Reuters: Obama Jobs Plan Includes Change In Treatment Of Carried Interest
(Reuters) – President Barack Obama is proposing cutting $467 billion in tax breaks for wealthier Americans and some companies to offset the cost of his job-creation plan, White House Budget Director Jack Lew said on Monday. Included is a plan to treat carried interest as ordinary income.
“In order to invest in jobs and growth, we’re going to have to pay for it,” Lew told reporters as Obama prepared to submit his $447 billion jobs program to Congress on Monday.
He said the extra $20 billion in cuts were intended to “build in a cushion” to make sure the plan is paid for without adding to budget deficits, as Obama has promised.
Lew said the “tax provisions” that Obama was proposing included:
A limit on itemized deductions and certain exemptions on individuals who earn over $200,000 and families who earn over $250,000, which would raise roughly $400 billion over 10 years.
A proposal to treat carried interest earned by investment fund managers as ordinary income rather than taxing it at capital gains rates, which would raise $18 billion.
Eliminating certain oil and gas industry tax breaks that would raise $40 billion.
A change in corporate jet depreciation rules that would raise $3 billion.
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Matt K said on September 12, 2011
So the strategy on this from the Administration is to attach the carried interest tax, limit on itemized deductions, and “loop hole” closing on every imaginable piece of legislation until they get it through?… now that is “Change” and “Hope” I can believe in…
James A said on September 13, 2011
This is just more evidence that the President cares more about demagoguery than he does jobs. Whatever side of the carried interest debate you’re on it’s clear that making the discussion of this topic a key part of his jobs plan announcement is just class warfare and wealth redistribution, the guiding tenets of his presidency. No one believes this jobs plan will improve the job situation. Half of the money is simply taking from those who are working and creating something and giving to those who are not in the form of unemployment insurance, which President Obama’s former economic advisors, Cristina Romer and Larry Summers, both have shown with rigorous academic work, will increase, not decrease unemployment.
Ray W said on September 13, 2011
I’m a diehard capitalist but the cynicism and self-interest has gone a bit to far in the efforts to protect our own short term interests at the expense of the long term health of the economy. Two recent examples: 1. We’ve relied on the naivete of legislators to treat “carried interest” (i.e. fees) like a capital gain and tax it as such. All fees should be treated the same way what ever you call them. 2. Everyone seems to agree the small businesses are the job creators in a recovery and yet lobbyists claim that raising the tax on retained corporate earnings will kill job growth. (a) Most small business are LLCs or “S” corps and so will pay no tax at the corporate level in any case so its effect on them and their contribution to job growth will be zero. (b) if US “C” corps invest their earnings (estimated to be $1 trillion on their balance sheets) in US growth and hiring then it won’t be there to be taxed.
The administrations current proposals may not be the best options but deception about their real effects is not the same thing as having a better alternative for the country.
Beth G said on September 13, 2011
The only reason this is an issue worth sounding off on is because it should have happened a long time ago.
Christopher said on September 13, 2011
If we are true leaders in this country, we will do what is best for the country not just ourselves. I fear, however, that many in positions of wealth and power have lost sight this basic premise. I paid far less in taxes last year than my children did, and I made far more money. How can this possibly be a fair system with a sound future?
Alfred D said on September 14, 2011
Some of the comments in your latest newsletter seem to start at the wrong point.
Historically PE firms got an annual 2% fee for managing other people’s money and then a success fee equal to 20% of the profits on the Limited partners money that they investment when it was liquidated. If the asset is liquidated at a loss the PE firm is not out of pocket because neither the firm nor its general partners, in that capacity, have their own capital at risk.
So whether these fees are retained by the PE firm or distributed to the partners they should be taxed as ordinary income of the partners based on the “flow through†tax rules relating to partnerships.
Calling these fees “carried interest†does not change that they are fees and many PE partners have readily admitted the equivalent of: “Of course these are fees and the special tax treatment was a nice ride while it lasted. Let’s move on.†I agree.
John G said on September 14, 2011
2 of the 6 comments here are strongly against changing the treatment of carried interest, while the others are either in favor or accepting of the change.
Of course on PEHub Wire, the headline is “Mr. President, the Suits with Pitchforks and Torches Have Arrived” and 2 of the three quotes are strongly against the change. In fact one guy says he won’t bother raising another fund, because he will “have little ability to make money for taking the risk if carried interest is taxed as ordinary income.”
Oh my, the hyperbole! Don’t forget that changing carried interest will also cause tornados and a plague of locusts. Either Adam Claypool is already extremely wealthy or his LP’s have great terms.
