Carried interest should be treated as ordinary income, and not as a capital gain, according to a paper by Steven Rosenthal, visiting fellow of the Urban-Brookings Tax Policy Center (TPC).
TPC, an independent tax analysis group with the ear of policymakers, was formed in 2002 from tax experts from the Ronald Reagan, George H. W. Bush and Bill Clinton administrations and is led by former member of the President’s Council of Economic Advisers, Donald Marron.
Rosenthal’s paper argues that private equity firms are active enough to be classified as a trade or business as their activities are “continuous, regular and substantial.” The large fees and profits firms command should also “readily satisfy the tests for a trade or business”, according to Rosenthal.
“For too long, this income has simply been considered gain from the sale of stock and treated as capital (and immense profits have been taxed at reduced rates). On closer examination, these profits arise from the everyday operation of a business and should be treated as ordinary,” he concludes.
This view is at odds with the US private equity industry’s trade body, the Private Equity Growth Capital Council (PEGCC).
Last week PEGCC’s president and chief executive, Steve Judge, told delegates at Private Equity International’s CFOs and COOs Forum 2013 in New York that it continues to lobby congress to maintain the status quo. The strategy has involved escorting House of Representative members on visits to portfolio companies in their districts (or meet GPs themselves) to demonstrate private equity’s value to the economy.
The trade body’s efforts come at a time when Congress is considering ways to reduce deficit spending and potentially raise the nation’s debt ceiling, which currently stands at $16.4 trillion. Many Democrats argue that taxing carry under higher ordinary income rates would help reduce the nation’s deficit, which in recent years continues to run past the trillion-dollar mark. But Judge said this change would only be a drop in the ocean, reducing the deficit by an estimated $13 billion over 10 years.