Monday, March 15, 2010

Horse-and-Buggy in a Formula One World

With the 2010 Formula 1 season getting underway this past weekend in Bahrain, the line near the end of this article in The New Yorker seems timely.

Managers of a typical private equity fund "usually pay only long-term capital gains—even though they put up hardly any of the fund’s actual capital, most of which comes from outside investors." 

"A general principle of good taxation is that similar jobs, and similar kinds of compensation, should be taxed the same way..."

"But the carried-interest tax break upends this rule. If you manage money for a mutual fund or a public company, you pay regular income taxes; do it for a private fund, and you pay capital gains."

'Simple Ventures'
"...when the law governing partnerships was passed, back in 1954, the goal was to make it easier for people to run what one law professor has termed 'simple ventures.' No one imagined that the law would end up covering an industry that manages trillions of dollars in assets, and would cost the government billions in tax revenue."

The article closes with the following:

"Too often, we're using horse-and-buggy laws to deal with a Formula One world. We shouldn't be too surprised when we get run over."

Check out the full article.


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