Tax: Additional Revenue From Carried Interest

[Fern]

Wow, I'm surprised.

Anyway, firstly the Carried Interest Provision is the much discussed provision that lets wealthy fund managers such as Warren Buffet pay tax at a 15% on their income. Many, including me, believe that this should be taxed at ordinary rates. (Actually, some of their profits should be taxed at 15% because managers have their own capital invested in the funds. But the portion that is not attributable to their capital s/b taxed as wages IMO.)

I happened to stumble across the below paper from William and Mary Law Review while searching for something else, nevertheless an interesting find.

Basically, this paper calculates the expected amount of additional tax revenue if the CI were taxed at 35%.

Their conclusion: An additional $2-3 billion per year (the amount is at the beginning, page # 115). That's far less than what I expected and certainly no where near enough to materially reduce our annual deficit.

Just in case you think they are FoS., at the back of paper they discuss estimates that were done by the Congressional Joint Committee of Taxation. Their estimate says $2.4 billion, basically identical. (See pg #160.)

http://scholarship.law.wm.edu/cgi/v...Wy9A1A#search="ordinary income quental agron"

Fern

 

[cybrsage]

Would this only raise the tax rate on fund managers? Doing this would cause the fees of the funds to increase, yes?

EDIT: I ask because I do not know.

 

[Throckmorton]

If it's only $2.4 billion per year, they should have no problem paying 35%.

 

[Fern]

Would this only raise the tax rate on fund managers? Doing this would cause the fees of the funds to increase, yes?

EDIT: I ask because I do not know.

Just raising rates on the fund managers.

No, it wouldn't increase the fund fees (unless the managers were able to do so to make up for their higher taxes.)

Fern

 

[cybrsage]

I wonder, why is 35% chosen? I recently asked on this forum what people's actual tax burden is and most people paid under 13% in taxes. Granted, we are not the super wealthy here, but still. Shouldn't it just be added to all their other income like my interest income is and taxed at whatever rate you fall into?

 

[Fern]

I wonder, why is 35% chosen? I recently asked on this forum what people's actual tax burden is and most people paid under 13% in taxes. Granted, we are not the super wealthy here, but still. Shouldn't it just be added to all their other income like my interest income is and taxed at whatever rate you fall into?

Not sure I follow?

Why did Congress pick 35% as the top rate? There are going to be many reasons (revenue impact budget impact, or the desire to keep the rate low enough so that profit taking is not encouraged, because politically that was do-able etc.) but Congress does not spend much time in technical literature the rational for the rates it chooses.

The paper used 35% because these find managers make so much money (10's or 100's of million often) almost all of it will end up taxed at the top rate of 35%.

Interest income and the like are considered investment income. Many tax professionals believe the Carried Interest income is income from personal services - the actual work fund managers do in managing funds. I.e., it should be taxed as wages, not investment income.

Currently, tax law classifies CI as long-term capital gains, hence top rate of 15%.

Fern

 

[Dr. Zaus]

I support a progressive sales tax.

If we abolished corporate tax companies would de-leverage and investors instead of bankers would make money.

 

[glenn1]

IMHO, the more appropriate solution is to set a minimum level of personally invested capital that fund managers need to have in order to claim gains as carried interest. To me, the amount of additional tax revenue raised (or public policy objective achieved) in declaring all fund manager compensation as normal income would be trivial in compared to the increased risk in the financial system from yet more players with skewed incentives. When investment professionals don't have their own money at risk ("skin in the game") they tend to take Lehman Brothers style risks that can lead to completely blowing up the financial system.

 

[boomerang]

As you're well aware, the actual revenue increase is immaterial. It's all based on emotion. The enemy has been identified and they must pay.

 

[Jhhnn]

It's grossly unfair that one man's work is taxed at a much lower rate than another's for the same income, which is what carried interest provides to hedge fund & private equity managers.

They "manage" just like any other high income manager, and their tax rates should reflect that.

 

[nonlnear]

$2-3B from an overdue correction to the tax code is something. Given that each and every vital fix will only bring in marginal revenue I don't know what the author's point could have been. Was it to refute the straw man position that taxing carried interest as income would make the deficit go away?

 

[cybrsage]

Not sure I follow?

The paper used 35% because these find managers make so much money (10's or 100's of million often) almost all of it will end up taxed at the top rate of 35%.

That is it, that answers my question. I wondered why 35% instead of whatever rate they would normally pay. I paid 11% this year (I think), so it would be taxed at 11% for me, if I understand what you are saying.

If so, then I have no problem with it.

 

[cybrsage]

I support a progressive sales tax.

I support no income tax at all, and a flat sales tax for all (with some adjustments made for necessities to prevent killing the poor). Same percentage paid by everyone...the rich pay more in real dollars because they buy more expensive things. Rate is the same, though.

The Fair Tax is the best I have seen so far, and the only one which has any chance (slight as it is) of ever being implimented.

 

[Jhhnn]

I support no income tax at all, and a flat sales tax for all (with some adjustments made for necessities to prevent killing the poor). Same percentage paid by everyone...the rich pay more in real dollars because they buy more expensive things. Rate is the same, though.