Kenneth said on September 14, 2011
The only good thing to come out of this debacle is watching self loathing finance professionals lose their jobs because of their choice to support Obama (a politician who openly scapegoats the entire financial services industry whenever possible). But I digress, keep attending Obama fundraisers in NY and CT, but don’t be surprised if your firm leaves to another more tax friendly nation. Then you can support Obama’s re-election in 2012 not because it shows you are cool and progressive, but because you are unemployed.
Steve Harris said on September 14, 2011
There’s no “loophole” here. What you have is the application of two long-standing components of the federal tax code, specifically put there by our elected officials and for very good reasons: 1–favorable treatment of capital gains (i.e. for investing in our productive capacity) and 2–the tax characteristic of flow-through entities (i.e. primarily the incentive provided by eliminating double taxation of the same profits). Neither of these principles is rooted in the notion of having significant capital at risk. Lots of people in lots of different circumstances benefit from these same tax principles: company founders who get common penny stock while their investors are paying up for the preferred; employees who receive and exercise stock options (yes, I know they must hold for one year after exercise to get long term capital gains treatment but you could hardly say their capital is at risk when the options can be outstanding for many years before exercise and the market price upon option exercise is multiples of the exercise price — VCs take substantially more risk than that simply by being general partners); and the broader world of investment entities, say for example, real estate investment or development entities that are structured around the same tax principles.
So, why just pick out private equity and venture capital professionals from this broad universe of those benefitting from these tax principles? Why not instead suggest that the founders & employees of service sector companies could not benefit from these tax principles as they apply to their specific applications in the areas of founders’ stock and stock options? How would that sound?
The answers to these questions are clearly rooted in political expediency; to redirect anger to a small group of “villians” and remove the blame from where it ought to reside, our top leadership. Why not, then, address all the people who benefit from these “loopholes”, particularly since the small group currently targeted can come nowhere close to addressing the revenue raising targets of our president? Again the answers are easy: 1–That would get too many voters angry and endanger politicians’ re-elections and 2–These principles were put in place for good reason and have proven their value in building our economy many times over.
The capital allocation system that has grown around these principles is the best in the world, as evidenced by how often it is imitated and it is clearly better than having our chief executive pump half a billion of our money into a single solar panel manufacturing failure (Solyndra).
Bill Alls said on September 14, 2011
One request: if anybody has the temerity to argue that if there’s a change to the carried interest tax rate that they’ll “stop investing”, you owe it to your readers to publish their name and firm. Why? Because they’re full of, um, effluent.
There are a lot of reasons to keep tax rates low, but the ridiculous saw that people are going to stop working or stop investing if their taxes are a few points higher is utterly ludicrous. Anybody trying to make that argument should be held out for the ridicule that they deserve.
Steve Nasmaith said on September 14, 2011
Well, I guess we know where Kenneth’s (see above) loyalties lie: let’s paraphrase what Kenneth said: “America be damned. If I don’t like it, I’m takin’ my money to a place where I can really pay no taxes.”
Brian Flynn said on September 15, 2011
Christopher: By all means, if you’re not paying your fair share (in your mind), you may voluntarily send an additional check to the US Treasury. It will be deposited, and all of us will thank you!
Steve Harris: Very eloquent. I couldn’t agree more. Why folks don’t understand the inconsistency you point out is completely beyond me. If Obama wants to tax carry as ordinary income, then all cap gains from employee and founder options should be taxed similarly.
Bill Alls: We both invest money for others in private deals and start companies. Taxing carry will absolutely impact my desire to find and fund deals. We’ll focus more on starting new companies and/or simply growing our existing ones should Obama succeed in his class warfare.
People, don’t kid yourselves. Beyond the carried interest issue, Obama will certainly raise the FICA cap from the current ~$107k and he’ll certainly want the Bush tax cuts to expire. If there’s no cap, then the marginal tax on carried interest will rise from 15% to 39%+15%= 54%.
Finally, I’ve proposed two possible alternatives:
1. Tax all cap gains from carry & employee stock at ordinary rates — bad idea, but at least it’s internally consistent;
2. Tax all carry above a certain level at some higher rate as a part of the goal of income redistribution from those who are uber-succesful. (e.g., >$10mm in a year, or $15mm over three years).
Ray W said on September 15, 2011
Brian, I’m with you. Steve, keep it simple. If you have your own capital at risk you should have a modest tax incentive to do so. If you don’t have our own capital at risk then your returns are ordinary income and should be taxed as such. Consistent for all. Keep it simple. Done. Let’s all send that selfless proposal to our legislative representatives. We’re getting closer to Steve Forbes “flat tax” and a tax return on a post card.