An Analysis of the "Carried Interest" Controversy
End Notes
[1] University of Illinois Law Professor Victor Fleischer has described carried interest as “the single most tax-efficient form of compensation [i.e. the form of compensation that is taxed most lightly] that is available without limitation to highly-paid executives.” Victor Fleischer, “Two and Twenty: Taxing Partnership Profits in Private Equity Funds,” University of Colorado Law Legal Studies Research Paper No. 06-27, revised June 12, 2007, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=892440.
[2] One important exception is when activities generate sizable social costs or benefits. For example, many economists think it would be efficient for the federal government to impose a tax on carbon emissions.
[3] “The Taxation of Carried Interest,” http://gregmankiw.blogspot.com/2007/07/taxation-of-carried-interest.html.
[4] Transcript of Senate Finance Committee Hearing, “Carried Interest: Part I,” July 11, 2007, obtained through Federal News Service.
[5] The $1 trillion figure is given in: Peter Orszag, “The Taxation of Carried Interest,” Testimony Before the Committee on Finance of the U.S. Senate, July 11, 2007, http://cbo.gov/ftpdocs/83xx/doc8306/07-11-CarriedInterest_Testimony.pdf. In addition, hedge funds hold another $1 trillion in assets, and hedge fund managers also typically receive a portion of their compensation in the form of carried interest. However, hedge funds frequently hold investments for periods of less than one year, a period too short to qualify for the reduced tax rate for long-term capital gains. Thus, a much smaller share of the income of hedge fund managers — as compared to the income of private equity fund managers — is currently taxed at the 15 percent long-term capital gains rate; a larger share is already taxed as ordinary income.
[6] Tom Bawden, “Warren Buffett Says Rich Should Pay More Taxes,” London Times, June 27, 2007, http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article1995931.ece.
[7] Steven N. Kaplan and Joshua Rauh, “Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?” National Bureau of Economic Research Working Paper No. 13270, July 2007, http://www.nber.org/papers/w13270.