A Carried-Interest Compromise?

There’s been much talk in the States about the carried interest tax “loophole” being closed. It currently stands at 15%.  Andrew Ross Sorkin wrote an editorial recently (my favorite part of the piece was the Private Equity Council’s Douglas Lowenstein calling into question the bias that venture capital investment is somehow seen as more virtuous than buyout investment money) which was followed up by a call for taxation compromise by Joseph D. Ament, a principal at Chicago law firm Much Shelist Denenberg Ament and Rubenstein.  

His proposal is to amend Internal Revenue Code Section 1256 to add carried interest as another type of Section 1256 contract. Thus carried interest would be taxed 40% as a short-term capital gain or loss, and 60% as a longterm capital gain or loss. However, any gray area of compromise will ultimately prove arbitrary. Some figure will be decided on as an increase is certain to come, but it will be in the haggling and positioning that occurs over that final number that will prove interesting. This could be a vital moment for the Private Equity industry to show in the public spotlight it’s long-term objectives.

Of course, depending on how you look at the issue you may be of the mind that there is in fact no gimmick to be fixed, and that it’s simply a tax increase. The Obama administration predicts it will generate $14.7 billion through 2014.  That number seems quite high given that the current drought of dealmaking. Also important to consider is whether or not it’s wise to take away some investment incentives at a time when private capital is needed most. Unfortunately, this last point is being lost among the populist outcry.

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