Kill the Private-Equity Tax Break

The U.S. should raise the 15% tax millionaire and billionaire investors pay on their private equity gains to 35%—and do likewise with the 0% tax private equity partnerships pay when they go public. Pro or con?

Pro: Subsidizing the Wealthy

Despite the many areas of dispute among economists, virtually all of them would agree tax rates should not vary by occupation. In other words, we don’t want to see one tax rate for firefighters, a different tax rate for schoolteachers, and a third tax rate for bookkeepers. In principle, everyone who earns $50,000 a year should face the same rate, regardless of occupation.

Hence, most economists oppose special tax breaks for managers of private equity or hedge funds. Under their own interpretation of current law, these managers do not pay taxes on their compensation. While those of us who get regular paychecks have taxes directly deducted each month, hedge fund managers have gotten into the habit of plowing their $100 million compensation packages back into the their funds without paying any tax whatsoever. When they do eventually pull money out of the hedge fund, they typically claim it as a capital gain and pay tax at just a 15% rate.

Proposals before Congress (bills S. 1624 and H.R. 2834) would make fund managers subject to the same tax rules as everyone else. They would have to pay taxes on their income when they earn it, and it would be taxed at the same rate as normal labor income. Under these proposals, fund managers would typically pay a 35% tax rate on the bulk of their compensation.

If our government had not grown so incredibly corrupt, this one would be a no-brainer. We might want to subsidize some important jobs (albeit probably not with special tax rates) that don’t offer very high pay—for example, doctors in rural areas or inner-city schoolteachers. I doubt, however, that anyone would suggest the government initiate a policy of subsidizing hedge fund managers, some of whom already pocket $1 billion a year.

Con: Already Taxed to Distraction

There is no "private equity tax loophole." Under current law, investment income is double-taxed: First, the company you’re invested in pays the 35% corporate income tax, and then you, the investor, pay a 15% capital gains and dividends tax on what little is left. This new scheme isn’t loophole-closing—it’s just the Congressional Democrat tax increase of the week.

One bill (S. 1624) would introduce a third tax bite for publicly traded, private equity partnerships. Not content with taxing the underlying investment at 35% and the partner who owns the investment at another 15%, this bill would tax the partnership itself at 35% on top of the other two. All told, there would be a combined triple-tax rate of 64%, up from today’s double-tax rate of 45%.

The other bill (H.R. 2834) would raise the tax rate of a private equity manager’s capital gains from 15% to 35%. This would raise the double-taxation of this "carried interest" from 45% to 58%.

Who does this affect? Not the rich, who can afford fancy tax lawyers. Millions of Americans with defined benefit pensions have their retirements wrapped up in private equity firms. Ditto for college endowments and philanthropic trusts. Hiking taxes on these investments will ruin the retirement, education, and charitable hopes of millions of Americans.

This is really a not-so-subtle attack by the Democrats on the 15% capital gains and dividends tax rate that has resulted in trillions of dollars in new shareholder wealth since 2003. By picking off investors a few at a time, they want to raise all capital gains and dividend taxes to 40% or higher.

Add this to the long list of Congressional Democrat tax hikes this year—energy, tobacco, and Americans abroad are also big targets. Savers and investors, beware: Next on the Democrat chopping block is your pension.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

M Marach

Typical Grover. Dean did a good job of reducing what is a complex tax issue and bringing it to a level that people not in the tax profession can understand. Carried interest represents nothing more than a tax avoidance strategy whereby the private-equity folks enjoy paying no more than 15% of federal income tax (let alone zero payroll taxes) on what are really wages, while the wages of average citizens contribute to the tax coffers at a rate three times that (28% federal income tax + 15.3% combined employee and employer's share of payroll taxes). Grover, on the other hand, uses his arrogantly conspicuous slippery slope approach to scare those few Americans who still have pensions into believing they will somehow be affected by this legislation. This is to say nothing of his disturbing method of accounting in coming up with his preposterous figures.

random

I knew that Norquist is paranoid of any changes to tax laws as "a liberal ploy to rob millions of Americans to fund welfare." Now I also know that he doesn't understand basic math and this is horrible because playing fast and loose with the numbers to prove a point rooted in an emotional knee-jerk is just plain dishonesty. And while dishonesty may work in politics, it doesn't work in math.

