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Taxation of Carried Interest

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Re: Taxation of Carried Interest

#121

Post by tardo99 »

Here's how I think it should work:

You can get capital gains treatment on returns on investments in a given year which don't exceed 20% a year compounded annually. This would apply whether or not the taxpayer has realized the gain (though I'd be fine with an exception for startups to give them, say, 5 years to pay since liquidity events don't always align properly).

This solves the situations that enrage people, namely:

* Carried interest

* People that luck into huge gains on flyer investments (i.e. bitcoin or whatever

* Startup founders who get capital gains treatment because of the $100 (or whatever) that they put into the company initially

In each of these cases, these are really speculations, not investments. There's nothing wrong with that, but I don't see why it should get preferential tax treatment.

Re: Taxation of Carried Interest

#122

Post by stealthmodeclan »

millstone wrote: post #83
WalterBright wrote: post #53

Earlier quoted context omitted.

1. The higher the capital gains tax rate, the less money will be invested. 2. Higher rates make for less efficient economics, because people will hold on to poorly performing investments longer. 3. A big chunk of capital gains are actually inflation.

Every point you make applies equally well to labor: 1. The higher the labor tax rate, the fewer people will work. 2. Higher labor tax rate makes for less efficient economics because workers will prefer lower-paying (less stressful) jobs. 3. Wage tax brackets are not indexed for inflation. Given these, why should the tax code prefer capital ownership to labor?

1. The higher the labor tax rate, the fewer people will work

If higher tax rate pays for better infra and healthcare, more people are likely to work.

2. Higher labor tax rate makes for less efficient economics because workers will prefer lower-paying (less stressful) jobs.

Isn't labor tax progressive, so bottom earners do not pay a high rate. Higher paying job might have more stress but it's offset with more disposable income and there is strong incentive to invest this disposable income into lowly taxed capital gains setup in the absence of which either people will hoard this money (where it sits doing nothing or hold onto worse performing assets) or spend it ( increasing inflation (which isn't good for economy)

3. Wage tax brackets are not indexed for inflation.

Yes, for higher wage earners there is strong incentive to purchase stocks/real estate to enjoy lowly taxed capital gains.

Re: Taxation of Carried Interest

#123

Post by gok »

beat wrote: post #54

The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral…

To be more precise, you are proposing eliminating the long term capital gains deduction. Short term capital gains are already taxed as regular income.

In other words, you propose eliminating the tax advantage of being a long term investor. Active traders will be unaffected.

Re: Taxation of Carried Interest

#124

Post by etaty »

Capital gain tax or income gain tax are designed to make the wealthy wealthier. Don't tax "gain", tax the "wealth". This will make it harder and harder to hoard wealth as you gain wealth. Every other "tax" can then be removed.

So with the "wealth" taxt, every year you sum all your possessions and you give X% (20%?) to the government.

This look simple enough to me, did any country try that?

Re: Taxation of Carried Interest

#125

Post by qaq »

beat wrote: post #54

The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral…

I think this conveniently ignores the risk factor your risk of not getting payed your wage is a tiny fraction of the risk of someone loosing the invested money. You want to participate on the win side of that risk without sharing the losses.

Re: Taxation of Carried Interest

#126

Post by tim333 »

The carried interest exemption is shockingly unfair. I think the only reason hedge fund managers can pay 15% on a $100m income while say a nurse may pay 40% on a modest income is the fund managers are able to pay lobbyists to effectively bribe the politicians to let them pay less. It's only in the USA - I'm in the UK where we have a huge finance industry without this nonsense. It should go.

Re: Taxation of Carried Interest

#127

Post by tim333 »

beat wrote: post #54

The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral…

Simply taxing gains as ordinary income is often unfair because it taxes stuff going up in nominal terms without actually being worth more in real terms. You can get around this by indexing for inflation, which gets complicated, or taxing it at a lower rate. Carried interest isn't really capital gains - it's income and should be taxed as that.

The deeper problem is if there is some way to reform the political system to be less easily bought.

Re: Taxation of Carried Interest

#128

Post by stealthmodeclan »

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.

Why should risking time and risking money get taxed at different rates?

GP gets 2% in management fees. That's a guaranteed return for his time.

Then 20% of the profits.

Re: Taxation of Carried Interest

#129

Post by lpolovets »

(Disclosure: I'm a VC in California, which is one of the states proposing this tax.)

For what it's worth, the tax rates being proposed on carried interest in these states are very high. E.g. California is proposing 17% while Maryland is proposing 19%. The result is that these carry taxes combined with a capital gains tax can be significantly higher than regular income taxes. I think imposing taxes of this size at the state level is foolish because I suspect many VCs would move to other states and commute. I already know LA VCs who fly to SF for 1-2 days every week, and the flight from Nevada or Portland would be approximately the same. Plus housing is much, much cheaper in those areas. It would be even easier to do this in Maryland, since Washington DC is so close.

Re: Taxation of Carried Interest

#130

Post by Dowwie »

qaq wrote: post #125
beat wrote: post #54

The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral…

I think this conveniently ignores the risk factor your risk of not getting payed your wage is a tiny fraction of the risk of someone loosing the invested money. You want to participate on the win side of that risk without sharing the losses.

You raise a good point about risk profiles. Let's consider other asymmetric risks?

An employee is hired at will and largely vulnerable to employment risk. The employee has no legal claim to income earned by an employer beyond general compensation provided in the duration of employment. On the other hand, an investor, without major financial restructuring, can through equity or debt secure a claim with various degrees of seniority.

So, to counter your claim, an employee is exposed to downside through these terms.

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