At Commentary, John Steele Gordon raises one aspect of carried interest that needs to change.
So, say a man has a $1 million account at a hedge fund and, after a very successful year, his account is worth $2 million. The fund would charge him $30,000 as a management fee and take $250,000 as its share of the profits, leaving him with $1,720,000 in the account. Even with the large fees, a 72 percent return on capital in a single year ain’t bad.
But the hedge Fund owners only have to pay tax on their share of the profit at the capital gains rate, 15 percent. Why?
It beats me. Unlike the customer, they have no money at risk (they don’t share in any net losses). It is a pure fee for service, although, to be sure, measured in capital growth. Hedge fund managers don’t deserve a tax break on their fees any more than lawyers, dentists, or, alas, writers do.
Exactly. There is no way the $250,000 in the above example should be taxed at 15%. It is basically just a management fee, i.e., ordinary income. However, to the extent that the general partners of a firm invests their own money in companies and realizes long-term capital gains, different story. But those particular gains are not carried interest. The final paragraph in Gordon's piece is mistaken. Senate Republicans road-blocked the proposed provisions. This should be an easy call for conservatives, but alas. Changing the tax code to close this loophole is no tax increase. More on the subject here.