If $1 million is taxed at 35%, the remainder would be $650,000 and the additional 15% tax on that remainder would reduce it to $552,500 making the total tax liability about 55% and not 64% as Norquist claims.

Another one of Norquist's glaring mistakes is saying that because the fund manager supposedly pays a 35% income tax rate, and then you, the investor, pay a 15% tax on the gains, this is double taxation when in fact these are two totally separate taxes applied to totally different people. If I invest $50,000 in a fund, gain $20,000, and then retrieve my money, I don't get back $38,500 after a 45% tax as he claims. I just pay the 15% tax on my earnings while the fund pays its taxes from the fees and other income it generated. So in effect, Norquist is suggesting that after you put money in your savings or investment account, you're actually loosing wealth thanks to taxes. If that was the case, why would 66% of Americans have some sort of investment in mutual funds or in the stock market?

He is also counting the 35% income tax twice in his 64% proposed tax claim. Normally I would contribute this to an oversight, but knowing Norquist's penchant for politics over math, I'm going to have to attribute it to an attempt to mislead the readers and appease those who will already agree with him that taxes are evil--like Dracula. And the evil IRS that actually has the gall to expect him to pay taxes.

So savers and investors, please do beware. You're being used as pawns in yet another partisan screaming match between think tanks. Also, if your gains are as meager as Norquist suggests (i.e. negative), I would talk to the SEC and your state attorney general if I were you.

Paying taxes is like paying rent. If you want police, firefighters, roads, hospitals, schools, and all the other wonderful, government-subsidized infrastructure that makes the U.S. such a developed and industrialized nation, the money has to come from somewhere. If Norquist really wants to reduce taxes, why doesn't he advocate a better, more efficient, less bloated government structure that removes the countless layers of various bureaucrats and forbids giving away hundreds of billions in pork barrels every year?

Oh right, because he works with a certain political party currently in power and thus doesn't want to criticize it as long as they cut taxes by 2% or 3% once in a while. You never wanna burn bridges in politics.

David

I guess an alternative for all of you tax-mongering Democrats would be for private equity firms to actually take direct equity interest in their investments instead of "carried interest" on the profits. This would no doubt create plenty of work for the lawyers and upset many PE firm investors, but it could most definitely be done. Maybe then you will propose increasing capital gains taxes to 35% or even 50%?

Kurt

Fair taxation is the only true driver for an equitable and stable society. The U.S. tax code is officially a joke, and due to the excessive corruption within government and lobbying, the code is now unwieldy and serves those people with enough money to exploit the loopholes. The simple answer is to actually scrap the code all together; very simple, everybody pays a sliding scale of tax, no exemptions, no special interest groups, no trust funds to protect the rich--and the only groups eligible for exemption are charities. At this stage, I am already hearing the screams that this will destroy businesses and innovation, but surely not; it just evens the field for everybody. I mean, isn't that the central tenet this country was founded on, a fair playing field and competition, not protection. Or was it "free competition only if I have an advantage first." Why should wealthy people be able to create trust funds? They have enough money to provide for their children. Therefore the trust is to reduce their tax or protect their assets in case they go bankrupt. Neither of these reasons is acceptable for the creation of these vehicles.

