Advocates and opponents of carried interest tax reform spoke Tuesday at the Senate Finance Committee’s second hearing on carried interest, agreeing only that all partnerships should be subject to equal taxation regardless of industry.
A venture capitalist and several tax law professors maintained that carry is in fact a compensation fee – Stetson University tax law professor Darryll Jones went so far as to suggest that carried interest is to the tax code “what Abu Ghraib was to the Iraq war” – while alternative asset industry leaders argued on behalf of maintaining current tax treatment carry.
The chairman of the Private Equity Council and Carlyle Group managing director, Bruce Rosenblum, said that carried interest is not a performance fee but an ownership incentive.
“We are co-owners with our limited partners, not their employees,” Rosenblum said, noting that GPs contribute substantial cash and intangible resources to their funds. “Capital gains treatment has never been tied to either the amount or proportion of capital at risk.”
Adam Ifshin, president of shopping center real estate company DLC Management Corp. stressed that carried interest’s designation as capital gains factors prominently into its business plan and allows it to reinvest capital in new projects and communities.
Both Ifshin and Rosenblum predicted that increasing the tax on carry would result in fewer firms willing to take long-term risks and could have an effect on returns for limited partners.
William Stanfill, founding partner of Denver-based Trailhead Ventures, however, disagreed, calling dire consequences being predicted cases of “Chicken Little”. He also called venture capitalist Kate Mitchell’s previous Senate Finance testimony on the venture capital industry’s tax treatment an idealised view of the industry, akin to the Wizard of Oz “before Toto pulled back the curtain”.
What all the witnesses did agree on was the point being pushed by Senator Chuck Schumer: that all partnerships from all industries should be given identical tax treatment.
“Our economy works best when we have the same tax rates across all industries,” said Stanford Law School professor Joseph Bankman.
Schumer, a Democrat from New York, noted that the taxes on oil and gas partnerships, as well as those concerning “real estate, ethanol and anything else” ought to be taxed the same as financial services partnerships.
The comment was presumably aimed at Iowa Senator Chuck Grassley, the committee’s ranking Republican member. Grassley has co-authored a bill that would tax publicly traded financial services firms as corporations, yet his home state stands to benefit from a proposed $69 million tax break on ethanol-related publicly traded partnerships, Bloomberg reported last week.
“I want to make sure that New York partnerships are not singled out when partnerships in other states use the exact same structures,” Schumer said.
Grassley has refuted claims that one industry is being singled out over another.
“The carried interest issue is complicated and some might say headache-inducing, but this committee is responsible for getting the policy right,” he said during opening remarks. “So we need to take our aspirin and wade in.”