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Carried Interest to be (mostly) Taxed as Ordinary Income
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mises



Joined: 05 Nov 2007
Location: retired

PostPosted: Mon Dec 06, 2010 10:18 am    Post subject: Reply with quote

Here's the problem:

Quote:
According to a report released by the Internal Revenue Service, America’s tax collection agency, the top 400 individual tax returns filed in 2009 reported an average gross income of $358 million each. The average amount of tax paid by these individuals came to under 17%, less than half the maximum Federal rate of 35%, which kicks in on annual income over $372,950 (click here for the 2009 tax tables at http://www.irs.gov/pub/irs-pdf/i1040tt.pdf ). This explains why Warren Buffet pays a much lower tax rate than his secretary. It really is true that in America, only the poor people pay taxes.


A solution:

Quote:
I have a very simple solution to the country’s budget deficit problem. Hit the reset button. Eliminate the Internal Revenue Code. Just set it on fire. Keep the existing progressive, hockey stick tax rates on income, but eliminate all deductions. And I mean everything; deductions for dependents, home mortgage interest, medical expenses, the works. There are no sacred cows. My revised Form 1040 would have only three lines on it:

Income
Tax Rate
Tax Due


http://www.zerohedge.com/article/tax-rate-fallacy
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Kuros



Joined: 27 Apr 2004

PostPosted: Wed Sep 07, 2011 8:46 am    Post subject: Reply with quote

Carried Interest rates may yet be taxed because of a tax court decision

Quote:
Does a recent Tax Court decision threaten the "carried interest" tax break beloved by managers of private-equity funds, venture-capital funds and, to a lesser extent, hedge funds?

Yes, says former top Treasury official Michael Graetz: "This decision in Dagres v. Commissioner gives the Treasury Department a clear opportunity to write regulations raising taxes on carried interest." Mr. Graetz is now a professor at Columbia University's Law School.

No, says independent tax analyst and Columbia Business School adjunct professor Robert Willens: "This decision doesn't give the government unbridled authority to change the tax treatment of carried interest."

. . .

Tax Court decisions like this one set precedent. Prof. Graetz says Treasury officials could use the decision to do administratively what Congress hasn't done legislatively—tax carried interest as ordinary income. Mr. Willens calls the holding "troubling for private-equity and venture-capital fund managers and investors," but notes that it doesn't specifically say carried interest should be taxed as compensation.
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ontheway



Joined: 24 Aug 2005
Location: Somewhere under the rainbow...

PostPosted: Wed Sep 07, 2011 10:41 am    Post subject: Reply with quote

Kuros wrote:
Carried Interest rates may yet be taxed because of a tax court decision

Quote:
Does a recent Tax Court decision threaten the "carried interest" tax break beloved by managers of private-equity funds, venture-capital funds and, to a lesser extent, hedge funds?

Yes, says former top Treasury official Michael Graetz: "This decision in Dagres v. Commissioner gives the Treasury Department a clear opportunity to write regulations raising taxes on carried interest." Mr. Graetz is now a professor at Columbia University's Law School.

No, says independent tax analyst and Columbia Business School adjunct professor Robert Willens: "This decision doesn't give the government unbridled authority to change the tax treatment of carried interest." . . .

Tax Court decisions like this one set precedent. Prof. Graetz says Treasury officials could use the decision to do administratively what Congress hasn't done legislatively—tax carried interest as ordinary income. Mr. Willens calls the holding "troubling for private-equity and venture-capital fund managers and investors," but notes that it doesn't specifically say carried interest should be taxed as compensation.



This court decision does not say that carried interest should be taxed as ordinary compensation. In fact, it specifically refers to the fact that it is taxed as a capital gain. It also allows that even though it is a capital gain for tax purposes it is also compensation for purposes of a deduction from income for tax purposes of a bad business loan. Thus the issues are separate.

Should the Treasury and the IRS decide to make a unilateral, administrative change in policy they can expect a very high powered court case instead of additional revenue.

The key line from the ruling:

Quote:
Wrote Judge David Gustafson: "Neither the contingent nature of [Mr. Dagres's carried interest] nor its treatment as capital gain makes it any less compensation for services."