As for the private equity players and the associated taxation arguments above, I find Grover's arguments quite amusing around the double taxation laws and companies etc. The main platform of a PE takeover is to purchase the business and utilize an increased amount of debt within the balance sheet to fund the purchase. From Economics 101, as you increase the debt, you increase the repayments, and therefore lower the profits of the business. The PE guys are hoping they can increase the value of the company for a resale. However, during this period the actual taxes paid plummet as the interest expense on the borrowed amounts reduces the taxable profits. So the real value (and income) for the PE play is the capital growth from reselling the business. They effectively mortgage taxable corporate profits over a three-year period (at 35%) for a one-time capital gain (taxed at 15%). Where is the fair playing field in that, Grover?

Matt

Actually, David, PE firms already make direct equity investments. The problem is that the managers of these firms put in a tiny fraction of the capital they use to make the investments and take out a quarter to a third of the profits or more. I don't have any problem with that, because they do a lot of hard work in between, but the proportion of their return in excess of their investment is not investment income; it is compensation for services. Therefore, it should be taxed as such.

I don't think the PE partnerships should be taxed. The investors are already subject to taxes on their investment returns, all of which are legitimate investment returns, and many of the investors are pension funds, philanthropic trusts, university endowments, etc., as Norquist points out.

The problem with the 35% on the "carried interest" or a manager is that part of that interest is legitimate investment income. However, I do agree that the portion of the "carried interest" that is in excess of the manager's proportional investment should be taxed as compensation, no more and no less than the compensation earned by anyone else.

Mark

Why is it that Norquist always must politicize the debate?

"Next on the Democrat chopping block..."

Doesn't language like that just smack of external bias? Asserting which party is more likely to do this or that simply distracts from the merits of the specific issue at hand.

The authors should stick to the question asked--just because we're on the opinion pages doesn't mean that propaganda is acceptable in every instance.

Kevin

To Random,
You claim that Mr. Norquist's math is "playing fast and loose with the numbers"? I'd recommend that you tend to your own before you begin attacking someone else's.

Let's look over yours:
"If $1 million is taxed at 35%, the remainder would be $650,000 and the additional 15% tax on that remainder would reduce it to $552,500, making the total tax liability about 55% and not 64% as Norquist claims."

This would be a perfectly reasonable objection--if you had actually read Mr. Norquist's piece. He states that the 64% is reached by the current double-taxation of 35% plus 15% plus the proposed triple taxation of an additional 35%. You even point this out yourself later but attribute it to malicious intent from the evil Grover Norquist. Playing fast and loose with the numbers? You're going well beyond that; this is fast and loose with the English language. I'd be willing to attribute it to an oversight, but you clearly have an axe to grind, so I'm inclined to say it's an attempt to deceive.

Now then, as for your claim of double taxation being a myth: I could be wrong on this, but when double- (or soon possibly even triple-) taxation is being discussed, it's not being claimed that any single entity is paying all the points of taxation. What's being taxed multiple times is the money itself. And that's why you are losing wealth when you invest; not actual wealth, such that you're getting less back than you used to, but potential wealth--wealth you would have gained had the government not stolen it. That's why so many Americans invest money. They still get returns on their investment; those returns are simply much less than they should be.

And as for all the government subsidized infrastructure that makes our nation great, you'll have to forgive me. In the America I've been living in, our status as a great, developed, industrial power was the result of a free market that provides economic incentive for success. But perhaps there's a second America where the public schools don't churn out incompetent students who can barely read and government subsidies haven't stagnated the market, preserving certain industries at the cost of successful developments revolutionizing the whole market. If such an America exists, I gladly leave it to you.

And for some reason I have trouble believing that Norquist is working with the party in power. After all, the current party in power has been pushing for increased taxes all over, untouchable earmarks, and all sorts of other costly measures. Maybe the Democratic party in your America has cut taxes, but the one here certainly has not.

