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serves While the controversy surrounding carried interest has existed for some time, it has faced increasing media scrutiny since the last presidential election when it surfaced that Mitt Romney paid taxes of $1.9 million on $13.69 million in income in 2011, an effective 14.1 percent rate<ref name = "mitt" />. Perhaps in response to the media and public uproar, the American Taxpayer Relief Act of 2012 raised what was then a capital gains tax of 15 percent to join 20 percent and was signed into law by President Obama on January 2, 2013<ref name = "wiki" />. In the incentives aftermath of the general partners Great Recession, being akin to those "hedge-fund guys" is politically precarious. It wouldn't be surprising if the current election's focus on increasing the capital gains tax had something to do with Romney's blunders. Curious about the interests future of the limited partners by providing performance-based compensation for capital gains tax after the general partners. The standard carried2016 elections? See our 2016 Candidates' Proposed Tax Reforms Post!
Carried Interest Debate (Blog Post) (view source)
Revision as of 16:03, 10 June 2016
, 16:03, 10 June 2016no edit summary
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 profit from whatever stake they might have in the fund (typically no more than 5 percent)they might have in the fund. 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" />. Those in favor of a low capital gains tax believe that a higher rate would reduce incentive for general partners to take risks and this lack of incentive would then discourage innovation and efficiency in markets.
==References==
<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] V. Fleischer, '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>
<ref name = "mitt">[https://www.washingtonpost.com/politics/decision2012/romney-earned-nearly-14-million-in-2011-paid-141-percent-tax-rate-campaign-says/2012/09/21/e62e5096-0417-11e2-91e7-2962c74e7738_story.html] P. Rucker, J. Yang, S. Mufson, 'Mitt Romney releases tax return for 2011, showing he paid 14.1 percent tax rate', ''Washington Post'', (Washington D.C.: September 2012)
<ref name = "wiki">[https://en.wikipedia.org/wiki/American_Taxpayer_Relief_Act_of_2012]'American Taxpayer Relief Act of 2012', ''Wikipedia'', (San Francisco) </ref>
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