Afternoon Must-Read: Victor Fleischer: How Obama Can Increase Taxes on Carried Interest

Victor Fleischer: How Obama Can Increase Taxes on Carried Interest: “President Obama could change the tax treatment of carried interest…

…with a phone call to the Treasury Department. But the White House will need a precise understanding of the regulatory landscape to make a change that is fair, easy to administer, and will hold up in court…. Managers of private equity, venture capital and other private investment funds receive a share of the profits, known as carried interest, in exchange for the services they provide. Under current law, the income they earn is often taxed at the long-term capital gains rate of 20 percent…. less than half the rate most would pay if their income were taxed as ordinary income…. Every year, the Obama administration proposes a budget that would close the loophole; every year, Congress fails to act…. Fund managers… put in just 1 percent of the financial capital and reap 20 percent of the profits…. So one may reasonably question whether the fund manager really ought to be taxed as a partner and not as a service provider. § 707(a)(2)(A)… directs the Treasury Department to write regulations addressing this kind of compensatory arrangement…. The Treasury has broad discretion to recharacterize transactions where the partner is not acting in one’s capacity as a partner but, rather, as a service provider. Remarkably, the Treasury has never issued these regulations in… 30 years…. If the administration should follow this path, fund managers would pay tax at ordinary rates, just like lawyers, accountants, bankers and other service providers…