Chris

Mark, it is a group of Democrats who have proposed the tax hike. Baker's argument is typical uninformed pandering to stir up resentment from the uninformed public. Most people have no idea (and clearly neither does Baker) how a PE firm actually works, and why going after it on the basis of "high salaries with tax breaks" is not only incorrectly stated and improperly presented but also has clear implications of changing the rules of capital gains for everyone. Whether they make a lot of money or not is really irrelevant to begin with. Not all PE firms are the likes of Blackstone & KKR. These funds earn income with money tied up in risky private investments for years. While they do make agreements that sweeten the deal for the managers, the money earned by carried interest is still capital gains of a long-term investment. If the investment fails, they get nothing. While most people only hear about billion-dollar leveraged buyouts of the likes of Hilton Hotels, many funds act as catalysts for entrepreneurs who are expanding their businesses and the fund is assuming risk alongside the business owner. Why tax them any differently than someone who starts a business and sells his or her equity to an investor?

TaxPlaya

The math is sound. Let's take several scenarios:

Scenario One (Current Law): The underlying investment pays a 35% corporate income tax. Only $0.65 of the original $1 of corporate profits remain. This $0.65 is then taxed to the shareholder at 15%, whether as a capital gain (if the after-tax corporate profit is retained and shares are sold) or as a qualified dividend (if the after-tax corporate profit is distributed). Fifteen percent of $0.65 is $0.0975. Add together 35% and 9.75%, and you have 44.75%. That is the integrated, total tax on investment income under current law.

Scenario Two (S. 1624): The underlying investment is taxed at 35%. The after-tax corporate profit (whether in the form of dividends or capital gains) is taxed at a new, partner-level 35%. Finally, the partner himself pays 15%.

There are two separate rates here. If the income is a capital gain, the tax cascading is 35-35-15. Do the math on that, and you end up with a combined, cascaded rate of 64.0875%.

If the income is a dividend, there is a special 70% "dividends received" exclusion. This results in a cascaded rate of 35-10.5-15. Do the math on that, and you end up with a combined, cascaded rate of 50.55%.

Scenario Three (H.R. 2834): The underlying investment pays a corporate income tax of 35%, and then the general partner pays a special capital-gains tax rate of 35% on his carried interest capital gains.

The cascading there is 35-35. Do the math, and the rate is 57.75%.

One can excuse Mr. Norquist for rounding, I would hope.

random

The numbers are still not right if we consider the fact that different entities are being taxed; they get distributed to partners in ways that can shelter them from taxes (giving a bonus of stock effectively annuls the taxes for the chunk of payment given in stock), and different entities pay different taxes on different amounts. My calculations and those used by Norquist were far too simplistic to reflect the real situation, I admit. Different amounts are being taxed every time.

There are also serious logical errors with this cascading line of thinking-- for one, assuming that when you invest money, the fund pays a 35% income tax on your investment. This is not the case. The funds pay on the income from fees and consulting services. And yes, the fact that different entities pay different amounts on different sums matters. An investment firm paying a 35% tax rate on $1 billion in annual EBIT is very, very different from your paying a 15% tax on the $200,000 you earned on your investment with that fund. And again, the fund is not paying for the money you gave it up front.

Kevin's argument that Americans loose money when they invest because the government "steals" it and that Americans invest because they get a return on their investment is like saying that when someone takes away half your money, you can still make 20% or 30% gains on your wealth, which is well...impossible. How could Americans be losing wealth and yet making money by investing in a money-losing venture?

Finally, the idea that Republicans haven't cut taxes as per Kevin's comment just isn't right. Earmarks and pork barrels are examples of government waste of our tax money and not extra taxes. The only hidden Republican tax is the GOP's refusal to address the AMT, which will have the net effect of a drastic tax hike over the next few years. Norquist's group had a few articles about this, but they have abandoned this key theme in search of more glamorous topics.

Marco

One thing: Since when do partnerships pay any tax at all? Hedge funds do not pay tax, because they're set up as partnerships anyway, so Grover's double-tax argument already has a major hole in it. Hedge fund managers are getting away unfairly by paying lower tax on what is complimentary. That is just wrong and corrupt, and I am glad it's coming to light.

jim

Marco,
The Democrats have proposed taxing publicly traded partnerships.

