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View Diary: Money-saving Suggestions for Congress to Consider (96 comments)

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  •  I'll rec this diary if (0+ / 0-)

    you can correctly explain what a "carried interest" is, how it's created, who is eligible to own them, and what portions of it are already taxed as ordinary income.

    14.  Tax carried interest at the same level as earned income.
    And no, I'm NOT a rightwing troll.

    My Karma just ran over your Dogma

    by FoundingFatherDAR on Thu Jan 17, 2013 at 11:20:29 AM PST

    •  There is a very good discussion of that by (0+ / 0-)

      the Brookings Institution and the Urban Institute here.  To quote a bit from their site:

      Carried interest is a right that entitles the general partner (GP) of a private investment fund to a share of the fund’s profits. Typically, the GP contributes 1 to 5 percent of the fund’s initial capital and commits to managing the fund’s assets. In exchange, the GP receives an annual management fee of 2 percent of the fund’s assets plus a "carried interest" of 20 percent of the fund’s profits that exceed a certain "hurdle" rate of return. The individual partners of the GP, not the GP itself, are taxed on these payments.

      Carried interest constitutes on average about one-third of the payments that GPs receive, and the management fee the remainder. Under current law, the management fee is taxed like wage and salary income, with a top tax rate of 35 percent, whereas the carried interest is taxed as investment profit, which often faces a lower tax rate. In particular, any portion of the carried interest that represents long-term capital gains of the fund is taxed at a top rate of 15 percent. Many commentators believe it would be fairer and more efficient for carried interest to be taxed like wage and salary income, but others disagree.

      To simplify, carried interest is the part of the profits from an investment fund that its investment manager receives in excess of the funding that the manager puts into the partnership.  This is generally between 15% and 25% of the fund's profits, but can be as high as 50%.

      The linked article goes on to discuss the issues with taxing carried interest, both for and against.  It's a pretty interesting read.  From this quote:

      The Joint Committee on Taxation has estimated that taxing the compensatory share like wage and salary income would raise about $15 billion in revenue over five years.
      it's clearly not a huge source of income but to me it's partly an issue of fairness, since this is the compensation the manager receives for performing her/his job.  Apparently about a third of Mitt Romney's income in 2010/2011 was from carried interest, on which he paid a very low tax rate.

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