Carried tax plan ignites debate

Senate hearings on taxing-carried interest begin tomorrow, but reports predicting its impact are out now.
SEP 05, 2007
The Senate Finance and House Ways and Means committees won’t hold their hearings on taxing carried interest until tomorrow, but the reports questioning the tax hike and the impact are already out. In a report from the U.S. Chamber of Commerce, Dr. John Rutledge, a global economist and chairman of Rutledge Capital, said that higher taxes on carried interest would cut the amount of long-term capital available to the U.S. economy and harm the nation’s ability to compete globally. The impact of a carried interest tax hike would hit numerous industry sectors, including real estate and arts and entertainment, he said. “In 2004, there were 15.5 million investors in partnerships,” he said in a conference call today. “These are not hedge funds. Hedge funds have captured all the headlines because no newspaper reader likes them.” Additionally, the negative effect would hit pension funds and beneficiaries, Dr. Rutledge said in his paper. Returns and after-tax gains would fall for limited and general partners, as would the value of portfolio companies. The 20 largest pension funds, which includes plans from California and New York, have $111 billion in private equity investments and 10.5 million beneficiaries—they, too, would lose from a tax hike, he said. Dr. Rutledge only released the first phase of his study today, detailing the broad impact of the tax raise. A second part, detaling the economic effect on selected sectors, will be published in six weeks. Meanwhile, a report from the Joint Committee on Taxation, released yesterday, questions the hit on pension funds. “The commercial arrangements between management firms and the investors in the funds they manage are determined by market forces,” the paper said. “If fund managers could demand a larger share of the yield of the investment fund, they would have already done so without regard to their tax liability.” Another paper by the JCT addressed the argument that higher taxes would drive private equity funds and investors offshore. “The United States generally taxes the worldwide income of its residents, and anti-deferral rules generally restrict the ability to defer U.S. taxation by deriving income through foreign corporations,” the paper said. “Thus, U.S. resident individuals generally do not have a U.S. tax reason for relocating abroad to manage alternative asset funds.”

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