The judge does not dispute the propriety of taxing carried interest as a capital gain. In fact, the judge's ruling is quite precise and correct. Carried interest should be treated both as compensation income for purposes of deductions allowed as in the court case and as a capital gain for tax rate purposes.
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Kuros



Joined: 27 Apr 2004

PostPosted: Fri Dec 30, 2011 7:01 am    Post subject: Reply with quote

I'm sorry for not bumping this thread when the Buffet Rule was announced. Buffet's statement, that he shouldn't be taxed at a lower rate than his secretary, was really referring to carried interest. But Obama took that lesson and misapplied it, trying to raise the marginal rate of ordinary income on higher earners.

Romney and carried interest (http://www.washingtonmonthly.com/political-animal/2011_12/romneys_carried_interest_probl034344.php)


Quote:
Because Romney still collects seven-figure checks from his vulture-capitalist firm, he’s paying [a lower tax rate] than middle-class families nationwide. And with that in mind…

Romney also indicated that he would not shy away from a legal tax break that shelters partners at private equity firms, like Bain Capital, from high tax rates on the largest part of their take-home profits.

“I can tell you we follow the tax laws, and if there’s an opportunity to save taxes, we like anybody else in this country will follow that opportunity,” he said.

Let me summarize the political problem this way:

1. Mitt Romney is worth $250 million.

2. He got rich by laying off American workers.

3. He pays a lower tax rate than you and the rest of the middle class.

4. He wants to be president so he can keep it this way.

I don’t know if voters will find this offensive or not, but it certainly explains why Romney is so eager to keep his tax returns under wraps.
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Kuros



Joined: 27 Apr 2004

PostPosted: Tue Jan 17, 2012 10:24 am    Post subject: Reply with quote

Romney admits he is taxed at about 15% rate


Quote:
He has probably paid an effective federal income tax rate of about 15 percent in recent years, Republican presidential candidate Mitt Romney told reporters in South Carolina a short time ago.

. . .

Romney's confirmation about his effective tax rate is sure to bring up mentions by his liberal critics of the "Buffett rule." Named for billionaire Warren Buffett (who thinks the very rich should pay more in taxes), it's the observation that those who can classify their income as "carried interest" get taxed at a rate much below the rates paid by many of the less well-off.


I can't vote for this guy.
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ontheway



Joined: 24 Aug 2005
Location: Somewhere under the rainbow...

PostPosted: Tue Jan 17, 2012 11:31 am    Post subject: Reply with quote

The greatest tax savings for Buffet (also Bill Gates and most of the very wealthy) has nothing to do with carried interest nor anything Buffet wants other people to pay taxes on.

The wealthiest Americans escape all taxes on unrealized capital gains.

They hold stock in a corporation, usually one they founded or joined early, and they never sell. The stock value grows, making them billionaires. They still pay no tax and report no income. Finally, they transfer their wealth to a trust fund or foundation of some kind and still pay no tax. The new holder of the wealth is a tax-free entity and the income has now escaped all taxation. And Buffet has no interest in changing this. This has been the source of nearly all of his wealth.


The only way to fix the tax system and make it fair is to make all income and property tax free for everyone. Then every American will have the same favorable treatment as Buffet.

We should then tax consumption - capped at 10% for all levels of government combined - everyone pays the same, no exceptions. Fair and equal, and you only pay on the money you use for consumption. All investment is tax free for everyone - not just the Buffets of the world.


The income tax is the number one cause of the growth of the oversized corporation and has prevented the creation of portable whole-life health insurance. The income tax is a major socialist disaster.

Buffet is not looking out for the little guy.
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Kuros



Joined: 27 Apr 2004

PostPosted: Tue Jan 17, 2012 2:35 pm    Post subject: Reply with quote

ontheway wrote:
The greatest tax savings for Buffet (also Bill Gates and most of the very wealthy) has nothing to do with carried interest nor anything Buffet wants other people to pay taxes on.

The wealthiest Americans escape all taxes on unrealized capital gains.

They hold stock in a corporation, usually one they founded or joined early, and they never sell. The stock value grows, making them billionaires. They still pay no tax and report no income. Finally, they transfer their wealth to a trust fund or foundation of some kind and still pay no tax. The new holder of the wealth is a tax-free entity and the income has now escaped all taxation. And Buffet has no interest in changing this. This has been the source of nearly all of his wealth.


Yes, yes, but they are still paying 15% on realized income, instead of the 35% on the highest bracket of ordinary income, or the 24%-27% range for the top rate in Simpson-Bowles.

