A defense of private equity, with specific responses to some recent critiques of the field, including the one I linked earlier today.

And even in this friendly post there is reference to "the unconscionable and indefensible carried interest tax break private equity gets treating its earned income as capital gains for tax purposes."

See, the problem isn't private equity, or rich people, or capital gains, or capitalism.

It's the way earned income gets taxed at a lower rate for one small group than for the rest of the working world.

Mitt Romney is a member of that small group. He didn't want to release his tax returns, because they illustrate the problem. And as far as I can tell, he has no interest in fixing the problem if he's elected, which is one reason this story won't go away.

Comments

[polifrog]

No, the problem is focusing on class warfare rather than the realization that capital gains taxes exist to solve the problem of earning money over extended periods of time.

[sean]

ok, frog, but romney didn't "earn" his $21M over a long period of time. he's not someone investing long-term, keeping his money in the market to not only profit based on a strategy, but to avoid capital gains taxes. he "cashed out" on earned income -- not a short-term investment in a portfolio -- within the tax year so that he could *only* pay 13.9%... how is that not a shady loophole?

[sean]

long-term capital gains taxes, the 15% rate, is incentive to invest long-term, rather than short-term. while it has sucked to pay taxes on investment income in the past -- obviously a relative sucking compared to high rollers -- it sure was better than paying the normal tax rate if i had sold within a year.

philosophically, it seems obvious to me that the government is attempting to nudge investors towards long-term investments, rather than short-term opportunities. from a perspective of trying to have a stable economy, that seems to make sense. even though this conversation is about the legal mischaracterization of income to get a better tax rate, it seems as though you feel that having a tax applied to any investment earned over a period of time other than a fiscal year equates to "anti-liberty."

wonder what you feel about the excise tax on purchased cars. that drives me nuts.

[Bill B.]

"the legal mischaracterization of income to get a better tax rate" Thanks, Sean.

That about says it all. A tax break bought and paid for via our mercantile legislators and shamelessly claimed by a candidate who accuses others of jealousy and divisiveness.

[greensboro transplant]

"He didn't want to release his tax returns, because they illustrate the problem."

You keep saying this. do you have evidence to support your allegation?

[Andrew Brod]

Romney's intentions aside, here's a lucid discussion of the carried-interest scam.

[bubba]

Arnold's intentions aside, here's a better understanding of the "carried interest scam" scam.

Noteworthy:

"Critics point out that, if the fund had paid its managers a straight salary, the salary would have been taxed as ordinary income. They argue that the fund should not be allowed to “turn” ordinary income into capital gains or dividends simply by paying the managers carried interest rather than salary.

But that’s not what’s going on. The way the fund pays its managers can’t change the total amount of capital gains and dividends or the total amount of ordinary income the fund has earned. Paying carried interest rather than salary simply reallocates the two types of income among the two types of partners — it gives managers more of the gains and dividends and less of the ordinary income while giving the investors less of the gains and dividends and more of the ordinary income. Nothing gets turned into anything else.

....But critics have failed to make a good case for imposing special restrictions that would prevent private-equity, venture-capital, and hedge funds from using the tax rules that apply to other industries. Any tax changes that are adopted should apply throughout the economy and should be based on facts rather than populist rhetoric."