Blaming the current US tax policy for “excessively favoring” capital gains income over ordinary income, an editorial in the New York Times today called the tax on carried interest “too easy” and urged Congress to take action.
The lead editorial, titled “Taxing Private Equity”, argued that “performance fees” are taxed at a low 15 percent capital gains rate in part because “the rules were developed before private equity became the force it is today, and mainly with small businesses and real estate partnerships in mind.”
The editorial notes a reported inquiry into the matter by Senate Finance Committee members Max Baucus and Charles Grassley, and notes the publication of a paper by University of Colorado Law School associate professor, Victor Fleischer, who argues that carried interest should not be treated as capital gain for tax purposes in part because private equity firms get investment capital from tax-exempt public pensions and endowments.
More generally, the editorial highlighted what it called an “excessive” system of taxing capital gains at a much lower rate than ordinary income. Such a system, the editorial argued, “lavishly” advantages earners of capital gains. “Excessively favoring one form of income over another encourages wasteful gamesmanship, creates inequity and crowds out other ways to foster risk-taking,” the editorial noted. “Tackling the too-easy tax terms for private equity is a good way for Congress to begin addressing that bigger issue.”
Last month, US private equity professionals scrambled for more information following client alerts from two law firms that warned key Washington lawmakers are looking into carried interest as a potential source of higher tax revenue. Grassley, a Republican from Iowa, has come out in favour of greater hedge fund regulation, but has not publicly made any statements about carried interest.