Quote:
The only way to fix the tax system and make it fair is to make all income and property tax free for everyone. Then every American will have the same favorable treatment as Buffet.

We should then tax consumption - capped at 10% for all levels of government combined - everyone pays the same, no exceptions.


What a disaster. The mega-rich would be taxed even less, and the shortfall for government services would be massive. You're talking about slashing the Federal budget by more than half.
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visitorq



Joined: 11 Jan 2008

PostPosted: Tue Jan 17, 2012 2:53 pm    Post subject: Reply with quote

Kuros wrote:
What a disaster. The mega-rich would be taxed even less, and the shortfall for government services would be massive. You're talking about slashing the Federal budget by more than half.

As it should be. All that money and resources wasted on government would be freed up for other things that people actually want/need, and new jobs would be created accordingly. It would be painful at first, but then so is cancer treatment... It could be done gradually, so as not to topple the whole house of cards at one fell swoop.

As for the mega-rich, they would not retain their privileged position without government corruption propping them up in the current crony/monopoly system. Taxation is not going to solve anything anyway (it is literally impossible to pay off the black hole of debt held by the government); rather reduced government expenditure and increased free market competition (to make goods and services cheaper for people, and increase our purchasing power) is the solution to pretty much everything.
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Kuros



Joined: 27 Apr 2004

PostPosted: Tue Jan 17, 2012 3:45 pm    Post subject: Reply with quote

visitorq wrote:
Kuros wrote:
What a disaster. The mega-rich would be taxed even less, and the shortfall for government services would be massive. You're talking about slashing the Federal budget by more than half.

As it should be. All that money and resources wasted on government would be freed up for other things that people actually want/need, and new jobs would be created accordingly. It would be painful at first, but then so is cancer treatment... It could be done gradually, so as not to topple the whole house of cards at one fell swoop.

As for the mega-rich, they would not retain their privileged position without government corruption propping them up in the current crony/monopoly system. Taxation is not going to solve anything anyway (it is literally impossible to pay off the black hole of debt held by the government); rather reduced government expenditure and increased free market competition (to make goods and services cheaper for people, and increase our purchasing power) is the solution to pretty much everything.


Well, as much as I would welcome reduction in the Federal power, immediately cutting government expenditures in half would be dangerous. If we were to enact a 20-year spending freeze, and each year cut Federal spending by 2%, you could halve the size of the government. But cutting social benefits to people in a depression is cruel. The military could get cut down to size, however.
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visitorq



Joined: 11 Jan 2008

PostPosted: Tue Jan 17, 2012 5:16 pm    Post subject: Reply with quote

Kuros wrote:
Well, as much as I would welcome reduction in the Federal power, immediately cutting government expenditures in half would be dangerous. If we were to enact a 20-year spending freeze, and each year cut Federal spending by 2%, you could halve the size of the government.

Agreed. I would definitely have to be done incrementally.

Quote:
But cutting social benefits to people in a depression is cruel. The military could get cut down to size, however.

I would certainly prioritize massive cuts to the military budget over cuts to social benefits. There's not much point in expecting poor people to go out and support themselves by finding work when there are no jobs to be had... But they would have to be weaned off it eventually as the economy reorganized itself and more jobs became available.
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ontheway



Joined: 24 Aug 2005
Location: Somewhere under the rainbow...

PostPosted: Wed Jan 18, 2012 8:25 am    Post subject: Reply with quote

Kuros wrote:


Quote:
The only way to fix the tax system and make it fair is to make all income and property tax free for everyone. Then every American will have the same favorable treatment as Buffet.

We should then tax consumption - capped at 10% for all levels of government combined - everyone pays the same, no exceptions.


What a disaster. The mega-rich would be taxed even less, and the shortfall for government services would be massive. You're talking about slashing the Federal budget by more than half.



Yes. Actually, it would cut the Federal budget by over 3/4 and it should be cut more - and NOT gradually.

This would benefit the poor the most, so don't try using that argument.

The first element in slashing the fat of the government is to cap government pay at a maximum of $100,000 per year - or lower. All government workers would take a pay cut - 10% at the lowest income levels and rising from there. This would take care of a large portion of the reduction.

