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Taxation of Carried Interest

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Re: Taxation of Carried Interest

#61

Post by harryh »

hn_throwaway_99 wrote: post #58
harryh wrote: post #35

Earlier quoted context omitted.

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

I know they are organized as partnerships, but the managers don't really have any equity rights to the committed capital, only the profits. But I guess that's really no different than an investor with preference rights in a startup. In any case, thanks very much for your explanations, really helped me think about the issue in a different way.

Happy to help out!

In any case, as I stated elsewhere(1), I'm actually not sure what I believe on this topic. I can really see it both ways.

1. https://news.ycombinator.com/item?id=17276214

Re: Taxation of Carried Interest

#62

Post by Declanomous »

WalterBright wrote: post #53
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…

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.

The only point that seems unfair is point 3, which can be mollified by adjusting for inflation.

If we reduce points 1 and 2 to their logical conclusion, capital gains should not be taxed at all. This is idiotic. Due to the structural advantages individuals with money have investing, you'd basically be creating a system where people with money would capture almost all of the wealth.

The end goal shouldn't be the most efficient economy possible, it should be the highest standard of living for the individuals in your country. To that end, a certain amount of taxation is necessary.

Re: Taxation of Carried Interest

#63

Post by rileymat2 »

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 would agree, if they taxed "real gains" not inflation.

Re: Taxation of Carried Interest

#64

Post by harryh »

Declanomous wrote: post #62
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.

The only point that seems unfair is point 3, which can be mollified by adjusting for inflation. If we reduce points 1 and 2 to their logical conclusion, capital gains should not be taxed at all. This is idiotic. Due to the structural advantages individuals with money have investing, you'd basically be creating a system where people with money would capture almost all of the wealth. The end goal shouldn't be the most…

> If we reduce points 1 and 2 to their logical conclusion, capital gains should not be taxed at all. This is idiotic.

FWIW a great many people believe that capital gains should not be taxed at all. And while there are certainly fine arguments against that point of view, I don't think it's fair to say that "it's idiotic" when their p.o.v. is based on solid economic theory.

Re: Taxation of Carried Interest

#65

Post by hippich »

harryh wrote: post #13
Alex3917 wrote: post #10

Earlier quoted context omitted.

> 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.

Employees invest their time for immediate pay off (they get paid twice a month, monthly or something like that typically) So in essence, this is short-term capital gain which is taxed at the same level as regular income.

Re: Taxation of Carried Interest

#66

Post by harryh »

hippich wrote: post #65
harryh wrote: post #13

Earlier quoted context omitted.

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.

Employees invest their time for immediate pay off (they get paid twice a month, monthly or something like that typically) So in essence, this is short-term capital gain which is taxed at the same level as regular income.

I'm sorry, I was unclear.

When speaking about employees, I was talking about startup employees who take a significant % of their compensation as risky stock options. My point was about this portion of their compensation.

Re: Taxation of Carried Interest

#67

Post by forapurpose »

hippich wrote: post #60
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…

One potential problem I see with it - when welfare, public infrastructure, country protection and other goods for all commons is outsourced to one ambiguous entity (federal government) people who paid for it the most are not getting respect for that, and instead are being called thieves and abusers of the system and that they should give more. While praise (if any) goes towards that ambiguous system. When a large don…

> people who paid for it the most

If we are talking about equal sacrifice, they did not pay the most, they paid as much as anyone else.

> hen someone pays a lot of money into federal treasury - nil

Why should they get any praise for doing their share? Or everyone should get praise (which I support). The premise that someone is somehow superior for doing their fair share is fallacious. They are not aristocrats condescending to help the poor; they are merely pulling their weight.

> are being called thieves and abusers of the system and that they should give more.

This is a strawman often used by advocates of low tax on the wealthy to, in a standard rhetorical technique, somehow portray themselves as victims - which is quite an incredible, cynical, and frankly embarrassing stretch.

In fact, consensus has supported decreasing taxes for the wealthy, which is what has happened. Also, even those who oppose it, calling names is rare, IME. I'm sure there are some out there, but given that it's just a portion of one side of the debate, it's not many. If anyone on HN is using those words, I don't recall it.

> While praise (if any) goes towards that ambiguous system.

I'm not sure what's ambiguous about it at all.

Re: Taxation of Carried Interest

#68

Post by forapurpose »

Swizec wrote: post #40
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…

I've heard that. In your experience, does that match the hypothesis that it's just a tactic of the right to divide voters - turn the working class against each other (on racial and rural-urban lines too)?

Re: Taxation of Carried Interest

#69

Post by forapurpose »

MR4D wrote: post #45
forapurpose wrote: post #27

Earlier quoted context omitted.

> 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…

I’ll pick out one point that you seem to miss - when the US taxed the heck out of people with high incomes, you still had people like Howard Hughes, Warren Buffet, and John Paul Getty becoming even richer than they were before. So yes, the rich get richer, and high taxes do not stop that (but present the illusion that it stops ). I’ll gladly admit I’m wrong if you can disprove my three simple examples. Last I hexked,…

I don't think three examples are representative of the wealthy overall. I didn't say 'no rich get richer'; beyond a doubt, some do - and that's fine and fully compatible with meritocracy. The question is, what is the overall trend? Is there social mobility, opportunity and meritocracy, or aristocratic power and inheritence?

Re: Taxation of Carried Interest

#70

Post by djur »

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 the concern is about newcomers not getting a fair shake, why not just assess a one-time wealth tax on VCs with over a certain net worth and use some of it to establish a fund to lend to underrepresented founders? The current president of the US proposed a one-off 14.75% wealth tax on estates over $10 million. Maybe he should dust that one off.
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