Paul L. Caron

Wednesday, August 1, 2007

Abrams Dissents from The Academic Consensus on Carried Interest

Howard Abrams (Emory) dissents from Victor Fleischer's post, The Academic Consensus on Carried Interest, which I blogged earlier today:

My contribution to the discussion seems to have been lost in the shuffle (The Taxation of Carried Interests, 116 Tax Notes 183 (July 16, 2007)). And the consensus to which Victor refers seems to me to exclude almost all of the practicing bar as well as partnership tax specialists in the academy who maintain any kind of strong relationship with practitioners. That suggests to me that the practical difficulties that would be created by a change to the taxation of carried interests are significantly understated by most academics.

Not so long ago significant tax reform was lead by a joint effort of lawyers and law professors (consider, for example, the repeal of General Utilities). Now, law professors and practicing lawyers rarely speak to one another. I think it is the professors more than the lawyers who have changed and in many ways not for the better: many academics now found distasteful (almost degrading, in fact) any connection between scholarship and the actual practice of law. As a result, these academics really don’t know much about what lawyers do. In my mind, the best lawyers are as intellectual and as curious as the best academics. We ought not try to distance ourselves from such a talented group of people.

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Good post by Professor Abrams. For a more detailed discussion regarding the blinding intellectual bias in the academy in favor of higher taxes, see Richard J. Kovach, Personal and Political Bias in the Debate Over Federal Income Taxation Rates and Progressivity, 21 Akron Tax J. 1-32 (2006).

Posted by: andy | Aug 1, 2007 3:32:42 PM

Thank you Professor Abrams. Professor Fleischer's assertions, like his testimony, uses a small sampling as evidence. The outsized low-taxed gains evidenced by some large private equity and hedge fund firms ignores the fact that the vast majority of capital gains which are in part a result of efforts, rather than capital, are in favor of less affluent taxpayers. (In the corporate arena, stock options function in the same way.) Many small and medium sized businesses attract employees to help build them by giving those employees the right to participate in the earnings and the appreciation in the value of the business if it is sold. Of course, you could say that capital gains rates are only for the taxpayers who have enough capital to invest. Or you could apply the rules to a particular industry. Would that be more equitable? The most interesting proposals are those that would only change the rule for publicly traded partnerships. In that case, what the tax law would be saying is that taxpayers who have enough position and capital to be involved in the finance business in private companies can take advantage of the capital gains rates, but the broader population who might invest in a public company cannot. The changes that have been proposed so far will catch many taxpayers which were not intended to disfavor. And those with the most financial flexibility and resources will find ways to avoid the consequences.

Posted by: John Dooling | Aug 1, 2007 7:58:21 AM