Straw man alert: Carried interest edition

March 5, 2013, 2:25 AM UTC

FORTUNE — Steve Judge, president of the Private Equity Growth Capital Council, today wrote an op-ed arguing that carried interest should continue to be treated by the IRS as a capital gain. Nothing particularly new in his fundamental argument, so it’s not worth relitigating my disagreement.

But Judge did add one wrinkle that should be noted (and then disabused). From his piece:

“Changing the tax treatment of carried interest would not generate the significant revenue needed to close our huge budget shortfall. Some of the latest proposals on carried interest would deprive private equity, venture capital and real estate partnerships of the same long-term capital gains treatment available to other kinds of businesses – and would only pay for merely 3.1 hours a year in federal government operations.”

Sorry, but this is a straw man.

No one has ever suggested that changing the tax treatment of carried interest would “close our huge budget shortfall.” In fact, based on estimates,you couldn’t have closed “the huge budget shortfall” in fiscal 2012 by mothballing the entire U.S. Defense Department.

Instead, the case for carried interest tax reform largely has been on the basis of tax code equality. Private equity investors and others should pay ordinary tax rates on their services to investors, just as a mutual fund manager or financial advisor would. Or just like an employee would on a performance-based bonus. And if that happens to provide a few extra billion dollars to U.S. Treasury coffers, so much the better.

But, again, I don’t want to get bogged down in the real debate over this issue. Just want to point out that this secondary ‘debate’ doesn’t really exist.

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