Carried Interest Taxation

The Joint Committee on Taxation, a bipartisan, bicameral committee charged with many aspects of the tax legislative process, has issued a report analyzing the Federal income tax issues relating to the taxation of partnership carried interests.  This report, along with the Senate Finance hearings scheduled to begin tomorrow morning, is an indication that the legislative process has left the station and that the bills currently before the House and Senate are getting a lot of consideration.

We'll have more to say tomorrow on the contents of the report, and we'll begin tonight to discuss the history of the tax fight on carried interests.

John Edwards becomes the first Democratic Presidential candidate who has voiced a position on the proposed carried interest legislation.   Mr. Edwards, who has worked for Fortress, believes that the rate gap for fund managers should be narrowed, but not eliminated.  He promises details of his proposal in the near future.

Senator Baucus announced yesterday that the Senate Finance Committee would hold initial hearings on the Blackstone Bill on July 11.  The witness list will be released later.  Stay tuned.

The Private Equity Council has fired back in the debate over the taxation of carried interests.  Its message-taxing fund managers will adversely impact pension plan participants.  We're not sure that this argument by itself will win the day, because we're not sure that the public will embrace the top tier of fund managers as champions of working people.   Also, it is not settled that the tax increase on fund managers will be passed on to investors.  However, the argument will resonate with those who believe that any tax increase on any segment is a negative. 

On a more relevant note to the debate, Kevin Hassett points out some of the dangers of raising taxes on selective sectors of the economy.

Due to the holiday this week, our entries will be relatively light.  However, beginning on July 9, we'll be chronicling the history of the tax rules governing carried interests.

Och-Ziff has announced a $2 billion IPO.  The structure is the same publicly traded partnership structure used by Blackstone and Fortress.  The issuers seem bullish on the unlikelihood of carried interest taxation legislation being enacted, which might make the proponents of such legislation more determined.  The back and forth will continue, we predict.