Correct

Random, you are wrong and confused. Kevin has said everything I wanted to say, only better.

Brian

House Committee on Ways and Means
Statement of Jack S. Levin, Partner, Kirkland & Ellis LLP, Chicago, Illinois

Testimony Before the House Committee on Ways and Means

September 06, 2007
Mr. Chairman and Committee members, my name is Jack Levin. I teach at Harvard Law School and University of Chicago Law School, am author of a 1,400 page treatise on structuring venture capital and private equity transactions, and am co-author of a 4,400 page treatise on mergers and acquisitions. In my law practice at Kirkland & Ellis LLP, I have long represented many private equity, venture capital, and hedge funds and their trade associations, although I appear today to express my own personal views on the appropriate taxation of carried interests.

In my brief testimony, and at more length in my written statement, I will try to answer 6 questions:

First question, why do we tax long-term capital gain--that is, to use the code's verbiage, gain from the sale of a capital asset held more than 1 year--at a lower rate than ordinary income, such as wages or interest income?

Several reasons: By imposing a lower tax on long-term capital gain than on ordinary income, Congress encourages the investment of risk capital in American business. I agree with this approach because the more risk capital invested into American business, the more our companies expand, create jobs and exports, and spread American prosperity.

Another reason for the lower tax rate on long-term capital gain is the recognition that it frequently takes many years to realize gain from a capital investment, by which time inflation has reduced the sales proceeds' real value. Stated another way, much of the so-called long-term capital gain does not really represent true gain because inflation has reduced the proceeds' value.

Second question, when a partnership recognizes long-term capital gain, why is the portion flowing to a carried-interest holder taxed as long-term capital gain?

We have traditionally had two systems of business taxation in this country. The corporate taxation system is very complex with double taxation (once at the corporate level and a second time at the shareholder level when the corporation makes distributions), §312 E&P calculations, §302 redemption recharacterizations, §305 stock dividend rules, §306 tainted preferred stock, §368 reorganizations, and 6 mind-numbing interest deduction disallowance rules.

The second system, for partnerships and LLCs, uses a flow-through approach and is designed to be much simpler and more economically rational, with a single level of tax, imposed on the partners when income is recognized at the partnership entity level, by allocating the partnership's income among the partners based on each's economic right to receive such income, with the income allocated to each partner retaining its entity-level characterization as (e.g.) ordinary income or capital gain.

This simpler partnership flow-through tax approach--designed to encourage groups of people to join forces by combining their capital, labor, and know-how to start, build, and expand businesses--has contributed mightily to the vibrancy of America's entrepreneurial economy.

So if a partnership holds stocks or other capital assets for more than 1 year, its gain on ultimate sale of those assets constitutes long-term capital gain in the hands of all the partners, both the pure capital investor and the part-capital part-management carried interest partner.

This is appropriate for a venture capital, private equity, hedge, or real estate fund because the general partners serve as the fund's principals or owners, selecting the fund's investments, sitting on the boards of the fund's portfolio companies, and making the fund's buy and sell decisions (like any owner of an investment), and generally making a substantial capital investment in the fund. General partners are not merely agents of the partnership, who have no capital at risk, merely making recommendations and following the dictates of their investor clients.

Third question, should carried interest partners be taxed at ordinary income rates on their share of the partnership's long-term capital gain because as joint venture managers they are really receiving sweat equity?

For many decades the Code has conferred the lower long-term capital gain rate on gain from the sale of a capital asset held more than 1 year and throughout these decades the Code has never contained an absence-of-sweat test.

For example, assume Warren Buffett retires from Berkshire Hathaway and invests some of his money in stocks and real estate--working 8 hours at his desk every day, including Saturdays, to pick which stocks and real estate to buy, hold, and sell--and assume we have a videotape of his activities showing that on many days he did indeed break a sweat while studying reports and placing buy and sell orders. Is (or should) his long-term capital gain on his stocks and real estate held more than 1 year be converted into ordinary income?

