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Let's Understand The Levin's "Carried Interest Bill!"

By   Follow Me on Twitter     Message Professor Emeritus Peter Bagnolo       (Page 1 of 1 pages)     Permalink

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Let's Understand The Levin's "Carried Interest Bill!" When the NYT is Right, they are Right, and when, on rare occasion such as this, they are wrong, I get to write about them, like now. It just isn't what the NYT says it is; it is something else. (Isn't that profound?) Therefore, read the article and find out why I think the Times is wrong, and the bill should pass as it stands. A week ago, Michigan Democratic Congressman Sander Levin introduced a bill to undo, to some degree, an old tax fix which gives private equity fund managers the ability to claim performance fees as capital gains rather than ordinary income. This particular tax bonanza is disguised, creatively, as "carried interest," which in more honest language that they pay a 15% capital gains tax on fees that that the rest of us pay as much as 35% on our regular income tax rate forms upon on. The cost of their covetous tax to the rest of humankind $5 or 6 billions per annum. That's right, we pay 35%, they pay 15%, we work for our money, they skim the profits the industry provides with little movement beyond a few relaxed computer clicks. Private equity fund managers' fees are primarily, and sometimes entirely, based on the performance and therefore the management of funds (theoretically). Their fees are based, on the performance of the stocks/funds they manage This fee structure is a contingency fee, like the fees attorney's, consultants, private detectives, artists and others receive. The only difference is that none of the above and others who work on contingencies, pay lower taxes than the rest of us pay. These tax rates are a Gift. Why and for what? Nothing more than GREED, or as the prophets call it, AVARICE! Why don't I and others who work on contingencies, receive this lower tax rate? Well, because our fees do not accrue by selling any assets. However, these managers do not invest their own cash in the assets they manage, so they cannot lose any money however, they may, if their management nets no profits for the investors, the managers do run the risk of working for nothing. Salesmen and women on commission are in the same position, and to the best of my knowledge they pay the same tax rates we, who do not manage assets, pay. Therefore, I see no reason why, since they aren't holding and/or selling fund assets, their income should be privy to a special tax rate. It is, of course only their ordinary income, not capital gains, and should be taxed as such. The oddity apparent in this law stems from a period in which Private fund managers did invest in the funds they managed. Those investments were called, "carried interest," because they "carried" the interest forward which they held as (long-term visa vie-carried) investments. Profits coming from the sale of that interest were as capital gains, which was correct and understandable-they were putting their cash on the line, they didn't merely talk-the-talk. Now, however, because the fund managers have no investments themselves, in the funds they are managing, they do not have carried interest, so, they are not entitled to have their contingency fees taxed at the same rate as capital gains. This matter is simple and straightforward; the issue is no more complex than that. It is however, often not so clear to those with little to no experience in such matters. For instance, the NYT, contained an editorial, which I read, which shaded the Levin Bill, by Blackstone's highly visible IPO (Initial Public Offering-The opening of a new stock, which those so privileged may be able to buy into before the opening. Indeed, when IPO's are selling well, as during the plush 1990's, many investors were able profit well by them. Well the Levin Bill and the IPO appeared on the same day-a pure coincidence. To those of us who do trade, the bill is no mystery, and it is apparent that it has nothing to do with this or any other IPO offering's or with trying to "mute" them. Not satisfied with not comprehending the Bill or its significance, the editorial confabulates that "the tax rules in question were developed decades ago for enterprises that had passive investors to whom gains were passed along. Hedge fund managers and private equity partners are not passive. They're actively managing assets." Well, it so happens that the Fund managers are only that fund managers and not investors, they are neither active nor passive, which distinction is irrelevant pertaining to this particular tax. They also made other unknowing comments, like; "It will also be necessary to narrow (my italics) the (Levin) bill. For instance, it could include a mechanism to allow compensation to be taken in a form similar to incentive stock options." The bill states nothing to that effect, and if it added such a thing, it would be enlarging the scope of its jurisdiction, not narrowing it. Finally, the Times attributes to the Bill that it will, "achieve a significant victory, for fairness and for fiscal responsibility." In that, they are correct, but the rest of what I read is a poor interpretation of a very simple matter. I hope it passes, because these brave Fund Managers, both male and female, type their arthritic fingers to the bone managing these Funds and are well compensated for doing so, when they are successful. If their clients make lots of money, they make lots of money, when their client s lose money, they the fund managers, aren't paid, which is as it should be.


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Professor Bagnolo has majored in: Cultural Anthropology, Architectural design, painting, creative writing. As a child prodigy, abed with polio for almost two years, he was offered an opportunity to skip three grades at age 8.
Later He was a (more...)

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