Debate Heats Up On Carry Taxation

Nothing like a column on carried interest to stir up a hornet’s nest of stinging commenters.

Earlier this week Richard Beales, a Reuters Breakingviews columnist, opined in our Vox Populi space that congress erred in dropping, at least temporarily, its proposal to raise taxes on carried interest. Beales is hardly alone: Even billionaire Peter G. Peterson, co-founder of the Blackstone Group and long-time beneficiary of the current tax treatment, recently said in an interview that carried interest should be taxed as regular income.

Still, that view didn’t sit well with many of our commenters:

Drew writes: I’m not sure how I keep getting lumped into the “ultra rich” category. I don’t make enough money to send my kids to college without student loans and I take much greater risks when I earn money through carried interest than does my next door neighbor with his traditional Fortune 500 job…

Eric writes: The tax treatment of carried interest is not a “loophole” by any stretch, as anyone familiar with subchapter K of the Internal Revenue Code will confirm. It is a product of the capital gains tax preference and the flexibility afforded partners in subchapter K to allocate income, gain, loss, deduction, or credit in whatever manner they deem fit. Partnerships are pass-through entities and the character of partnership profits is almost always capital gains (not ordinary income), so the character of any allocation of partnership profits follows accordingly. The same rules apply to all entities so taxed, be it a Blackstone-managed limited partnership or a family LLC formed to hold a three-flat…

Leonard writes: It is not true that people with carried interest did not invest money in order to obtain it. 47% of the partnerships with carried interest are real estate and the vast majority are small businesses. The general partner paid for all the front-end costs to set the deal up in the hope of getting their carried interest. If the deal was successfully syndicated the general partner got all his capital back as an interest free loan, so he now has no money in the deal and no return on his invested capital other than his carried interest. Carried interest is not obtained just by labour.

***A few commenters gamely took the other side of the argument, or were simply worn out by the issue:

JG writes: The focus on your comment shouldn’t have been about the theoretically correct way to tax carried interest. Most people who receive carried interest will never acknowledge that it should be taxed as ordinary income. The real news here is how political contributions and muscle from those with net worths in the top 1% carved out/maintained a loophole for themselves, even in the face of a recessionary economy, enormous populist sentiment and mindboggling national debt.

Steve writes: Aren’t you getting a little tired of beating this editorial viewpoint ad nauseum? Is this the filler for light news days? Enough already…we’ve heard the positions on both sides over and over again…We don’t come to your blog to read them again.

***Also striking a chord was last week’s piece by peHub reporter Connie Loizos on the heated competition for Silicon Valley programming talent.

Wakjon writes: Yeah we heard all this worker shoratge stuff back in 1998 too and the response to that was to flood the labor market, which caused the recession. There is so much unemployed native talent in the U.S. Right now, it’s not even funny.

Mike writes: Newsflash: a TON of engineers in the valley make $150k or much, much more as a salary. You must be interviewing the worst senior engineers and cheapest companies in the valley if they’re only making $100-125k. I know numerous people who, out of college, were making $100k as engineers in the Bay Area. Terrible article.

P Henry writes: That’s odd. In the Boston area, there are no jobs. Could it be that corporations are trying to spread the lie about a “shortage” in order to increase the H-1B quota at a time of +10% unemployment?

Realist writes: What articles like this all like to say is that there is a shortage of engineers willing to work/move for the relatively low salaries they are being offered. We all know engineers create incredible value for companies, but they are getting them on the cheap. They have already usually paid for their education elsewhere, and they tend to skew younger and so have massively reduced health and pension costs. Valley companies have just got spoiled by being able to pay H1-Bs peanuts, so they think that’s how everyone should work. That’s just wrong.