Carried Interest - Your Thoughts

[imoldernu]

Up for grabs....
Does carried interest affect you? Directly or indirectly? Good? Bad?
So little about this in the news.
A moral question? Or fair and productive investment strategy?

Recent Moyers show: Full Show: Plutocracy Rising | Moyers & Company | BillMoyers.com

Of particular interest to me, was the breadth of investments that are affected by this. Pensions, Foundations, Local government.

Discussion?

 

[MichaelB]

Perhaps you could share a little about the link, such as what it is about along with a short description or snippet.

 

[imoldernu]

Frankly, much of this is new to me, but though I like Moyers, before I make a judgement, I like to hear the other side. The show demonizes Goldman Sachs, and the entire Hedge Fund Industry.

Much as I thought I had a handle on the subject of derivatives, the carried interest part... (no simple way to describe this) has been confusing. In essence, as the Moyers piece would suggest, the inference is that the firms and brokers engaged in derivatives trading use other people's money to exact guaranteed commissions without risk.

Since it hasn't surfaced as a political issue for Democrats or Republicans, the suggestion (in the Moyers Show) is that the Plutocracy has a signed/sealed pact with a "bought" government to place the interests of the uber rich above and apart from the interests of the people. Thus the moral question.

FWIW, the Plutocracy was not defined as millionaires, but multi billionaires.

More on carried interest - Carried interest - Wikipedia, the free encyclopedia

 

[MichaelB]

imoldernu, not trying to stifle a discussion, but it is a service to fellow members when you link something to provide an explanation and snippet of the link so they know what to expect before opening it. As an example, the link you provided in your first post doesn't appear to be about carried interest, based on the description of the program found at the linked site.

 

[imoldernu]

learning as I go along

 

[NYEXPAT]

Did not read the link and "carried interest" no longer effects me, but I am a big fan of OPM!

 

[haha]

Carried interest only aids rich people, therefore it is really really bad.

Ha

 

[MasterBlaster]

Since it hasn't surfaced as a political issue for Democrats or Republicans, the suggestion (in the Moyers Show) is that the Plutocracy has a signed/sealed pact with a "bought" government to place the interests of the uber rich above and apart from the interests of the people. Thus the moral question.

Perhaps the benefit goes to those who serve the uber rich rather than the uber rich themselves. The uber rich, who by definition have their capital at risk (arguably) may deserve capital gains treatment.

Personally, Bill Moyers makes me want to scream. But I do agree that carrioed interest just doesn't seem fair and should be eliminated from tax policy. On the other hand, the amount of income that the illimination of carried interest will bring in is tiny in the big scheme of things.

If only Bill Moyers and other liberals would take a look at the big picture and see that all our spending is a trainwreck waiting to happen. And that the trainwreck will occur whether or not illiminating carried interest and soak the rich tax policies are undertaken.

 

[brewer12345]

Perhaps the benefit goes to those who serve the uber rich rather than the uber rich themselves. The uber rich, who by definition have their capital at risk (arguably) may deserve capital gains treatment.

Personally, Bill Moyers makes me want to scream. But I do agree that carrioed interest just doesn't seem fair and should be eliminated from tax policy. On the other hand, the amount of income that the illimination of carried interest will bring in is tiny in the big scheme of things.

If only Bill Moyers and other liberals would take a look at the big picture and see that all our spending is a trainwreck waiting to happen. And that the trainwreck will occur whether or not illiminating carried interest and soak the rich tax policies are undertaken.

Any time we are ready to turn the sacred cow of military spending into hamburger, I am ready to eat.

 

[Texas Proud]

I think your link to wiki is the easy explantion of carried interest...


I do not think that carried interest should be allowed... IOW, taking 20% of the profits off the top (as an example) is compensation... sure, it is variable compensation as the manager has to actually make a profit to earn his fee... but we have examples where someone does not earn a fee unless they 'win', such as contingency fee lawyers.... and as far as I know, their fee is considered ordinary income....

As also mentioned, the amount of money that would flow into the gvmt is pretty small.... but to me it is one of those 'fairness' issues that is brought up all the time.... this is one that I actually would agree with....

 

[ChiliPepr]

I think you have to look at what an example of carried interest could be...

Let's say you are a contractor/handyman and I go to you and say "I have a lot of money, I would like you to go find a real estate property, I will buy it, you will manage it... And in 5 years we will sell the property and I will give you 50% of the profits."

That sounds great until at the end of 5 years, the property sells for a million dollars more than I paid for it... Currently you get $500k and I get $500k, since the property was held long term we both pay 15% tax on our gains....

If Carried Interest is changed to be taxed as Income, I will be taxed at 15% on my $500k, by you will be taxed at 35% because that will be your income tax rate.

 

[pb4uski]

.....Personally, Bill Moyers makes me want to scream. But I do agree that carrioed interest just doesn't seem fair and should be eliminated from tax policy. .....

+1 To the extent that a fund manager has money at risk like other fund investors then I would think their investment should be treated for tax purposes the same as other fund investors - but my understanding is that most of this carried interest is essentially a performance kicker to their AUM based management fee and in my view should be ordinary income (like the AUM based fee) and not capital gain.

 

[MasterBlaster]

I think you have to look at what an example of carried interest could be...

