Today in Carried Interest: Some People Still Care

The carried interest taxation debate is fast becoming as irrelevant as “The Decision.” Only a few die-hards still believe that persuasive arguments could revive meaningful legislation, while the rest of us despair at Democratic spinelessness and Republican obstruction.

But God bless ’em for trying.

Today, the Kauffman Foundation’s Paul Kedrosky and Harold Bradley penned a Bloomberg Op-Ed, arguing that the IRS should treat carried interest as ordinary income. Not as some sort of ordinary income/capital gains hybrid, but as the same tax that the rest of us pay (or at least those of us without active lobbies in DC). They included the following rebuttal to those who claim carried interest is comparable to homeowner equity:

First, the U.S. government has decided for policy reasons to favor home ownership, a tax distortion with many consequences that helped incubate the economic pain we still endure.

Second, homeowners don’t earn a management fee from lenders, while venture-fund general partners do. General partners serve in a fiduciary role for their own investors. This relationship illustrates that carried interest is a bonus and not a share in partnership profits based on capital contributions.

Finally, a homeowner’s equity may be reduced or eliminated by declining prices, while poor investments made by venture- capital general partners cause loss of capital only to the investors and usually not to the managers of the fund’s investments.

All of this comes one day after venture capital legend Arthur Rock weighed in, as part of an interview with WSJ Digits. He joined the sentiments of vocal minority VCs like Fred Wilson, saying:

“I’m one of the few people around who thinks that carried interest should be taxed as ordinary income tax… I think people do venture capital because they like it and it’s in their blood and I don’t think it’ll [carried interest] make any difference whatsoever.”

Again, I’m not optimistic that Congress will reconsider this issue outside of campaign stump speeches (or perhaps as doomed-to-fail proposals if/when Democrats are in the minority). But, if it does somehow happen, I hope they pay attention to the few folks out there who are not yet hoarse from shouting about the inequity of current carried interest law.