Taxation of Carried Interest • Hacker News Board

Re: Taxation of Carried Interest

#11

Post by MR4D » Sun, Jun 10, 2018, 3:05 AM UTC

hn_throwaway_99 wrote: post #2

Taxation of carried interest as capital gains makes absolutely no sense - I can't think of a better example really to illustrate "one set of rules for the rich and another for everyone else.'

Carried interest is effectively the General Partners share of the dividend. Dividends are taxed at a lower rate than ordinary income, so this is as well. This is true whether you’re poor and own one share of a dividend paying stock, or you’re Ray Dalio.

Here a pretty good breakdown of how it works and why it makes sense [0].

To be clear, I’m not saying you have to like it, but the rich have been getting richer since the beginning of time. I don’t expect that will ever change. It’s as true with humans as with animals like lions (albeit the measures are different, as lions have no care about dollars).

[0] https://www.cnbc.com/2014/03/04/cnbc-explains-carried-intere...

Re: Taxation of Carried Interest

#12

Post by Alex3917 » Sun, Jun 10, 2018, 3:06 AM UTC

hn_throwaway_99 wrote: post #2

Taxation of carried interest as capital gains makes absolutely no sense - I can't think of a better example really to illustrate "one set of rules for the rich and another for everyone else.'

> one set of rules for the rich and another for everyone else

The rich (LPs) aren't the ones getting carry, it's the GPs who get carry.

Re: Taxation of Carried Interest

#13

Post by harryh » Sun, Jun 10, 2018, 3:07 AM UTC

Alex3917 wrote: post #10

harryh wrote: post #7

FWIW, here is the simple counter argument: Alice & Bob form a partnership to invest some money. Between the two of them they invest $100. After 5 years they sell their investment for $200. As far as the government is concerned, that's a long term gain of $100 and should be taxed as such. How Alice & Bob decide to split the gains is between them and not a tax question. I don't necessarily buy this argument, but it's a…

> I don't necessarily buy this argument Why should risking time and risking money get taxed at different rates? I guess I don't understand the argument for why LPs should pay less taxes than GPs. Especially since entrepreneurs get to pay longterm capital gains on their stock, and the risk profile of being a founder is basically identical to the risk profile of being a GP.

Yes, your first sentence is an especially pithy way to boil down what I wrote.

When I said that "I don't necessarily buy this argument", I didn't mean that I necessarily disagreed with it either. TBH, I remain uncertain.

It's interesting that you compare founders/GPs/LPs without bringing up employees. They also risk their time and, in a majority of cases, will not receive preferential tax treatment.

Re: Taxation of Carried Interest

#14

Post by cromwellian » Sun, Jun 10, 2018, 3:21 AM UTC

How about we require people who manage large funds to have their own “skin in the game”, perhaps they’d do a better job for their clients.

Re: Taxation of Carried Interest

#15

Post by harryh » Sun, Jun 10, 2018, 3:22 AM UTC

cromwellian wrote: post #14

How about we require people who manage large funds to have their own “skin in the game”, perhaps they’d do a better job for their clients.

Most large funds do require that.

Re: Taxation of Carried Interest

#16

Post by iseff » Sun, Jun 10, 2018, 3:25 AM UTC

harryh wrote: post #15

cromwellian wrote: post #14

How about we require people who manage large funds to have their own “skin in the game”, perhaps they’d do a better job for their clients.

Most large funds do require that.

This is correct. The vast majority of funds have at least 1% committed by GPs. This is what Fred means when he writes, "The partners at USV make up a sizeable portion of our funds."

Re: Taxation of Carried Interest

#17

Post by tptacek » Sun, Jun 10, 2018, 3:27 AM UTC

thesausageking wrote: post #3

Counterpoint from Matt Ocko (DCVC): https://twitter.com/mattocko/status/1005367508910596096 1/ TL; dr: “Having gotten immensely rich in part due to a tax break, I now solemnly opine that it should be denied to others... with no consequence to me...” This is “pulling up the rope ladder behavior” - here’s why: 2/ Fred’s stance screws over underrepresented VCs the most... They are most likely to have smaller funds that…

If really the most persuasive argument for the carried interest deduction is that it prevents new entrants from becoming middlemen financiers, that bodes pretty poorly for the policy.

An opinion that seems to be widely shared between conservative and liberal economists is that the financial sector is bloated. If the carried interest deduction serves to inflate it, that's actually by itself an argument to eliminate it.

Re: Taxation of Carried Interest

#18

Post by jadedhacker » Sun, Jun 10, 2018, 3:28 AM UTC

thesausageking wrote: post #3

Counterpoint from Matt Ocko (DCVC): https://twitter.com/mattocko/status/1005367508910596096 1/ TL; dr: “Having gotten immensely rich in part due to a tax break, I now solemnly opine that it should be denied to others... with no consequence to me...” This is “pulling up the rope ladder behavior” - here’s why: 2/ Fred’s stance screws over underrepresented VCs the most... They are most likely to have smaller funds that…

The policy is less about fairness to funds and more about fairness to the rest of the taxpayers (comprising >99% of the population).

Re: Taxation of Carried Interest

#19

Post by hn_throwaway_99 » Sun, Jun 10, 2018, 3:31 AM UTC

MR4D wrote: post #11

hn_throwaway_99 wrote: post #2

Taxation of carried interest as capital gains makes absolutely no sense - I can't think of a better example really to illustrate "one set of rules for the rich and another for everyone else.'

Carried interest is effectively the General Partners share of the dividend. Dividends are taxed at a lower rate than ordinary income, so this is as well. This is true whether you’re poor and own one share of a dividend paying stock, or you’re Ray Dalio. Here a pretty good breakdown of how it works and why it makes sense [0]. To be clear, I’m not saying you have to like it, but the rich have been getting richer since…

Yes, but as the parent article states, and even what is pointed out in your own link, while dividends are taxed at a lower rate, the manager is paid the lower rate on capital that is not his to begin with. That's the part that makes no sense to me. It is quite simply an incentive payment for his labor: it's income that investors pay him for his expertise, and as such should be taxed at income rates.

Re: Taxation of Carried Interest

#20

Post by harryh » Sun, Jun 10, 2018, 3:32 AM UTC

tptacek wrote: post #17

thesausageking wrote: post #3

Counterpoint from Matt Ocko (DCVC): https://twitter.com/mattocko/status/1005367508910596096 1/ TL; dr: “Having gotten immensely rich in part due to a tax break, I now solemnly opine that it should be denied to others... with no consequence to me...” This is “pulling up the rope ladder behavior” - here’s why: 2/ Fred’s stance screws over underrepresented VCs the most... They are most likely to have smaller funds that…

If really the most persuasive argument for the carried interest deduction is that it prevents new entrants from becoming middlemen financiers, that bodes pretty poorly for the policy. An opinion that seems to be widely shared between conservative and liberal economists is that the financial sector is bloated. If the carried interest deduction serves to inflate it, that's actually by itself an argument to eliminate it…

I'm sympathetic to this line of reasoning but we don't really measure the bloat of finance by number of people involved but instead by % of GDP consumed. Perhaps reducing new entrants to the field would reduce competition, raise prices and further bloat the field?

(Just thinking out loud here.)