The sun is shining, the Bancrofts acceded and the beloved Celtics are suddenly 5-2 to win the NBA championship. In other words, it’s time for some Wednesday Warblings.
First up are some responses to my A Third Way column, which discussed a possible compromise on the carried interest tax issue (albeit a compromise among Democrats, rather than between parties):
Eric writes: “Are you aware of another approach to potential compromise being bandied about? I’m speaking of the ‘imputed interest’ solution. The GP would be charged imputed interest on the funds invested ‘on the GP’s behalf’ by the LPs – in other words, 20% (assuming no complexities like hurdle rates, etc.) For example, on a $20mm investment, the GPs would pay tax each year on $4mm at ordinary rates (then gains would remain at capital rates). The biggest issue with this would probably be phantom income – the GPs have to pay tax on income they haven’t actually received in cash.”
Chris: “I firmly believe that carried interest should be accorded capital gains treatment and, if that were to change, PE firms and their attorneys would no doubt find other ways to replicate those economics. Having said that, it seems to me the PE industry’s arguments would be bolstered by going ‘back to the future’ and moving wholesale to a waterfall by which carried interest income is only distributed after committed capital is returned… VC and PE firms have eroded the traditional waterfall structure and, in doing so, have unwittingly given credence to those who argue for ordinary income treatment. By moving back to a committed capital standard, the industry would not only defuse this argument by truly making carried interest a long-term form of income, but also eliminate the supposed competitive pressures (primarily employee retention arguments) which many firms have used to erode more traditional waterfall structures. LPs would also benefit from a better alignment of interests with their fund managers.”
Nick: “If the basic Democratic sound bite – ‘Why should billionaires pay 15% taxes on their income’ – is a clear winner, wouldn’t ‘Why shouldn’t everyone pay 15% taxes on their income’ be better?”
Joan: “You reported that Obama led all presidential candidates in terms of getting campaign contributions from the PE industry, but that was before he came out in favor of the carried interest tax change. He either should reverse course, stake out some middle ground – like the Third Way you discuss – or start looking for some different donors.” I definitely agree that he’ll take a hit from that Joan, but not necessarily as much as one might think. It seems that PE pros and VCs are very willing to silo their political beliefs and business interests. For example, many big-time Democratic fundraisers in Silicon Valley give to VenturePAC, which donates a majority of its stash to Republicans.
*** Tony on my belief that the buyout sky isn’t yet falling: “I enjoy your comments, but please don’t start putting lipstick on the pig as it related to the private equity industry. I know that is the hand that feeds you, but be careful.” Casey chimes in with similar sentiments: “You’ve obviously been spending too much time drinking the Cool-Aid in LBO firm boardrooms. How can you not hear the Fat Lady? She’s turned up to 11.”
*** Mike: “Why didn’t you mention the Celtics deal? It should have been in Top Three.” I did mention it Mike, with the note that Doc will unfortunately mess it up. It’s like buying a Porsche and then having Toonces drive it home from the lot
*** Worth noting that various emails this week have referred to me as a “lunatic lefty” for doubting Iraq War success, and also as a “neocon suckup” for suggesting the Iraq War has boosted the U.S. economy. As Walt Whitman once wrote: I am large, I contain multitudes…