TaxProf Blog

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

Saturday, February 28, 2009

Eliminating Capital Gain Treatment of Private Equity

Shrilaxmi S. Satyanarayana (J.D. 2008, St. John's) has published Note, Tax Equality: Eliminating the Low Effective Marginal Tax Rates for Private Equity Professionals, 82 St. John's L. Rev. 1589 (2008).  Here is the abstract:

The ability to translate ordinary wage income into long-term capital gains income can result in a significant reduction in a taxpayer’s overall tax liability due to the significant differential in the marginal tax rates for ordinary income and long-term capital gains income. While reclassifying income in this regard is beyond the control of most taxpayers, certain individuals employed in the private equity and venture capital sectors are able to achieve such a transformation by taking advantage of partnership tax provisions that allow income earned by the partnership to retain the same treatment it receives when earned at the partnership level, when it is taxed at the individual partner’s level. This Note examines the case law and Internal Revenue Service policies that have allowed certain partners in private equity and venture capital funds to re-categorize their income from ordinary income into long-term capital gains. The Note also considers other segments of the Internal Revenue Code that treat stock-based compensation as ordinary income and argues that in the interest of fundamental fairness, the private equity and venture capital professionals’ compensation should likewise be treated as ordinary income.

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Yes -- taxing ordinary income about 300% higher than capital gains has always been a crock. Tax capitals like we tax ordinary income. Let the market sort out which is more effective.

Ordinary income -- such as self employed, small business -- create jobs and provides services. Why they hello are they taxed up to 300% higher (when you figure FICA for self employed).

I made capital gains from stocks -- and I invested in Chinese stocks, Canadian mining stocks. I bet AGAINST US jobs. I didn't create any jobs with my stock purchase.

The huge myth no one seems to mention -- is that capital gains exists as a term in order to screw the working people. If you REALLY want to help the economy -- help the ordinary income crowd. The workers, the self employed.

Sure, maybe some capital gains from stocks does create a job. But much capital gains does NOT create jobs. In fact, you can make capital gains by DESTROYING jobs too.

We have punished ordinary income in this country -- are rewarded bullship. We rewarded leverage buy outs -- we rewarded stock manipulation, naked shorts, etc. At every point we taxed the ordinary income folks far higher -- and the ordinary income folks were the ones actually creating real jobs. Providing real services.

Your local plumber, doctor, lawyer, tree surgeon, house painter, the guy that poured your driveway, had to pay very high taxes on money he worked for. Why should some guy who makes money on shorting US stocks get to pay far lower taxes than the hard worker who really provides jobs?

Tax capital gains like we tax ordinary income. Let the market work.

Posted by: Mark | Feb 28, 2009 4:18:27 PM