The Fair Tax is the best I have seen so far, and the only one which has any chance (slight as it is) of ever being implimented.

The "Fair Tax" is a scam to shift the tax burden down the scale. If we think about it at all, why stop at taxing retail transactions? Tax 'em all-

http://www.apttax.com/

 

[Throckmorton]

I support no income tax at all, and a flat sales tax for all (with some adjustments made for necessities to prevent killing the poor). Same percentage paid by everyone...the rich pay more in real dollars because they buy more expensive things. Rate is the same, though.

The Fair Tax is the best I have seen so far, and the only one which has any chance (slight as it is) of ever being implimented.

I bet you don't plan to apply the sales tax to stocks etc...


BTW, I pay enough taxes already between federal, state, excise, and gasoline. Fuck the fair tax, I'm too poor to pay any more. Try to take money from us poor and middle class people that we don't have, and we will resort to force. A guillotine isn't that hard to build.

 

[Jhhnn]

I bet you don't plan to apply the sales tax to stocks etc...

Of course not- no "Fair Tax" on stocks, bonds, real estate or any other financial instruments, and no tax on a lot of things.

If I want to go on an extended world tour, bring my whole family, I book round trip flights to the Caymans for the beginning & end, pay for the rest in the Caymans & wherever I go. No tax on that, either...

No tax on offshore earnings of any kind, & I can even earn all of my money in this country & spend it elsewhere, not pay a dime in American taxes.

The so-called "Fair Tax" would be an enormous windfall for people who don't need a windfall at all.

 

[cybrsage]

I am not surprised Jhhnn is ignorant about The Fair Tax, yet displays his lack of understanding and knowledge proudly like a badge of honor. I am not used to Throck acting like Jhhnn. I hope this is not a new trend in you. Here is a few snippets from the FAQ page:

What is taxed?

The FairTax is a single-rate, federal retail sales tax collected only once, at the final point of purchase of new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed. A rebate makes the effective rate progressive.

Exactly what taxes are abolished?

The FairTax is replacement, not reform. It replaces federal income taxes including personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes.

Does the FairTax rate need to be much higher to be revenue neutral?

The proper tax rate has been carefully worked out; 23 percent does the job of: (1) raising the same amount of federal funds as are raised by the current system, (2) paying the universal rebate, and (3) paying the collection fees to retailers and state governments. Unlike some other proposals, this rate has been independently confirmed by several different, nonpartisan institutions across the country. Detailed calculations are available from FairTax.org.

Is the FairTax fair?

Yes, the FairTax is fair, and in fact, much fairer than the income tax. Wealthy people spend more money than other individuals. They buy expensive cars, big houses, and yachts. They buy filet mignon instead of hamburger, fine wine instead of beer, designer dresses, and expensive jewelry. The FairTax taxes them on these purchases. If, however, they use their money to build job-creating factories, finance research and development to create new products, or fund charitable activities (all of which help improve the standard of living of others), then those activities are not taxed.

Do corporations get a windfall with the abolition of the corporate tax?

Corporations are legal fictions that have not, do not, and never will bear the burden of taxation. Only people pay taxes. Corporations pass on their tax burden in the form of higher prices to consumers, lower wages to workers, and/or lower returns to investors. The idea that taxing a corporation reduces taxes on, say the working poor, is a cruel hoax. A corporate tax only makes what the working poor buy more expensive, costs them jobs, lowers their lifestyle, or delays their retirement. Under the FairTax Plan, money retained in the business and reinvested to create jobs, build factories, or develop new technologies, pays no tax. This is the most honest, fair, productive tax system possible. Free market competition will do the rest.

What happens to the stock market, mutual funds, and retirement funds?

Investors prosper greatly under this plan, since corporations face lower operating costs and individuals have more money to save and invest. The reform significantly enhances the retirement savings and/or retirement spending power of most Americans. The purchase of stocks is considered a purchase for investment purposes and not personal consumption so they are purchased tax free. The service fees charged by the broker, however, are personal consumption and therefore subject to tax.

http://www.fairtax.org/site/PageServer?pagename=about_faq_answers

The info is really easy to find.

Buying and selling of stock is not taxed (other than the brokerage fees), but that is not a problem. INCOME is not taxed at all. What good is that money if you do not ever buy anything for yourself with it, though? The billionaire is not suddenly going to start driving a Yugo and eating Hamburger Helper (sans the hamburger) in order to reduce his taxes. He will simply pay a lot more money in taxes than you or I will when he buys his $300 meal.

Saying it is a windfall is pure idiocy.

 

[Rainsford]

I am not surprised Jhhnn is ignorant about The Fair Tax, yet displays his lack of understanding and knowledge proudly like a badge of honor. I am not used to Throck acting like Jhhnn. I hope this is not a new trend in you. Here is a few snippets from the FAQ page:


http://www.fairtax.org/site/PageServer?pagename=about_faq_answers

The info is really easy to find.

