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Carried interest is effectively the General Partners share of the dividend. Dividends are taxed at a lower rate than ordinary income, so this is as well. This i

• hn_throwaway_99 8y ago
  Yes, but as the parent article states, and even what is pointed out in your own link, while dividends are taxed at a lower rate, the manager is paid the lower rate on capital that is not his to begin with. That's the part that makes no sense to me. It is quite simply an incentive payment for his labor: it's income that investors pay him for his expertise, and as such should be taxed at income rates.
  • harryh 8y ago
    You & I start a company. I provide $100,000 in seed money but little actual work/time. You provide no seed money but a lot of work & time. We agree to split ownership of the company 50/50. 5 years go by. We sell the company for $1,000,000. You get $500,000, I get $500,000. Should I get to pay a lower tax rate than you?
    • hn_throwaway_99 8y ago
      Then let hedge fund managers organize their funds as equity purchases from their investors. To use your analogy, if managers were deserving of 20% of the profits, then structure it as investors own 80% and managers own 20%. Of course, that would make many hedge funds a lot less attractive for many investors. Hedge fund managers want to have their cake and eat it too.
      • harryh 8y ago
        That is (more or less) what hedge fund managers do.
        • hn_throwaway_99 8y ago
          I know they are organized as partnerships, but the managers don't really have any equity rights to the committed capital, only the profits. But I guess that's really no different than an investor with preference rights in a startup. In any case, thanks very much for your explanations, really helped me think about the issue in a different way.
          • harryh 8y ago
            Happy to help out! In any case, as I stated elsewhere(1), I'm actually not sure what I believe on this topic. I can really see it both ways. 1. https://news.ycombinator.com/item?id=17276214 https://news.ycombinator.com/item?id=17276214
    • freeone3000 8y ago
      No. You shouldn't. The person doing the actual work should be paying it as tax on labor, and the person who put up the funds should be paying it as capital gains. And obviously, capital gains should be taxed at a rate greater than labor.
      • harryh 8y ago
        That is a fine point of view, but perhaps outside the scope of the topic under discussion.
        • freeone3000 8y ago
          The parent poster is saying that carried interest should be capital gains taxable to avoid having it in the higher bracket, as it would be if it were taxed as wages. Thus, the idea that it is wages but that should be cheaper than capital gains answers the issue.
      • MR4D 8y ago
        Uh, what? You want to make it more expensive to increase productivity? (Because that’s what capital does - it gets invested to increase profits). The logical path you’re going down would replace road builders with people with spoons to move dirt around and file down rocks with spoons to put them in the ground to walk on. Seriously, if you consider the logical conclusion of your argument, we end up in madness.
        • freeone3000 8y ago
          That's nonsense. The gains of investing in a work crew still make money for capital. They still get their income. The increase in productivity is its own reward - the road gets built faster or with less labor, you're able to out-bid your competition. It makes more sense to extract money from the people who contributed money than from people who contributed labor.
          • MR4D 8y ago
            Nonsense? #1 You’ve just discouraged capital investment. #2 you’ve just agreed with my initial statement that there is a reason carried interest is taxed the way it is. If you tax capital more than labor, then by definition, carried interest is fine, because the people who pay it ARE THE PEOPLE DOING THE LABOR!! Seriously, I realize that this is an emotional topic for many people, but you have to think through the second order effects. The first effect is pretty simple, but in this case the second order impacts have all sorts of ramifications. I’m fine with people having their opinion and feeling that something is right or wrong - that’s healthy. What’s not healthy is having an opinion that is either self-contradicting, or made out of frustration. Think through the scond order effects. Harry’s gave a great exam-let that showed just one simple version. There are tons more.
    • jakelazaroff 8y ago
      This analogy doesn't work; carried interest isn't granted because of any sort of ownership stake.
      • harryh 8y ago
        That is not correct. Hedge funds and VC funds are generally organized as partnerships. The General Partners (GPs) are just as much owners as the Limited Partners (LPs).
    • deleted 8y ago
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    • thinkcontext 8y ago
      No, you have risked nothing but your time. Since you have no investment at risk you should not get preferential tax treatment meant to encourage you to do so.
      • deleted 8y ago
        [deleted]
      • harryh 8y ago
        (I think you might have inverted the "I" and "you" in my scenario making your comment a bit confusing. But I think I understand the point you were intending to make.) Why is the risking of money deserving of special tax treatment but not the risking of time?
