its been interesting to see the debate on carried interest rage over the last couple weeks.
here are a few thoughts:
1) I’m sympathetic to the idea that tax policy shouldn’t discourage venture investment. But the majority of carried interest is earned by two (much larger) other asset classes (hedge funds and private equity) that don’t have the same impact on job creation.
2) Why are capital gains taxed lower than ordinary income? I assume it is to encourage risk-taking and investment. If that’s the case, you shouldn’t get capital gains without the prospect of facing capital losses. VC’s don’t face capital losses on their investments – they get success fees.
3) The basis for carried interest is that investment managers, like startup founders, contribute time and effort (instead of capital) to create value for a new entity (an investment partnership, instead of a startup).
It seems like a huge tax shelter to be able to classify success-based fees as equity, if they are treated through a partner ship structure.
Mutual funds and hedge funds both do the same thing — invest money. Mutual funds take a fixed percentage of assets from clients. If you run a mutual fund, and you do really well, your annual bonus is taxed as ordinary income.
Hedge funds really get paid through carried interest. If you run a hedge fund, and you do really well, your annual bonus is taxed at capital gains rates.
Is that right? Both the mutual fund manager and the hedge fund manager invested a lot of time (but not necessarily risked their own capital)
