Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Taxation of Carried Interest

avc.com

Post reply on HN
Print view View original

31–40 of 306 posts

Re: Taxation of Carried Interest

#31

Post by millstone »

What is the modern argument for preferential tax treatment of capital gains?

Arguments against it seem compelling to me:

1. The American dream is achievement through hard work. But taxation of capital gains privileges ownership over labor. That's just un-American.

2. This preferential taxation creates an anti-productive industry dedicated to re-casting ordinary income as capital gains, leading to misallocation of resources.

3. Many states including California tax capital gains at the same rate as ordinary income; CA is not exactly suffering from lack of investment income.

4. Optics are terrible: I and many other ordinary Americans pay a higher average tax rate than the very wealthy, including ex-presidential candidate Mitt Romney and in all likelihood President Trump.

Re: Taxation of Carried Interest

#32

Post by [deleted] »

millstone wrote: post #31

What is the modern argument for preferential tax treatment of capital gains? Arguments against it seem compelling to me: 1. The American dream is achievement through hard work. But taxation of capital gains privileges ownership over labor. That's just un-American. 2. This preferential taxation creates an anti-productive industry dedicated to re-casting ordinary income as capital gains, leading to misallocation of res…

[deleted]

Re: Taxation of Carried Interest

#33

Post by harryh »

millstone wrote: post #31

What is the modern argument for preferential tax treatment of capital gains? Arguments against it seem compelling to me: 1. The American dream is achievement through hard work. But taxation of capital gains privileges ownership over labor. That's just un-American. 2. This preferential taxation creates an anti-productive industry dedicated to re-casting ordinary income as capital gains, leading to misallocation of res…

https://en.wikipedia.org/wiki/Optimal_capital_income_taxatio... is a good place to start. Right up top is a nice summary:

"Starting from the conceptualization of capital income as future consumption, the taxation of capital income corresponds to a differentiated consumption tax on present and future consumption. Consequently, a capital income tax results in the distortion of individuals' saving and consumption behavior as individuals substitute the more heavily taxed future consumption with current consumption."

Here is a simplified explanation of the above:

http://www.thebigquestions.com/2010/01/27/a-quick-economics-...

Re: Taxation of Carried Interest

#34

Post by hn_throwaway_99 »

harryh wrote: post #23
hn_throwaway_99 wrote: post #19

Earlier quoted context omitted.

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.

You & I start a company. I provide $100,000 in seed money but little actual work/time. You provide no seed money but a lot of work & time. We agree to split ownership of the company 50/50. 5 years go by. We sell the company for $1,000,000. You get $500,000, I get $500,000. Should I get to pay a lower tax rate than you?

Then let hedge fund managers organize their funds as equity purchases from their investors. To use your analogy, if managers were deserving of 20% of the profits, then structure it as investors own 80% and managers own 20%.

Of course, that would make many hedge funds a lot less attractive for many investors. Hedge fund managers want to have their cake and eat it too.

Re: Taxation of Carried Interest

#35

Post by harryh »

hn_throwaway_99 wrote: post #34
harryh wrote: post #23

Earlier quoted context omitted.

You & I start a company. I provide $100,000 in seed money but little actual work/time. You provide no seed money but a lot of work & time. We agree to split ownership of the company 50/50. 5 years go by. We sell the company for $1,000,000. You get $500,000, I get $500,000. Should I get to pay a lower tax rate than you?

Then let hedge fund managers organize their funds as equity purchases from their investors. To use your analogy, if managers were deserving of 20% of the profits, then structure it as investors own 80% and managers own 20%. Of course, that would make many hedge funds a lot less attractive for many investors. Hedge fund managers want to have their cake and eat it too.

That is (more or less) what hedge fund managers do.

Re: Taxation of Carried Interest

#36

Post by freeone3000 »

harryh wrote: post #23
hn_throwaway_99 wrote: post #19

Earlier quoted context omitted.

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.

You & I start a company. I provide $100,000 in seed money but little actual work/time. You provide no seed money but a lot of work & time. We agree to split ownership of the company 50/50. 5 years go by. We sell the company for $1,000,000. You get $500,000, I get $500,000. Should I get to pay a lower tax rate than you?

No. You shouldn't. The person doing the actual work should be paying it as tax on labor, and the person who put up the funds should be paying it as capital gains. And obviously, capital gains should be taxed at a rate greater than labor.

Re: Taxation of Carried Interest

#37

Post by jakelazaroff »

harryh wrote: post #23
hn_throwaway_99 wrote: post #19

Earlier quoted context omitted.

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.

You & I start a company. I provide $100,000 in seed money but little actual work/time. You provide no seed money but a lot of work & time. We agree to split ownership of the company 50/50. 5 years go by. We sell the company for $1,000,000. You get $500,000, I get $500,000. Should I get to pay a lower tax rate than you?

This analogy doesn't work; carried interest isn't granted because of any sort of ownership stake.

Re: Taxation of Carried Interest

#38

Post by [deleted] »

harryh wrote: post #23
hn_throwaway_99 wrote: post #19

Earlier quoted context omitted.

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.

You & I start a company. I provide $100,000 in seed money but little actual work/time. You provide no seed money but a lot of work & time. We agree to split ownership of the company 50/50. 5 years go by. We sell the company for $1,000,000. You get $500,000, I get $500,000. Should I get to pay a lower tax rate than you?

[deleted]

Re: Taxation of Carried Interest

#39

Post by extradego »

forapurpose wrote: post #27
MR4D wrote: post #11

Earlier quoted context omitted.

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 rich have been getting richer since the beginning of time That's not true and we must be careful not to accept an aristocracy (or oligarchy) as inevitable. That the wealthy will inevitably hold and consolidate power is counter to the history of democracy, a specific rejection of aristocracy, and a system which has worked the other way in country after country to great success economically and politically - grea…

The idea of democracy as a “rejection of aristocracy” has been well discredited for centuries now.

The topic of discussion here is not “social” but economic mobility. Let’s not mix them up so carelessly. Economic mobility is a measure of ability, or potential, not concrete events. To discuss “downward” economic mobility is to imagine wealth being forced upon these folk.

Re: Taxation of Carried Interest

#40

Post by Swizec »

forapurpose wrote: post #30

We can argue rules, technicalities and definitions, but here's the overriding one: Everyone needs to pull their weight, pay their share. Nobody is more important than anyone else. Pulling your weight means equal sacrifice. It might be hard to calculate the equal sacrifice of someone making $20,000 and someone making $20,000,000, but I can tell you that $1,000 (EDIT: or 20% of income) is a heck of a lot more sacrifice…

> I'm sick of people complaining about pulling their weight or saying they are too important to do so

The people complaining the most are those too well off for assistance and too poor to bear their responsibility comfortably. That portion of the population where it feels like you can pay health care/insurance/taxes or afford to go out to dinner one night a month instead of cooking.

It’s not a fun place to be.

I grew up like that. There was a lot of talk about assholes in power stealing from us to give to the lazy bums on welfare.

Post reply on HN