street Journal published yesterday, warned: "When you increase the tax rate on an activity, you get less of it. The only question is how much less of it you will get." Rutledge wants to characterize it as the latest "soak-the-rich scheme."
If this argument is supposed to resonate with the American public, it surely doesn't -- at least not today. If you drive around my town, every third house has a "Vote Yes" sign in favor of a tax override needed so the school can keep its arts program. This idea that the poors are "soaking" the deserved rich whose trickle down they should be grateful for comes off as well as Lloyd Blankfein's "God's work" defense from last November.
In the small and mid market, and of course the venture community, changes to the tax code will certainly change the economics in a negative way. And I know it hits a lot of investors close to home. As Rutledge implied, it will very likely send some running for greener pastures.
Another possibility is that GPs will commit more of their own equity into a fund. That's the supposed goal of the break on capital gains taxes in the first place -- to reward investors for taking risks. And if a certain segment does flee, the silver lining for the GPs who have bemoaned the crowded marketplace in recent years, is that the ensuing inefficiences should improve the opportunities for those who remain.
12 Comments
Louis Vuitton:Women's competition and rivalry is a war between. Louis Vuitton Outlet Handbags is like a merchant, who is specialized in manufacturing various" arms", these" arms" for women to compete with each other to suppress each other. Although women compete must spend money, but the arms dealer is to make money, to make big money. So this batch of arms dealer is intentionally put weapons do powerful and expensive, let consumer can not afford to women. In this endless escalating war, absolute victims are these women's husband and boy friend, the absolute benefit is the Louis Vuitton Handbags, women 's work is nothing but to a lot of money from his own pocket to make man arms dealer hand only, get is only a few minutes the vanity of the meet Louis Vuitton Bags.
Posted by: leo c | February 23, 2012 9:12 PM
Of course,who would expect positive response from that? - gutter guards
Posted by: Shane B | February 20, 2012 10:58 PM
This is really useful if you think of something while at work that you need to research when at home, or when you're in a bar discussing something with a friend and want to citalopram hbr follow up on it.
Posted by: minli c | February 18, 2012 12:57 AM
It was very well authored and easy to understand. Unlike additional blogs I have read which are really not that good. I also found your actos side effects posts very interesting. In fact after reading, I had to go show it to my friend and he enjoyed it as well!
Posted by: minli c | February 15, 2012 10:42 PM
In the small and mid market, and of course the venture community, changes to the tax code will certainly change the economics in a negative way. And I know it hits a lot of investors close to home. As Rutledge implied, it will very likely send some running for greener pastures. custom essay | GCSE Coursework | Custom Dissertation | Custom Thesis
Posted by: padma l | February 7, 2012 12:26 PM
coach outlet online coach outlet louis vuitton uk louis vuitton coach outlet online coach factory outlet coach outlet coach outlet store online louis vuitton sale louis vuitton outlet coach factory outlet coach factory online coach factory outlet coach factory outlet online louis vuitton uk louis vuitton coach outlet online coach outlet coach outlet store coach outlet store online coach bags coach outlet store coach outlet coach outlet store online hermes birkin hermes bags gucci uk gucci uk sale louis vuitton outlet louis vuitton bags
Posted by: CHEN M | January 14, 2012 2:47 AM
presto, a capital gain. Another solution Sorkin identified would have LPs "lend" money to the sponsor, who would use the funding to acquire a capital interest. Then there is the less creative offshore option, and even talk that partnerships would be unwound in favor of operating on a deal-by-deal basis, in which sponsors create new entities for each investment, thus introducing founders' shares to the economics.android tablet pc
Posted by: Knife M | December 7, 2011 11:26 PM
if this argument is supposed to resonate with the American public, it surely doesn't -- at least not today. If you drive around my town, every third house has a "Vote Yes" sign in favor of a tax override needed so the school can keep its arts program. This idea that the poors are "soaking" the deserved rich whose trickle down they should be grateful for comes off as well as Lloyd Blankfein's "God's work" defense from last November.android tablet pc
Posted by: Knife M | December 7, 2011 11:25 PM
while the Private Equity Council's Douglas Lowenstein issued a statement, warning that amid the market uncertainty, "now is not the time" to impose a tax hike on the asset class. I suppose he would have preferred this legislation back in 2007, a more tranquil period for private equity when legislators first kicked around the idea.android tablet pc
Posted by: Knife M | December 7, 2011 11:25 PM
packers jersey, Charles Woodson Jersey,Ryan Grant Jersey,Aaron Rodgers Green Jersey Dallas, on the Ryan Grant Green Jersey other hand, is not A.j. Hawk Green Jersey playing good football. Clay Matthews Green Jersey They lost in heartbreaking Aaron Kampman Green Jersey fashion at New England Donald Driver Green Jersey this weekend. Charles Woodson Green Jersey Their only two wins Greg Jennings Green Jersey are over San Francisco Jermichael Finley Green Jersey (a miracle comeback) B.j. Raji Green Jersey and Washington (won without scoring a touchdown).
Posted by: kaijili e | November 14, 2011 3:43 AM
Ideological fulminations notwithstanding, it is really very simple. It's all about the ROI. For a given risk profile of an investment prospect (re: any business venture, whether early stage or technology based, etc.), the prospective "net" cash return must merit the "perceived" level of risk. The less the after-tax returns, the fewer the investments that will be made or the lower the valuations. The one reality that you can take to the bank, 'soak the rich' tactics NEVER return any where near the levels proclaimed by those who 'supposedly' seek a more equitable societal end (ala CA, MI, NY, NJ, IL).
Posted by: las | May 27, 2010 4:10 PM
Taxing carried interest at ordinary tax rates will send GP's fleeing? C'mon... if there was any other place in the world they could make the same income, they would already be there.
Posted by: David B | May 25, 2010 1:56 PM
Add Your Comments...
Already Registered?
If you have already registered to Money Management Executive, please use the form below to login. When completed you will immeditely be directed to post a comment.
Not Registered?
You must be registered to post a comment. Click here to register.