Private equity, taxes, and NPR

Morning Edition ran a piece this morning on tax rates on private equity carry interest. For this not familiar with the term, carry interest is the percentage of investment profits the firms partners keep, typically 20%.

While I'm a fan on NPR, sometimes even NPR falls into the trap of letting the people they are talking prattle on fact free without challenging them. Morning Edition let Representative Eric Cantor prattle on about how the attempt to close this tax loop hole is the first to raising the capital gains tax. Rep Cantor had zero evidence for this claim.

My objection to the taxation of the carry as a capital gain is that the partners of these have zero capital at risk. Modifying the tax code to restrict the capital gains rate to situations where the party claiming rate has capital at risk is an both fair and sensible. I don't support the efforts for a special private equity tax. Private equity managers should be taxed like everyone else.

The point was also made that firms would try to avoid paying tax on the carry as regular income by giving managers shares of stock in the companies they acquire. Fine with me. If the managers don't pay full market value on the stock at acquisition, that's a taxable event at regular income rates. They may do well both from a tax efficiency and an investment point of view with this strategy but they now have capital risk since they would be outright owners of shares.