TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, September 20, 2007

Fleischer & Weisbach Debate Private Equity Tax Reform

Victor Fleischer (Illinois) and David Weisbach (Chicago) debated How Should Private Equity Fund Managers Be Taxed? The Carried Interest Debate yesterday at the American Enterprise Institite:

Earlier this year, an article by Victor Fleischer [Two and Twenty: Taxing Partnership Profits in Private Equity Funds, 83 NYU L. Rev. ___ (2008)] a professor now at the University of Illinois College of Law, helped turn a technical aspect of partnership taxation into the most contentious tax policy issue of 2007. Members of Congress, the George W. Bush administration, the 2008 presidential candidates, academic commentators, and the media have now joined the debate about what tax rate should be applied to “carried interest,” a major component of the compensation of private equity fund managers. Carried interest is the managers' share of the profits from the fund’s investments. Under current law, managers are taxed on much of the carried interest at the 15% rate used for dividends and capital gains rather than at the top 35% percent rate used for ordinary income. Congress is now considering a proposal to tax the carried interest as ordinary income. Any such change could also impact other industries, including real estate and oil and gas.

Supporters of the pending proposal [including David Weisbach of the University of Chicago, author of The Taxation of Carried Interests In Private Equity Partnerships, 116 Tax Notes 32 (7/31/07), funded by the Private Equity Council], argue that carried interest is a form of earnings that managers receive for their work and therefore should be taxed at the same rates as wages. They contend that it is unfair for these high-income managers to pay a lower tax rate than middle-class workers. Opponents of the proposed legislation maintain that the current tax rules are appropriate because carried interest is no different than other dividends and capital gains. They warn that tax changes in this area could harm investment and economic growth. Various alternative reform plans have also been suggested.

Alan D. Viard, a resident scholar at the AEI, was the third panelist. Kevin A. Hassett, director of economic policy studies at the AEI, was the moderator.

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