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[[category:McNair Projects]]{{McNair ProjectsBlogPost|Project TitleHas title=Carried Interest Debate (Blog Post)|Topic Area=Economic and Business Trends|OwnerHas author=Jake Silberman& Catherine Kirby & Tay Jacobe|Start Term=Summer 2016|End Term=TBD|Status=In Writing|Deliverable=Blog Post|Audience=General Public|Skills NeededHas content status=Writing IPublished|Primary BillingHad publication date=Dr. Edward Egan2017/04/07
Types Now to discuss the elephant in the room, carried interest. General partners of private investment funds include private equity the fundsare compensated through management fees, venture capital fundscarried interest, andprofit from whatever stake (typically no more than 5 percent) they might have in the fund. Management fees are consistently around 2 percent of a fund's assets under management and are paid regardless of the fund's performance. Carried interest, alternatively, is a contractual right for the general partner to receive about 20 percent of coursethe fund's profits<ref name="fleischer" />. The controversy stems from carried interest's tax treatment as it faces a maximum capital gains rate tax of 20 percent<ref name = "bell" />, hedge-fundscompared to the maximum ordinary income tax rate of 39.6 percent<ref name = "taxbracket" />. What are the differences between all Those in favor of a low capital gains tax believe that a higher rate would reduce incentive for general partners to take risks and this lack of these funds? Here incentive would then discourage innovation and efficiency in markets. Those opposed frequently argue that carried interest is performance-based compensation, much like a brief summary of eachbonus, and therefore should be subject to the same rate, i.e. the ordinary income rate<ref name = "cbo" />.
Private equity funds generally invest in large companies with While the intent to restructure and sell controversy surrounding carried interest has existed for some time, it has faced increasing media scrutiny since the firms for a gainlast presidential election when it surfaced that Mitt Romney paid taxes of $1.9 million on $13. Venture Capital funds aim to invest 69 million in high-tech startups with high-growth potential income in exchange for a stake 2011, an effective 14.1 percent rate<ref name = "mitt" />. Perhaps in response to the company with media and public uproar, the eventual goal American Taxpayer Relief Act of 2012 raised what was then a liquidity eventcapital gains tax of 15 percent to 20 percent and was signed into law by President Obama on January 2, i.e2013<ref name = "wiki" />. a(n) acquisition, merger, or initial public offering. Hedge funds tend to focus on achieving high returns through risky investments that may come in In the form aftermath of stocksthe Great Recession, bonds, commodities, derivatives, and just about anything else that promises a strong gainbeing akin to those "hedge-fund guys" is politically precarious. It is worth noting that, in practice, wouldn't be surprising if the current election's focus on increasing the distinctions between these funds can be blurredcapital gains tax had something to do with Romney's blunders.
Carried Interest Debate (Blog Post) (view source)
Revision as of 12:35, 5 June 2017
, 12:35, 5 June 2017no edit summary
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Link to Jake's google doc : https://docs.google.com/document/d/1COY0nejVzkuw7646FGTBpbUSL8qh3B4qwgkmYkTfBRw
Link to collaborative draft google doc: https://docs.google.com/a/rice.edu/document/d/1Mpn79vOTgcvOaeqCZF9mkYkmdmM5y5tA9vSf_51PuqY/edit?usp=sharing
==Abstract==
To many, the concept of carried interest is confusing or meaningless, and the question as to why anyone would debate something so arcane is even more so. In all likelihood, the concept of the exorbitantly wealthy Wall Street bankers or hedge-fund managers is much more familiar, so we will start from there. The objective of this blog post is to shed some light on the obscure world of "hedge funds," explain why the managers are perceived to pay so little tax, and explore recent political developments that may or may not affect that perception in the future.
First, let's clear one thing up. When Donald Trump and Hillary Clinton rally against "hedge-funds" for paying so little tax <ref name = "hillald" />, they are actually referring to private investment funds in general. In short, a private investment fund invests capital in order to achieve returns for investors. It is that simple; although, the types of funds, means through which capital is raised for the funds, how the capital is invested, where the profits are distributed, etc... can complicate the situation.
Before considering the aforementioned complications, one must understand the basic structure of a private investment fund. These funds, set up as limited partnerships or limited liability companies, are organized under general partners and limited partners. The general partners are the funds' managers or managing firms, while the limited partners are the funds' investors. These investors are typically made up of financial institutions, pension funds, and wealthy individuals. Types of private investment funds include private equity funds, venture capital funds, and, of course, hedge-funds. What are the differences between all of these funds? See the McNair Center's [http://128.42.44.180/wiki/Carried_Interest_Debate wiki page on carried interest] for an in-depth explanation.
==References==
<references>
<ref name = "hillald">[http://www.bloomberg.com/politics/articles/2015-09-29/trump-clinton-lines-on-hedge-fund-tax-payments-puzzle-experts] R. Rubin, 'Trump, Clinton Lines on Hedge Fund Tax Payments Puzzle Experts', ''Bloomberg'', (New York City: September 2015) </ref>
<ref name="fleischer">[http://victorfleischer.com/wp-content/uploads/2009/12/Two-and-Twenty.pdf] V. Fleischer, 'Two and Twenty: Taxing Partnership Profits in Private Equity Funds',''New York University Law Review'', (New York City: April 2008) </ref>
<ref name = "bell">[http://www.bankrate.com/finance/taxes/capital-gains-tax-rates-1.aspx] K. Bell, 'A look at long-term capital gains tax rates', ''Bankrate.com'', (New York City: April 2016) </ref>
<ref name = "taxbracket">[http://taxfoundation.org/article/2016-tax-brackets] K.Pomerleau, '2016 Tax Brackets', ''Tax Foundation'', (Washington D.C.: October 2015) </ref>
<ref name = "mitt">[https://www.washingtonpost.com/politics/decision2012/romney-earned-nearly-14-million-in-2011-paid-141-percent-tax-rate-campaign-says/2012/09/21/e62e5096-0417-11e2-91e7-2962c74e7738_story.html] P. Rucker, J. Yang, S. Mufson, 'Mitt Romney releases tax return for 2011, showing he paid 14.1 percent tax rate', ''Washington Post'', (Washington D.C.: September 2012)
<ref name = "wiki">[https://en.wikipedia.org/wiki/American_Taxpayer_Relief_Act_of_2012]'American Taxpayer Relief Act of 2012', ''Wikipedia'', (San Francisco) </ref>
<ref name = "cbo">[https://www.cbo.gov/budget-options/2013/44804] 'Tax Carried Interest as Ordinary Income', ''Congressional Budget Office'', (Washington D.C.: November 2013) </ref>
</references>
http://www.wsj.com/articles/how-should-capital-gains-be-taxed-1425271052
