For more than 40 years the question of whether "carried interest" of general partners of limited partnerships should be treated as capital gains or ordinary income for tax purposes has been a ticking time bomb waiting to be elevated to a higher level of public dialogue. During this time it has consistently been treated as capital gain under the tax code.
Carried interest is now the subject of active public debate brought about purely as a result of Congress seeking wherever it can, to deal with the need for new sources of revenue. In a matter of days it will likely be resolved to treat carried interest as ordinary income thus increasing the tax burden on thousands of general partners of limited partnership vehicles which invest in everything from energy to real estate to private equity and my own area of interest, venture capital. While I will be a casualty of the new legislation and while I believe strongly that if we, as a nation wish to encourage start-up formation and entrepreneurship, that there should be a carve out for partnerships focused on small early stage investments, I must admit that in its essential character, carried interest can be construed as ordinary income as it does not meet the test of an interest "at risk" necessary to be treated as a capital gain. In spite of that fact, I can argue that the middle of a recession is not a propitious time to increase the tax burden of the specific segment of the economy, namely venture capital, which is a gross and net creator of jobs. Nevertheless, reluctantly I will accept the outcome.
On the other hand, in the further quest to raise tax revenue it is now proposed additionally to create an "Enterprise Value Tax" (EVT) at ordinary tax rates upon the sale of the entities which manage these partnerships. In so doing, Congress is compounding the burden and is proposing to go far beyond any rational tax policy in what can only be described as a confiscatory manner. The proposed EVT would have far reaching negative implication for over 10 million individuals who have used the investment partnerships to run their business.
The Enterprise Value Tax is unprecedented, punitive and has no justification in the tax code. It will create the first class of American business that will not be afforded capital gains treatment upon sale or transfer and will affect millions of well-meaning people. These individuals have built farms, buildings as well as established a myriad of small companies in industries that are the job creation engine of our economic system. They have the rightful expectation that upon the sale of their business - many of which have been built over decades - they will be afforded capital gains treatment as does every other business.
Some tax experts are claiming that the enterprise tax is necessary to prevent circumvention of the new tax on carried interest. But that not only assumes that the seller of an investment partnership would be willing to commit fraud (guilty until proven innocent is not a part of the American tradition) but ignores both tools in the existing tax code and far less sweeping measures that would ensure that the new tax is properly collected.
The other justification advanced for the enterprise tax is the seductively large amount of revenue it would ostensibly collect. In times of huge fiscal deficits, no new revenues can be ignored and renouncing any becomes well nigh politically impossible. But most outside experts who have examined the new tax on carried interest say that the Congress has both woefully underestimated the amount the new tax on carry would raise and drastically overestimated the amount the enterprise tax would raise as investors and entrepreneurs alter their behavior to avoid it.
Congress can meet its revenue goals without this new tax, and investors are needed more than ever to sink capital into our economy and stay with it over the long term. Now is not the time to turn them away.
Great care should be taken before Congress implements legislation which vividly illustrates the law of unintended consequences.
I grew up among farmers whose Secretary of Agriculture stood before them and told them to grow or die -- farmers who have indeed mostly gone out of business and/or died now. Their children typically neither could nor would want to stay with that tradition.
Those few families who achieved enough success to bear the payment of erratic estate taxes without destroying the viability of the farm when the parents passed away still often left ownership in the hands of children who would never farm, though they might still honor those who do. Even these we are taught to hate. Here are offered a subtle hint that perhaps they function under some exotic privilege, like hedge fund managers whose annual millions are shielded from the tax rates endured by the rest of us. I don't buy it, simply because I've never known such a family.
Instead, I feel that I am getting a glimpse behind the curtain that hides the entities that own so much of our precious farm land, increasingly devoid of homes or opportunity for youth. Is it possible that they who dwell on tax privilege are the perpetrators of the unbearable price of good land, the devastation of rural America, and the final transformation of farmers into lowly wage slaves? Anybody know?
Everyone thinks that a McDonald's franchise is 'small business'; it's not.
Everyone thought it was cute-n-funny to bail out Big Failures, like Goldman Sachs;
...because what you have now is an economic model that says corporate monopolies and gambling casinos will decree that forever more they will have access to taxpayer backed funds at 0% while serfs and wannabe entrepreneurs will enslave themselves with much higher rates.
However a system such as this is self-cannibilizing because the less-and-less credit for real production and infrastructure is diverted to more-and-more gambling trades on Wall Street.
Beneificaries of the system like Goldman Sachs, will demand that taxes be raised somehow in order to supplement the dwindling 'depository base' of 0% funding.
Of course the American sucker can't see it this way because his short-sighted view of life is re-inforced through constant tv-watching of sports and garbage.
But Goldman Sachs and JP Morgan could care less that the government will raise ever more taxes on poorer and poorer peoples because for now it's a temporary fix.
The stupidity in all of this is that many of us know this fact already and are trying to WARN peoples but until everything is completely canibalised and destroyed, only then will they say to themselves: "I think someone WARNED we were on a sinking ship".
Reagan took over in 1981 and the national debt stood at around $900 billion. When he left office we had just about $4 Trillion.
When Bush 41 came in we had that same $4 Trillion. When he left we were at about $5.5 Trillion.
When Bush 43 came in we had just about $6.5 Trillion. When he left we were at about $12.5 Trillion.
That adds up to $3 Trillion for Reagan, $1.5 Trillion for Bush 41, and $6 Trillion for Bush 43, or a total of $10.5 Trillion for those three! I'm SOOOOOOOO tired of cons lying about wanting smaller government in spite of those numbers!!!
Taxing the sale of shares like anything else bought and sold would put a serious lid on bubbles and speculation.