Or if an innovative entrepreneur like Bill Gates and his investor group start a computer company, is (or should) the entrepreneur's long-term capital gain on sale of the computer company's stock be converted into ordinary income because he had many sweaty armpit days?

My point is that the code does not make, and never has made, the absence or presence of activity and ingenuity--or even a bit of bodily dampness--the test for long-term capital gain, nor should we now legislatively adopt a test requiring IRS agents to poke around in Warren Buffett's or Bill Gates' dirty laundry searching for perspirational evidence.

But if we tax carried interest capital gain differently than other capital gain, isn't that the next step? If venture capital, private equity, and hedge fund managers who invest substantial capital and contribute substantial intangible assets in the form of (e.g.) know-how, reputation, goodwill, contacts, and deal flow are to be tainted by sweat, shouldn't the same rule apply to Warren Buffett and Bill Gates in my examples?

Fourth question, do Steve Schwartzman of Blackstone and his peers make so much money that they should be taxed more harshly?

Whenever this august body has enacted punitive tax legislation based on vignettes, rather than on careful macro-economic analysis, our great country has been ill served. Perhaps the best example is the famous 1969 Congressional hearings that discovered 21 unnamed American millionaires paid no federal income tax for 1967. The direct result of those hearings is the odious, illogical, and counterproductive alternative minimum tax (or AMT)which has been an albatross around all our necks ever since, and which threatens to affect 25 million taxpayers in 2007 and 56 million by 2017.

Let's not repeat our past tax-legislation-by-vignette approach. Just because some private equity investors, or some athletes, or some thespians, or some computer-company founders make substantial amounts of money doesn't mean it is in America's best interests to impose tax penalties on them without carefully examining the macro-economic ramifications.

Fifth question, will changing the long-standing definition of capital gain to impose ordinary income tax on carried interests in long-term capital gain be harmful for the American economy?

Over the past 20 years or so, it has not been the big publicly traded auto companies and airlines that have provided growth in jobs, exports, and prosperity. Rather it has been the venture capital, private equity, and hedge fund financed companies that have made our economy the most efficient, vibrant, and emulated in the world.

If the carried-interest bill passes, will the flow of venture capital and private equity money into American business be reduced by 10%? By 20%? By 30%? Will American job growth, exports, and business vibrancy be curtailed? I believe there is substantial risk the flow of entrepreneurial investments will indeed be reduced, with significant harm to our vibrant economy.

So beware the law of unintended consequences and be slow to start down an opaque road if you don't know where it leads.

The basic principle of our free enterprise capitalistic economy is that American employment, growth, and prosperity will be maximized by allowing the free market to operate.

It is the antithesis of the free market when Congress enacts tax laws targeting specific activities and designating winners and losers, for example, taxing carried interest in venture capital, private equity, real estate, and hedge funds more harshly than other types of carried interest and more harshly than other investment gains. When Congress enacts laws picking winners and losers, with the tax rates and rules differing by industry, the free market is inevitably distorted, with great risk of dire long-term consequences for American economic growth.

Sixth question, will a slowdown in venture capital/private equity investing hurt only fat cat venture capital/private equity professionals?

Among the largest investors in venture capital/private equity funds are pension plans and university endowments. Thus, a slow down in venture capital/private equity formation and investing harms not only new and growing American businesses that do not receive the funding necessary to start up, grow, and prosper, but also the millions of American workers whose pension plans are the single largest venture capital/private equity investors and also the millions of American students whose tuition is reduced by their university's endowment profits.

I would be happy to answer any questions.

andrew

All who care to comment,

Set aside the math problem for the moment, and discuss the thinking behind the proposed taxation.

Recharacterizing capital gains as income just because someone can afford it goes against the basis upon which this country was founded. How can one consider a general partner's carried interest as income when it is subjected to claw-back risk? Claw back is triggered when the fund underperforms the minimum standard and the general partner has to settle up with the limited partner, even if it means giving back previous years' gains.

