Max Baucus, D-Mo., has reintroduced his tax extenders bill, and once again it includes a provision to increase the taxes paid by alternative investment funds. Specifically, it would increase taxes paid on carried interest — the slice of investment profits given to fund managers — from capital gains rates to a hybrid of capital gains and ordinary income.
I kind of want to get worked up over this. Changing the tax treatment of carried interest has been a pet cause for years, ever since Rep. Sandy Levin, D-Mich., first introduced it more than three years ago (even though he didn’t really seem to understand what he introduced).
In short: Carried interest is a fee for services rendered. Like when a general contractor refinishes your kitchen, increasing the value of your home. Or when a mutual fund manager picks you a good portfolio. Valuable services, but only the person taking the financial risk should get to claim capital gains. In the case of private equity or hedge or venture capital funds, that person would be the limited partner. To the extent that members of the general partner put up their own money, then that’s where they can recognize capital gains.
But, again, Sandy Levin first introduced this change more than three years ago. For two of those years, the White House has been occupied by someone who supported a change to carried interest during his campaign. The common denominator is that all the support comes from Democrats, who have a Detroit Lions-like knack for grabbing defeat from the jaws of meaningful victory.
Usually we don’t know how they’ll do it — as Jon Stewart pointed out last night — but this time it’s probably just a question of calendar. Congress has just a few working weeks left before its members return to their districts for full-time campaigning. The chances of Congress passing this legislation before then seems remote, even if Republicans have lost their original talking points from the original tax extenders bill (the offending unemployment insurance provisions have been largely removed). I’m pretty sure they can find something else to complain about, rather than hand Obama a win just before the mid-terms.
It’s possible their complaint will focus on the noxious enterprise value tax, which also was left intact by Baucus. No idea why goodwill and expected future earnings built by a partnership isn’t as cap gains-worthy as are goodwill and expected future earnings built by a corporation …
Anyway, below is a summary of the relevant carried interest passage. Pretty sure it’s overestimating the tax revenue figure just a wee bit …