As the plot thickens around the tax returns of presidential candidate Willard Mitt Romney, the term “carried interest” will be bandied about more often. It describes a tax break for the ultra-wealthy economic elite not available to such firms as John’s Local Carpentry or Lewis’s Landramat.
One of the best explanations comes from The Atlantic:
“Managers of private equity firms like Romney are often paid under an arrangement in which they receive both a set fee for their management, as well as a share of the profits that the firm makes for investors. While their management fees are taxed at normal income tax rates, the share of investor gains that go to a private equity manager (called “carried interest”) are treated as capital gains, and thus taxed at a top rate of 15 percent. (Hedge fund managers and partners in real estate ventures also benefit from receiving carried interest.)
The argument for a lower capital gains rate is that it encourages investment. Whether that’s true or not, private equity managers are allowed to pay the capital gains rate on the profits they make managing someone else’s money, not for any risk that they take themselves. Treating carried interest as capital gains is an unjustifiable tax break that needs to be eliminated.” (emphasis added)
It’s the part after “not” that should be of interest to most taxpayers. If the private equity managers were risking their own treasuries in the investment process, then the capital gains taxation rate might make a little sense. However, their profits are made by managing Other People’s Risk — not their own.
But, but, but…if carried interest were to be taxed as the income it is wouldn’t private equity investment dry up, blow away, and depart the investment field? Not likely. The actual sources of the wealth under management, wealthy individuals, pension funds, etc. still need to put their funds somewhere in order to earn interest.
But, but, but…doesn’t private equity investment represent the best form of capitalism because of the “sense of ownership” implied? Not likely. Remember, the entire purpose of firms like Bain Capital, and 19 other extremely lucrative operations, is to get the best return FOR THE INVESTORS. Not the company operations, not the company mission, not the company’s infrastructural environment — BUT FOR THE INVESTORS.
If the needs of the investors are absolutely paramount, then employee benefits are of little or no interest, employee wages and salaries are of little or no interest, the tax environment is of no interest except to see taxation reduced, and the Investors can easily expect the Little People to carry the burden for providing local services like police and fire protection while their concerns (earnings) are held inviolable. This is a recipe for short term gains and long term losses.
And, and, and, what do we call it when one sector of the economy — which is only concerned with the manipulation of financial paper and the earnings thereon — becomes the raison d’etre for the entire economy? Financialism.