A Tax Increase I Can Support

As all of you know, I am no fan of tax increases. In this case, well, I still don't.

Here's the deal. Private Equity Fund managers take a certain percentage of the profits, say 20%, leaving 80% for the investors. That's right, the manager need not have any of his own money in the fund. Despite having none of his own money in the fund, his 20% is taxed as "capital gains," rather than as ordinary income. That, to me, is ridiculous.

The Private Equity Council, a recently formed industry lobbying group, opposes any change to the taxation of carried interest. General partners not only contribute time and energy to managing a fund's assets but are required to mitigate losses so that investors get back the capital they put in, according to Council spokesman Robert Stewart. "They take entrepreneurial risk. (Carried interest) is not akin to getting a fee for service." He calls it a profit share.

What a load. I doubt that these managers take money out of their own pockets and give it to the investors if there is a loss. If they do, fine, they can deduct it from their ordinary income.

One potential consequence of raising the tax on carried interest is the risk of lower returns, Stewart said, noting that managers might be less willing to take risks with investments if they know their tax bill will be higher.

It just keeps getting better. "I'm not going to make more money, because 40% will be taken in tax instead of 20%." I'm making up the tax rates, but you get the idea.

Another consequence is that partnerships may find ways around any new regulations.

Translation: "Let's not do the right thing, because some people will find a way to avoid it."

People exploit loopholes in the tax laws all the time, but these people don't advocate scrapping the income tax completely. (I do, but that's another story.)

Sorry, folks, but when I get a bonus, it's taxed as ordinary income. Performance bonuses of major-league players and coaches are taxed as ordinary income. These are no different.

So while I am not supporting a tax increase per se, but I do support changing the classification of this income from "capital gains" to "ordinary income."