Tax Increase on “Carried Interest” Creates Howls of Anguish from Poor Widdle Venture Capitalists
As part of the current tax act making its way through Congress, one that would extend unemployment and COBRA benefits among other things, is a revenue provision that would change the way that so-called carried interests of hedge fund managers and venture capitalists are taxed.
Hedge funds and venture capital operations are set up as limited partnerships so that profits (and losses) are passed through to the investors and reported on their individual tax returns. The managers of these partnerships have been taking advantage for some time of a tax provision which provides that if you receive a profits interest in a partnership for future management services to be provided, and you don’t actually put any money or property into the venture yourself, then down the road, assuming profits are realized, they are taxed to you as capital gains. Long term capital gains if the property was held for more than a year.
What does this mean? It means that what is essentially compensation to the managers, and fairly hefty compensation at that since the managers’ share is usually around 20% of the entire profit, is not taxed to them the way compensation would be to you or I. Capital gains are taxed at a maximum of 15% for federal purposes and are not subject to social security or Medicare taxes.* I mean even Wall Street trader bonuses don’t get this kind of a deal.
Not surprisingly Congress, and other commentators, see this as a loophole and have been seeking for some time to close it. And now seem on the verge of doing so, although they are softening the blow by some phase-ins and an ultimate blended rate (pussies.)
One problem with tax loopholes, of course, is that when they’ve been around for a while the beneficiaries of these loopholes come to feel entitled to them. So let the wailing and rending of garments and gnashing of teeth begin.
Someone called Gerry Langeler of OVP Venture Partners actually gets space in the New York Times to make a tortured and implausible argument that letting him keep his long-term capital gains is really no different than a homeowner getting to have long-term capital gains treatment when he sells his house because really all he invested was his down payment.
You used the bank’s capital as leverage on your $20,000 investment, but that does not matter from a tax standpoint. Neither does the fact that you worked around the house over those 10 years to improve its value.
Oh you cute, sheltered little venture capitalists who have obviously never had to take out a mortgage for a house. The bank did not “invest” in your house. The bank loaned money to you in the form of a mortgage. You also paid principle on that mortgage over the ten years. And when you sold the house (and by the way did not pay capital gains or any tax on it under your fact pattern and current tax law) you didn’t share that profit with the bank. You repaid the remainder of the loan (if you hadn’t already paid it by taking out a 10 year mortgage or accelerating payments on principle) and got to keep all the profits yourself. You, the homeowner, made the entire investment in the property. Please, please Gerry, do not pretend that the situations are even remotely analagous. Thank you.
Robert Johnson, founder of BET and currently a, yes, venture capitalist, comes up with two rationales for not cutting into his bottom line. First, it will hurt minority businesses! And if that’s not bad enough, how about this? It will ultimately hurt pensions!
At least so far nobody’s threatened to “go Galt” (although Gerry mourns the future of young venture capitalists) or take over third grade classrooms. Maybe that will be in tomorrow’s round of crybaby antics.
*The rationale for this being that long-term capital gains are primarily a result of appreciation of property over time rather than substantial improvement or redevelopment of property as a result of the owner’s services.
Posted by marindenver on 05/25/10 at 01:36 PM • Permalink
Categories: Geek Speak • Politics • Editorials • Our Stupid Media •
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