Let's say you are a contractor/handyman and I go to you and say "I have a lot of money, I would like you to go find a real estate property, I will buy it, you will manage it... And in 5 years we will sell the property and I will give you 50% of the profits."

That sounds great until at the end of 5 years, the property sells for a million dollars more than I paid for it... Currently you get $500k and I get $500k, since the property was held long term we both pay 15% tax on our gains....

If Carried Interest is changed to be taxed as Income, I will be taxed at 15% on my $500k, by you will be taxed at 35% because that will be your income tax rate.

Yes, That's what the carried interest illimination would mean.

For those without capital at risk, any partnership gains are taxed at ordinary income tax rates even though they managed the enterprise.

 

[ChiliPepr]

Yes, That's what the carried interest illimination would mean.

For those without capital at risk, any partnership gains are taxed at ordinary income tax rates even though they managed the enterprise.

So basically, anyone who puts "labor" into the partnership will be taxed at a different rate (probably higher) as the person who put in the capital.

 

[ChiliPepr]

I am very familiar with carried interest, I work at a firm that is very dependent on carried interest.

 

[pb4uski]

So basically, anyone who puts "labor" into the partnership will be taxed at a different rate (probably higher) as the person who put in the capital.

Yes, the result of their "labor" will be taxed at ordinary rates just like the labor of other taxpayers whose rewards are contingent on the successful results of their efforts like commissioned salespeople, lawyers and others who are compensated on a contingency fee, performance bonuses, etc.

Why should one "laborer" pay taxes at capital gains tax rates while other laborers pay tax at ordinary rates.

The difference is that they person who puts up capital could end up losing their capital. The "laborer's" loss is not monetary, but rather time and effort that is uncompensated (just like salespeople who put effort into a pitch but don't get a sale, lawyers on contingency who don't win their case, etc.)

 

[ChiliPepr]

Why should one "laborer" pay taxes at capital gains tax rates while other laborers pay tax at ordinary rates.

Because the "labor" in my example was over 5 years, not within one year.

 

[Texas Proud]

I think you have to look at what an example of carried interest could be...

Let's say you are a contractor/handyman and I go to you and say "I have a lot of money, I would like you to go find a real estate property, I will buy it, you will manage it... And in 5 years we will sell the property and I will give you 50% of the profits."

That sounds great until at the end of 5 years, the property sells for a million dollars more than I paid for it... Currently you get $500k and I get $500k, since the property was held long term we both pay 15% tax on our gains....

If Carried Interest is changed to be taxed as Income, I will be taxed at 15% on my $500k, by you will be taxed at 35% because that will be your income tax rate.

Yes, the result of their "labor" will be taxed at ordinary rates just like the labor of other taxpayers whose rewards are contingent on the successful results of their efforts like commissioned salespeople, lawyers and others who are compensated on a contingency fee, performance bonuses, etc.

Why should one "laborer" pay taxes at capital gains tax rates while other laborers pay tax at ordinary rates.

The difference is that they person who puts up capital could end up losing their capital. The "laborer's" loss is not monetary, but rather time and effort that is uncompensated (just like salespeople who put effort into a pitch but don't get a sale, lawyers on contingency who don't win their case, etc.)

+1 on what PB said....

Let's use your example of selling a house... in reality the guy who managed the house did not have any investment in the property.... he had deferred income.... you on the other hand have a $1 million capital gain which you can offset with a $500,000 payment to your handyman... who's compensation should be taxed as any other handyman doing the same job....

I think carried interest taxed as cap gains should be repealed.... and I can say there are few places I would raise taxes... but this is one...

 

[pb4uski]

Because the "labor" in my example was over 5 years, not within one year.

And you effectively deferred your taxes for 5 years so you got a minor benefit. Many contingency lawsuits take many years to get tried and resolved. Ditto for bonuses under long term incentive plans which are also taxed as ordinary income.

IOW, in order to get preferential capital gains tax treatment you need to have risk of monetary loss like an investor - the time period that the compensation relates to shouldn't be the deciding factor.

CP, while I know you and your PE colleagues would like cap gains treatment and if my comp could be cap gains I would like it as well, WADR it is pretty indefensible.

 

[Texas Proud]

Because the "labor" in my example was over 5 years, not within one year.

Cap gains is on investments, not labor...

So, under you example, if I make an agreement with my boss that he can keep the money for 5 years and then pay me in a lump sum.... I should get cap gain tax rates

Or another example... I have put money into a 401(k)... with my current labor... so, I am not being 'paid' for my labor... but when I take out that money, I pay ordinary income taxes on it.... why is it not cap gain

 

[ChiliPepr]

So, under you example, if I make an agreement with my boss that he can keep the money for 5 years and then pay me in a lump sum.... I should get cap gain tax rates

No, my example was on a physical property, that the laborer was working for 5 years with the possibility of sharing in the profits in 5 years, not the deferral of a guaranteed lump sum.

Or another example... I have put money into a 401(k)... with my current labor... so, I am not being 'paid' for my labor... but when I take out that money, I pay ordinary income taxes on it.... why is it not cap gain

You get the benefit of contributing into your 401k before taxes and not paying taxes on the distributions each year. With the understanding that you will pay income taxes on withdrawal. you could pay your taxes on you income today and invest in something and only pay cap gains tax when you sell it (if over a year).

 

[Alan]

Thanks folks .....

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