        • thinkcontext 8y ago
          I personally don't think it is but that is the logic used to justify the capital gains tax.
          • deleted 8y ago
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    • evanpw 8y ago
      FWIW, the common rebuttal scenario goes like this: You and I earn $200k in wages, and each pay $100k in taxes. You spend your remaining $100k on a boat. I invest my $100k, and 5 years later it's worth $200k. Suppose that $100k gain is taxed like ordinary income at 50%. After taxes I have $150k, which I also spend on a boat. Without taxes, you would have had $200k to consume in year 0, but you actually got $100k; your effective tax rate is 50%. Without taxes, I would have had $400k to consume in year 5, but I actually got $150k; my effective tax rate is 62.5%. Who should pay the higher tax rate? The person who consumes their wage income immediately, or the one who defers consumption? For them to be equal, the capital gains tax rate has to be 0%.
      • harryh 8y ago
        My comment was providing a defense of preferential tax treatment for carried interest. You provided an argument for a 0% tax rate on capital gains. I'm not sure how your comment is a rebuttal to mine? Perhaps you responded to the wrong comment by accident?
        • evanpw 8y ago
          Your example seems to have nothing to do with carried interest. There's a single investor; no investment manager. The question around carried interest is whether certain types of income earned by investment managers should be classified as labor or capital income, whereas you have one person with labor income and one person with capital income, and are asking who should be taxed more heavily.
          • harryh 8y ago
            In my comment "I" am the investor and "you" are the investment manager. I'm sorry if that was unclear.
  • MR4D 8y ago
    I think harryh ‘s comment states everything I could but much more succinctly, so I’ll just second his statement.
    • harryh 8y ago
      :)
• guelo 8y ago
  If the point of lower capital gains tax rate is to incentivize risking capital then the carried interest loophole makes no sense because the noney manager isn't risking his capital. His "share of the dividend" is just another fee that should be taxed as any other income.
  • MR4D 8y ago
    If you want to discuss “fair”, I’d tend to agree with you. But taxing them while not screwing out all the other business structures that look just like this (see harryh’s example above) is damn near impossible. Which is why the exemption is in there. Figure that out and it might change. Until then, you risk screwing up all sorts of businesses that are not financial let alone hedge funds.
• deleted 8y ago
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• forapurpose 8y ago
  > the rich have been getting richer since the beginning of time That's not true and we must be careful not to accept an aristocracy (or oligarchy) as inevitable. That the wealthy will inevitably hold and consolidate power is counter to the history of democracy, a specific rejection of aristocracy, and a system which has worked the other way in country after country to great success economically and politically - great news and great hope for humanity in these times. The foundation of the U.S. is that all are created equal, and after that it's a land of opportunity where merit wins out, not inherited wealth and corruption. If by that you mean that rich have been getting richer relative to others, that's certainly not true. In the U.S. it's been true since the 1980s, but it fluctuates and in most other advanced economies the proportional difference (the disparity) is much less. If you mean that there is not downward social mobility for the rich, that's also not true. I don't have the numbers, but I've read about research that overall social mobility (up and down) is significantly less than it was before Reagan. There's also the old American family story: Rags to rags in 3 generations. More concretely, the U.S. used to have higher taxes on the high income, and more importantly, a (much higher?) estate tax: Inherited wealth is not merit, but effective aristocracy. That said, I don't know the inter-generational overall trends of wealthy families. (Or maybe the parent means something else.) EDIT: Some clarification + the last sentence
  • extradego 8y ago
    The idea of democracy as a “rejection of aristocracy” has been well discredited for centuries now. The topic of discussion here is not “social” but economic mobility. Let’s not mix them up so carelessly. Economic mobility is a measure of ability, or potential, not concrete events. To discuss “downward” economic mobility is to imagine wealth being forced upon these folk.
  • MR4D 8y ago
    I’ll pick out one point that you seem to miss - when the US taxed the heck out of people with high incomes, you still had people like Howard Hughes, Warren Buffet, and John Paul Getty becoming even richer than they were before. So yes, the rich get richer, and high taxes do not stop that (but present the illusion that it stops ). I’ll gladly admit I’m wrong if you can disprove my three simple examples. Last I hexked, they were R I C H.