Buying and selling of stock is not taxed (other than the brokerage fees), but that is not a problem. INCOME is not taxed at all. What good is that money if you do not ever buy anything for yourself with it, though? The billionaire is not suddenly going to start driving a Yugo and eating Hamburger Helper (sans the hamburger) in order to reduce his taxes. He will simply pay a lot more money in taxes than you or I will when he buys his $300 meal.

Saying it is a windfall is pure idiocy.

I get what you're saying, but I've never found that argument very convincing. Yes, rich people spend more in absolute terms than the middle class, who in turn spend more than the poor. On the other hand, I'm not at all convinced that spending increases in direct proportion to income...and I suspect the data would support this. A flat sales tax would almost certainly be REgressive as a percentage of income, meaning it would have more negative impact on people the poorer they were.

I'm also worried that a consumption based tax would be very harmful in a consumer based economy since it encourages savings and investment instead of spending as a way to avoid taxes. Which is good for the individual, but not so good for the economy as a whole.

 

[Jhhnn]

I am not surprised Jhhnn is ignorant about The Fair Tax, yet displays his lack of understanding and knowledge proudly like a badge of honor. I am not used to Throck acting like Jhhnn. I hope this is not a new trend in you. Here is a few snippets from the FAQ page:


http://www.fairtax.org/site/PageServer?pagename=about_faq_answers

The info is really easy to find.

Buying and selling of stock is not taxed (other than the brokerage fees), but that is not a problem. INCOME is not taxed at all. What good is that money if you do not ever buy anything for yourself with it, though? The billionaire is not suddenly going to start driving a Yugo and eating Hamburger Helper (sans the hamburger) in order to reduce his taxes. He will simply pay a lot more money in taxes than you or I will when he buys his $300 meal.

Saying it is a windfall is pure idiocy.

The billionaires you reference spend only a very small part of their incomes on anything taxable under the so-called "Fair Tax" plan, and would therefore enjoy a huge windfall from not paying any income taxes at all. Middle and working class people pay a much, much larger % of their incomes on "Fair Tax" items, out of necessity rather than choice. Viewed as a % of income, the "Fair Tax" is highly regressive, despite the payback aspect of it all.

No taxes on inheritance or gifts, either. Do you suppose that vast fortunes of inheritance occur because the the money was spent by the people who earned it? Obviously not.

But the "Fair Tax" would apply to new homes, too, thus raising the price by 23-30%, depending on how we look at the deceptive marketing of the whole flimflam. Contemplating the effects of that would make rational people shudder.

 

[Rainsford]

As you're well aware, the actual revenue increase is immaterial. It's all based on emotion. The enemy has been identified and they must pay.

Believe it or not, taxes aren't just some abstract morality play. Taxes are what pays for government, and they need to be collected from SOMEWHERE.

 

[amish]

No tax on offshore earnings of any kind, & I can even earn all of my money in this country & spend it elsewhere, not pay a dime in American taxes.

the US is one of the few countries in the world that taxes its citizens and resident aliens on all of their world wide income regardless of the location.

you may be able to exclude a portion of said income or take a foreign tax credit on the income but you will still need to report it.

 

[BoberFett]

Believe it or not, taxes aren't just some abstract morality play. Taxes are what pays for government, and they need to be collected from SOMEWHERE.

If only that were true...

Other than the most basic of tax law, taxes are in fact used mainly as a carrot or stick to enforce "morality."

And they currently don't pay for government, at least not fully, deficits pay for a massive chunk of running our government at all levels.

The tax system in this country will not work as long as it's used for both purposes. The system will be gamed and corrupted, as everything in this country is.

 

[fskimospy]

Believe it or not, taxes aren't just some abstract morality play. Taxes are what pays for government, and they need to be collected from SOMEWHERE.

What's strange about this discussion is that the carried interest provision is something that everyone almost universally agrees is a terrible idea. We should feel free to fix terrible ideas regardless of how great their impact is, and while $2-3 billion isn't that great this is probably also a function of how we think about budgeting.

This analysis is putting it in yearly terms while normal budget analysis works in 10 year terms. So by normal budget math this is a $20-30 billion tax change.

 

[cybrsage]

I get what you're saying, but I've never found that argument very convincing. Yes, rich people spend more in absolute terms than the middle class, who in turn spend more than the poor. On the other hand, I'm not at all convinced that spending increases in direct proportion to income...and I suspect the data would support this. A flat sales tax would almost certainly be REgressive as a percentage of income, meaning it would have more negative impact on people the poorer they were.

I'm also worried that a consumption based tax would be very harmful in a consumer based economy since it encourages savings and investment instead of spending as a way to avoid taxes. Which is good for the individual, but not so good for the economy as a whole.

In any standard national sales tax, you would be correct. The Fair Tax gives a monthly stipend for the expected tax cost on necessities. Since the poor buy very little above necessities, almost all their purchases would be tax free. The rich would only get a small portion of the tax they spend on necessities back (due to buying far more expensive necessities but only receiving the amount of the basic necessity which is far less expensive).

 

[cybrsage]

The billionaires you reference spend only a very small part of their incomes on anything taxable under the so-called "Fair Tax" plan...

Can you support this? Last I noticed, billionaires buy homes, cares, eat food, buy clothing, etc. Do you have some proof they do not do these things?