Excerpted from Whitney Tilson’s email to investors.
1) I don’t win many friends among my fellow hedgies by continuing to say this (I’ve been public with my views for years), but the carried interest loophole that we all benefit from is absurd, outrageous and unfair. Thus, it’s good to see these developments, even if I have to hold my nose about the source (Trump, who has used every tax dodge in the book).
Give Donald Trump credit for this: The Republican presidential candidate has done more to put a stake in the heart of the carried-interest tax loophole in the last month than the Obama administration has in the last six and a half years.
That’s not for want of trying by the White House. President Obama has proposed closing the loophole in his budget proposals. He has tried to get rid of it as part of bargains on tax reform and budgets. There have also been efforts to kill it in Congress.
Yet it lives on, lining the pockets of billionaire financiers and hedge fund and private equity managers by giving them preferential tax treatment on a large portion of their compensation.
To understand the unfairness of this loophole, consider a guy who sells shoes in a department store who earns a base salary of $40,000 plus gets a $10,000 bonus at the end of the year based on how many shoes he sells. Obviously, both the $40,000 and the $10,000 are taxed as regular income.
Now let’s consider a hedge fund or private equity/venture capital manager with a $1 billion fund who, after collecting 2% ($20 million) in management fees, earns a 15% return ($150 million) for his investors in a particular year. Of this, he takes 20% as his promote/performance allocation ($30 million), which is no different than the shoe salesman’s performance-based bonus and should be taxed the same way: as the regular income that it is (generally 39.6% instead of 23.8%).
The fact that the manager has some of his own money invested in the fund is irrelevant. That capital account is simply treated like any other LP’s, receiving a K-1 that reflects interest and dividend income and realized short- and long-term gains. Nor is it relevant that hedge Funds and private equity funds might be good for our markets or economy. The statement from the Private Equity Growth Capital Council that closing this loophole could spell the end of “decades of America’s commitment to fostering entrepreneurial risk-taking” is laughable.
I don’t begrudge investment managers for their success – I celebrate them and try to learn from them! Nor am I a socialist or engaged in class warfare against myself and my friends – but I am concerned that this kind of nonsense makes it easier for others to wage class warfare against us.
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