Say What Now?

I spoke with Rep. Sandy Levin (D-MI) on Monday, about the carried interest bill he introduced in Congress. It did not go well.

We then spoke again yesterday for about 20 minutes. It went better, but still not terribly well.

To preface, I generally support the idea of treating carried interest as ordinary income. I know I’ve hedged a bit on this in the past, but most of the arguments against such a change have fallen flat with me. I respect them and am always willing to reconsider (participate in the debate here), but for now cannot support what appears to be a double-standard. In other words, Rep. Levin had a sympathetic ear.

I began by asking him if his primary motive was to raise federal tax revenue, and he said it was not. Instead, he was motivated by a sense of tax fairness. Levin explained: “It was brought to my attention a few months ago by a tax lawyer, who was a former classmate of mine. He said it didn’t make any sense… I looked into it and couldn’t find a rationale for treating this any differently from the income others receive for services.”

I then asked why his bill had no Republican co-sponsorship, particularly given the bi-partisan authoring of the so-called Blackstone Bill. No real answer, except that he expects to get GOP support after Congress holds hearings on the matter next month. Ok.

Then came the trouble. I asked Levin to respond to the most persuasive counter-argument against his bill – the one about how carried interest should be treated like founders’ equity (i.e., as capital gains). But Levin didn’t have an answer. Even worse, he did not seem to understand the question – even though I repeated it using varying language no less than four times. At one point, his spokeswoman had to break in and try to explain it to him.

Levin kept repeating that company options are treated as ordinary income, but I kept replying that I was talking about founders’ equity – not normal options that a salaried employee like me would have (were Thomson to be so generous, which it is not). He promised to call back with an explanation. His spokesperson emailed to apologize, saying it was her fault for not speaking with me ahead of time, so that “we would have been ready for your questions.”

She missed the point – Levin should have been ready for my questions, because Levin introduced the bill. Maybe I’m just a hopeless legislative romantic, but I’d like to think that Congressmen pay attention to pro/con arguments after proposing bills. Three full days had passed between the bill’s introduction and my interview with Levin. Is it too much to ask that he take an active interest in its aftermath? The “founders’ equity” debate was all over the place, including both comments and blog posts at peHUB. NVCA president Mark Heesen has been trumpeting it for months…

I spent Monday night wondering if I had inadvertently ginned up a legislative push to treat founders’ equity as ordinary income (i.e., spit on the good graces of even more readers). But no worries, as Levin continued to support founders’ equity as capital gains, during yesterday’s follow-up call.

So how did he reconcile founders’ equity with his bill? Very carefully.

Levin argued that founders have an asset at stake (i.e., their position in the company). Private equity funds also have an asset at stake, but distinguished that fund managers do not (save for any money they invest individually into the fund). It is a very thin line, and I’m not too confident that it will hold up next month during hearings. Just wait until the matter gets confused by the introduction of entrepreneurs-in-residence (which I tried yesterday – to which Levin seemed genuinely interested in, but unaware of).

Again: I support the tax change. But I also think its Congressional backers are going to have to educate themselves very quickly, if they want to persuade skeptical colleagues. As of today, they do not seem to have done so.