Second, we must recognize that Social Security is just a failed welfare plan - there are no real trust funds - and the system if it were a real retirement plan has been bankrupt since the mid 1950s. It's the biggest Ponzi scheme in the history of the world.

So, we eliminate SS payments to high income individuals - over $100,000 income get nothing. A 10% cut at the bottom and rising from there for the rest.

We also announce the end of SS benefits for anyone under age 50. Start saving to pay your own way.

Third, we end the empire and bring the troops home as quickly as possible and slash military spending and abolish the direct and indirect foreign aid.


These three changes will cut the budget in half, and then we can look at the rest. Plenty of smaller items to eliminate.


Eliminating taxes on income and property, eliminating minimum wages and eliminating licensing laws will make it possible for everyone who wants a job to go to work, work as many hours as they want, to keep everything they earn and to invest and build their wealth. This will help the poor the most.
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Kuros



Joined: 27 Apr 2004

PostPosted: Wed Jan 25, 2012 6:09 pm    Post subject: Reply with quote

The Daily Show catches up to this thread:

(http://www.thedailyshow.com/watch/tue-january-24-2012/indecision-2012---i-know-what-you-did-last-quarter)
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Kuros



Joined: 27 Apr 2004

PostPosted: Sun Apr 14, 2013 8:42 am    Post subject: Reply with quote

Obama wants Mitt Romney's favorite tax to die

Quote:
President Barack Obama’s new budget proposal, released Wednesday, would raise $16 billion in revenue over 10 years by getting rid of one of the ways millionaires and billionaires pay lower taxes than their secretaries. It's called the carried interest tax break, and it allows the wealthy to pay a lower rate on some of their income. But ending the carried interest exception will be tough, and not just because a budget compromise with Republicans is unlikely: Previous proposed legislation to kill the tax break was riddled with loopholes.

The carried interest tax break works by letting private equity and hedge fund managers treat some of the income they earn from managing clients' portfolios as if they had invested it themselves. That allows folks like Mitt Romney to pay a 20 percent investment income tax rate on their money management fees, instead of the normal 39.6 percent tax rate on earned income. This special rich person perk costs the government some $1.3 billion a year. That's one reason why Obama and many Democrats slam the tax break as unfair and have targeted it for repeal.

"There continues to be no rationale whatsoever for people to pay at a vastly lower tax rate when they are managing other people’s money," Rep. Sander Levin (D-Mich.), who has introduced all of the carried interest legislation in past years, said in an email. "This is an issue of fairness that we should address as we seek a balanced approach to deficit reduction that involves both additional revenues and spending cuts."


This thread shows how poorly prior legislation to tax carried-interest at normal rates has fared.

Quote:
"The carried interest lobbying effort has been a scandal," [Steve] Rosenthal says.

A staffer on the House Ways and Means Committee that Levin serves on says they "are taking the comments of Steve and others into consideration as we continue to hone the language in the draft."

"I don't think anyone can defend the phenomenally low rates that private equity managers have reaped over the years," Rosenthal says. "But how you're going to try to deny it to them is hard." Even if Congress does eventually end up including legislation to ax the tax break in a budget deal, "we may enact something that no one understands. A mumbo jumbo statute," he says. "That is likely."


There's your standard.
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Kuros



Joined: 27 Apr 2004

PostPosted: Mon Dec 25, 2017 9:17 pm    Post subject: Reply with quote

Carried Interest Rule; GOP Tax Legislation Edition

Fox News: https://youtu.be/yNYqtj5xGWs?t=55

ProPublica: https://www.propublica.org/article/carried-interest-reform-is-a-sham

Quote:

In November, after being criticized because their tax legislation didn’t deal with carried interest, House and Senate Republicans addressed the problem. Sort of, but not really.

Their “reform” doesn’t require proceeds from “profits interests” to be treated as ordinary income — which would be real reform. Rather, the legislation requires that investments be held for more than three years to get capital gains treatment, rather than the current period of more than one year.

That’s pretty much a joke, given that venture capital and buyout funds — whose managers are the biggest beneficiaries of the “carried interest” loophole — typically hold investments for well over three years before selling them. This legislation has the appearance of reform, but not the substance.

. . .

As best as I can tell from Trump’s financial filings and his leaked 2005 federal income tax return, he doesn’t play the carried interest game. So even if carried interest were to be reformed properly, it wouldn’t cost him anything.
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