What ever happened to the carried-interest tax?

The Wall Street Journal looks at that today, reporting that hedge funds and private-equity funds may be about to finally get taxed like the rest of us.

As it stands, they only get charged capital-gains tax rates on their share of their funds’ profits, even though the money’s being made (mostly) with other people’s money. That’s the “two and twenty” structure that’s common in the industry. A typical fund takes an annual fee of 2 percent of total assets under management plus 20 percent of the profit.

The question has been whether this should be treated as income or as capital gains, which are taxed at a much lower rate: 15 percent instead of 35 percent. Well, actually, there hasn’t been much question—you can’t have capital gains on capital that isn’t yours—but the industries have successfully delayed their day of reckoning through fierce lobbying.

The Journal does a good job of walking us through the policy debate and its progress, though I probably would have worded the lede differently (emphasis mine):

The “carried-interest” tax debate has re-emerged in Congress, threatening to more than double taxes on some of the country’s wealthiest individuals—private-equity and hedge-fund managers.

That makes it sound like an unfair thing when there aren’t many people who actually think that who aren’t on the industries’ payroll.

And let’s ding the Journal for that all-too-common business-press tic—misusing the word “populist”:

The issue first appeared on Capitol Hill in 2007, when investment firms were earning record profits, but died after an aggressive pushback by industry lobbyists. Since then, populist sentiment has turned against Wall Street. The carried-interest tax is also viewed by some lawmakers as low-hanging fruit as they look to rein in the soaring deficit and pay for an array of spending measures.

As Dean “William Jennings” Starkman once said, “Popular? Must Be ‘Populist.’”

But all in all it’s a good look at the issue. Here it explains the industries’ line of lobbying, which is what you might call a reach:

Private-equity and hedge-fund lobbying groups are still girding for a fight. Lobbyists have issued statements aimed at heading off a tax increase, arguing that it would stifle risk-taking by shrinking potential rewards for fund managers.

And this is a very good kicker:

“It’s amazing to me that at the same time the U.K. is imposing a 50% excise tax on bankers’ bonuses, the private-equity guys aren’t even willing to pay the usual ordinary income rate,” Mr. Fleischer said. “You would think they would recognize a fair deal when it’s offered.”
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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.