Tax Nonsense

"Nero fiddled while Rome burned, but at least he didn't strike the match. Members of Congress are doing Nero one better. In the middle of the second global financial crisis in two years, Congress is preparing to dramatically raise a key tax rate on long-term investment. ... Last week, Senate Finance Committee Chairman Max Baucus (D., Mont.) and House Ways and Means Chairman Sander Levin (D., Mich.) released joint legislation that would significantly raise the tax on 'carried interest'. ... Carried interest refers to the share of the capital gains (typically 20%) earned on long-term investments in real estate, venture capital, private equity and other investments organized as partnerships that is allocated to the general (managing) partner. ... Both general partners and limited partners pay taxes based on the character of the income earned by the partnership; ordinary income rates on dividends and short-term capital gains, and the long-term capital gains rate on the long-term capital gains", John Rutledge (JR) at the WSJ, 24 May 2010, link:

http://online.wsj.com/article/SB10001424052748704852004575258401601217646.html.

"Dear IRS: Please note that beginning this year, I am no longer earning an income. From now on, I am compensated through what I like to call column interest. It isn't pay. It's a capital gain that I receive in exchange for providing about 2,000 words a week to this newspaper. Please lower my tax rate accordingly. hey, you can't blame me for trying. After all, a similar strategy has worked for years for money managers at hedge funds and private equity firms. ... The private investment community is decrying the move as a massive tax increase, is if oblivious to the fact that it's enjoyed an unfair tax break for years. ... Let's set aside the rather silly notion of private equity as an engine of job creation--most buyouts result in big job cuts--and focus on the inequality. Private equity managers typically collect a 2 percent annual fee on assets in the fund, which is taxed as income. They also scoop up 20 percent of their funds' annual profits, which is known as carried interest. ... Profit-sharing plans for just about everyone else are taxed as income. ... Tax law is a murky world, but one basic principle of our tax code is that people who perform similar jobs for similar pay should receive similar tax treatment. That's not the case in the investment world", Loren Steffy at the Houston Chronicle, 26 May 2010, link:

http://www.chron.com/disp/story.mpl/business/steffy/7022356.html.

What nonsense. Carried interest is a form of managment fee. It should never have been treated as long-term capital gains. What's the holding period? JR is a professor at Claremont Graduate University.

Right on Steffy!