Difference between revisions of "Carried Interest Debate (Blog Post)"
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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. | 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. | + | 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. |
| − | + | Now to discuss the elephant in the room, carried interest. General partners of the funds are compensated through management fees, carried interest, and whatever stake they might have in the fund (typically no more than 5 percent). 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 the 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" />, compared to the maximum ordinary income tax rate of 39.6 percent<ref name = "taxbracket" />. | |
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| + | serves to join the incentives of the general partners with the interests of the limited partners by providing performance-based compensation for the general partners. The standard carried | ||
==References== | ==References== | ||
<references> | <references> | ||
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<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 = "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] '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> | ||
</references> | </references> | ||
Revision as of 15:35, 10 June 2016
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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.
Text
First, let's clear one thing up. When Donald Trump and Hillary Clinton rally against "hedge-funds" for paying so little tax [1], 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 wiki page on carried interest for an in-depth explanation.
Now to discuss the elephant in the room, carried interest. General partners of the funds are compensated through management fees, carried interest, and whatever stake they might have in the fund (typically no more than 5 percent). 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 the fund's profits[2]. The controversy stems from carried interest's tax treatment as it faces a maximum capital gains rate tax of 20 percent[3], compared to the maximum ordinary income tax rate of 39.6 percent[4].
serves to join the incentives of the general partners with the interests of the limited partners by providing performance-based compensation for the general partners. The standard carried
References
- ↑ [1] R. Rubin, 'Trump, Clinton Lines on Hedge Fund Tax Payments Puzzle Experts', Bloomberg, (New York City: September 2015)
- ↑ [2] 'Two and Twenty: Taxing Partnership Profits in Private Equity Funds',New York University Law Review, (New York City: April 2008)
- ↑ [3] K. Bell, 'A look at long-term capital gains tax rates', Bankrate.com, (New York City: April 2016)
- ↑ [4] K.Pomerleau, '2016 Tax Brackets', Tax Foundation, (Washington D.C.: October 2015)
