Fat-cat tax break is a pure rip-off

By Jeff Schnepper

Boy, would I love to convert my ordinary income as an author, accountant and lawyer into capital gains.

But the tax law says Jeff A. Schnepper can't pay tax at the 15% capital-gains rate. So I'm drained at the top 35% ordinary-income rate, plus an additional 15.3% in Social Security and Medicare taxes.

In other words, I pay the full load. I guess I've been contributing to the wrong politicians because there are some people who get paid compensation, just like me, but they get to claim their income, called carried interest, as capital gains -- and they get huge tax breaks.

Here's my take: Carried interest is a rip-off, plain and simple.

Carried interest, technically, is the portion of the gains from a private-equity, venture-capital or hedge fund that the investment manager is allowed to keep as compensation. Typically, that's 15% to 25% of the capital gains earned by the fund. Note the key word here: compensation.

Here's how unusual this tax treatment is: If a mutual-fund manager gets to keep a percentage of gains, that's ordinary income, taxed at up to 35%. Under current law, carried interest for private-fund managers is taxed at the maximum 15% capital-gains rate. A lot of people are asking why, and, frankly, they should.

We're not talking investment income here. Carried interest is clearly compensation for services rendered. It's typical for managers in all endeavors to have some sort of performance-based compensation. Why do these special fund managers get to shave their tax rates by 20 percentage points and their tax bills by nearly 60%?

Congress has attempted to level the playing field. Under the House bill H.R. 2834, publicly traded partnerships and fund managers who are paid a share of any capital gains from the funds they control would be required to pay the higher ordinary-income tax rates on their compensation. The bill was introduced in the 110th Congress by Rep. Sander Levin, D-Mich., and co-sponsored by 22 others, including Rep. Charles Rangel, D-N.Y., the chairman of the House Ways & Means Committee.

The bill would have required investment managers at private-equity and hedge funds to pay the same tax rates as mutual-fund managers and financial advisers. But the measure never made it out of the committee and to the House floor for a vote.

Lots of big-bucks opposition

There was plenty of opposition, especially from the Private Equity Council, which includes the big private-equity players, such as Carlyle and Blackstone (BX, news, msgs).

The Access to Capital Coalition, a group of minority and female business leaders, also opposed the bill. The coalition includes RLJ Cos., whose chairman, Robert Johnson, founded Black Entertainment Television. The Private Equity Council provides some funding to the group.

"This is not a revenue grab," Iowa Sen. Chuck Grassley, the ranking Republican on the Senate Finance Committee, said of the proposed legislation. "The issue is about closing loopholes, not raising taxes."

Continued: It's all about the money

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