Employee performance/incentive incomes are not subjected to repayment risks as a normal course of business--"hey, you didn't meet your goals for the year, so you have to pay back last year's bonus to the company."

As for comments about private equity firms making money only by tax arbitrage through maximizing debt and minimizing earnings, it's simply not true--at least with successful private equity firms. In order to make an IPO of the previously acquired assets, these assets have to demonstrate not only solid earnings but also improved growth potential to the equity market.

If the government is going to tax capital gains as income for private equity firms, it should tax each and every individual who has owned and sold homes in the U.S. over the last 10 years. We're now beginning to face a severe mortgage crisis caused by individuals who levered beyond their means--most of whom were levered to buy speculative properties in hopes of a big payout.

I understand a healthy economy needs stability and reasonable distribution of income. My question is, where does personal responsibility come into the debate?

My Pension

Interesting Norquist final comment concerning how the Democrats are interested in chopping "my pension" by taxing the equity firms...that won't happen since the equity investment managers have already taken it (along with my health care). I am not some whiny Democrat who thinks I deserve a pension or even company-paid health care, but I also don't think a few equity managers who can manipulate the balance sheet to line their pockets are any better than those who want to protect their pension or health care or even their jobs. Yes, the investors get a piece of the lining, but there is a good bit going to the "managers" just because they can.

You can say all you want about the free market--there is no such thing as free market. Tax and trade laws direct how business and investment and wealth will grow. Equity investment firms exist and thrive today because of the current structure, not because of some imaginary free market. If there is nothing wrong with taking advantage of that structure to make money, then there is nothing wrong with taxing that structure.

One thing to remember is that any "structure" has cycles. The current structure favors a very few of people, and the very wealthy in the U.S. have become more wealthy, and the poor and middle class have become poorer. The farther the pendulum swings in one direction, the harder it will swing the other way. Now you can find "experts" that say the poor and middle class are actually better off, but that's their opinion--the poor and middle will make that decision, and that decision will lead to new government and new structure.

Interesting. . .

This is ridiculous. I'm not a PE firm manager. I'm an impoverished student and I'm about as poor as they come (live below the poverty line), and I frankly feel like these people should be rewarded for their risks.

It's very interesting that we should take away the incentive to take risks out of the economy with this tax. If I work at Walgreens for a specified number of hours, I'll get paid (unless Walgreens goes bankrupt. If it did, I'd go work somewhere else for my measly $6 an hour). This doesn't sound like a very risky endeavor. If I work, I get paid (pretty much riskless unless, like I said, Walgreens goes bankrupt).

However, if I'm Blackstone, not only is there a possibility that I will not be paid, but there's a possibility that after all of my extremely hard work and persistence, I will actually be worse off than I was originally. This scenario sounds very much like a regular investment scenario, not a "regular income" scenario. In an investment scenario, you're taking a risk, and the capital gains tax was set up to induce this sort of risk taking.

Why in the world are we going to tax them as if it's their regular income? Because they're working all day on this? What about day traders? What about those people who spend every waking moment looking at stocks and investing. There are "normal" Americans who do do that. Maybe they should be taxed at the 35% level, too, because that's what they spend all of their time doing? This is ridiculous and so inconsistent. They're just trying to target these PE and hedge fund managers because they're rich. That's it. If PE and hedge fund managers were making less and incurring losses because of these risky investments, the government wouldn't care.

Doug

Re: Interesting

As you said, you are a student, so you aren't working in a company owned by equity managers. What is being debated is not their money at risk, but their compensation for managing the equity or hedge fund. Their money is not at risk anymore than my income if the company I work for goes bankrupt. The company goes down, and I won't have an income. The management fees are taken from the company that the equity invested and also from the fund, but they have not risked a dime of their own money. Your risk and reward argument is ridiculous, because it is inconsistent with what is really happening--they have taken on no personal risk.

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