As far as this kvetching about taxing profits from the sale of partnerships as income? Color me an Eisenhower Republican on tax policy: a progressive income tax that tops out at around 90% and does not discriminate between earned income and extraordinarily rich people's income (aka capital gains.)
In fact, with the systems we have in place for tracking income, if we returned to Eisenhower's Republican policy on taxes, I'd be prepared to give up the sales tax on stocks!
"We cannot afford to reduce taxes" - Dwight Eisenhower on the 91-92% upper tax bracket he favored.
Over the last 60 years Mr. Patricof and his ilk have purchased enough representation in Congress to transfer the burden of subsidizing the federal government almost entirely onto the middle class, while at the same time transferring almost all of the benefits and protections to the rich.
I’ve had it. I hope you are taxed until you cry. Then you might have some small idea of what the rest of us have been going through.
Which they are, except people work for income, while the rich collect the benefit from that labor.
And then pay only 15% on that money they get for DOING NOTHING?
Tax capital gains and dividends like income, and the bill is not needed. Problem solved.
PS I live of my investments, so I also do nothing.
But not being rich, I pay income taxes because the money is in an IRA.
That's the other big ripoff: investment tax cuts are only for the rich, not for 401Ks or IRAs.
It the business fails the "investor" will only lose what he's invested into the stock!
This is the "property is theft" crowd. You are, therefore, a thief. And these are the cheerleaders of redistributive change. You will not last long here.
Look at it like this: I own a small business, which I started with my own capital. Because of that, my income is taxed as income. Had he loaned me the money, my income would be taxed at the normal rates, but his would only be taxed at 15%. Again, he would get welfare that I subsidize. If he only wants to pay 15% tax on his income, then he should lobby that everyone, including self-funded small business owners only pay 15%.
I think that NO ONE should receive welfare, whether it be corporate or personal. I see no moral justification to strip wealth from some to fund the lifestyles of others.
As far as a flat tax of 13% or 15% on all income, without any deductions or loopholes... I've been a supporter of that for 30 years. I remember wearing a "Jerry Brown for President" button as a teenager because of his flat-tax scheme. The only caveat I would add would be to tax all income over a set "floor" of say $30,000 or $40,000 (this way you are not totally scr*wing the working poor).
I think you've hurt my feelings...
Why should people in the financial sector pay 15% when almost everyone else pays 25% and up? You call these things confiscatory and punitive, but that only reveals a misplaced sense of entitlement. The rich and the near-rich often make the mistake of thinking that America owes them something, when it is in fact they who owe American society for their continued success and prosperity. They may provide a vital service, but it is no more vital than the police officer who patrols the streets, the teacher who instructs our children, or the soldiers who guard us while we sleep. Yet somehow, the financial sector, that one segment of the population that has already benefited so much from American society believe they are entitled to even more. You say it is only by appeasing the greed of the investor that we can avoid economic disaster. I say that it is because we tried to appease their greed that we have this economic disaster in the first place.
Yes they are. Unfortunately, you're parroting the supply-side, trickle down mantra that's been disproven. When the economy tanks, like it has in this recession, we desperately need those investors who have been given huge breaks by supply siders to keep investing that money... yet they don't. We've spent 30 years giving them everything they could want, and the point in time where we need them.. they hold their money back.. or worse, take it out of country (exactly as anyone not a blind ideologue has seen these past 18-24 months).
Supply side economics does not work... all it does is give money to the rich who don't give a damn about anything or anyone other than themselves. Theoretical ideas only are acceptable until they've been proven not to work... catch up to reality.
Here's some reading for anyone so blind as to think supply sided economics still works. This was done by a conservative economics researcher, and republican adviser... and neatly summed up as:
"What the budget office found, as study after study has shown, was that any new revenue that tax cuts brought in paled in comparison with their cost. This is why the deficit jumped under the last two tax-cutting presidents (Ronald Reagan and George W. Bush) and fell under the last two tax-raising presidents (George H. W. Bush and Bill Clinton)."
http://www.cbo.gov/ftpdocs/69xx/doc6908/12-01-10PercentTaxCut.pdf
Our political discourse is so degraded that any discussion of progressive taxation is treated as communist heresy. In such a limited forum of ideas we have self-serving claptrap like this article, passing for reasoned discourse.
Our economic system is collapsing. I believe it will collapse. No "unless we do this" or "unless we do that." We will have arguments like the one above to remember when it becomes clear what got us into this mess. This is what Karl Marx meant when he said Capitalism contains the seeds of its own ruin. He meant it straight-up, Capitalism behaving at its best, but corrupt, greedy, self-glorying, narcissistic Capitalism will self-immolate more rapidly.
We might as well start figuring out what the next system will be. We have plenty of examples, private and public, of how not to run an economic system. Maybe by a process of "neti-neti" (not this, not this) ...
Could it possibly be that we spend too much money? That this profligacy of our governements is the problem? That the utter generational theft that the "Greatest American Generation" and the ones to follow committed on the current and future generations by promising absurd government pensions without paying for them. By committing us to a never ending series of wars and interventions we have hemorrhaged both precious blood and the future's treasure?
Capitalism isn't failing because people don't pay enough taxes. It is failing because it promised too much to too many that never pay anything at all.
And as for the 60%, I don't believe you. I'm making just over 5 figures with my wife, and we're paying around 35-40% total in taxes.
Why is HuffPo defending trickle-down economics?
Alan Patricof, an investor in the publication, uses it to argue against raising taxes on hedge fund managers
http://www.salon.com/technology/how_the_world_works/2010/06/18/alan_patricof_huffington_post/index.html
Seriously, HuffPo, you've got a lot of 'splainin' to do here... What does Arianna have to say?