Wednesday, August 1, 2007
Interesting post by Victor Fleischer (Illinois): The Academic Consensus on Carried Interest:
While the political issue is very much up in the air in DC, even among some Democrats, it's safe to say that there is an academic consensus among tax profs on the issue: the status quo is problematic, and it should be addressed. ... We may not all agree on exactly what to do about the tax issue -- (1) tax the grant of a profits interest at ordinary income rates, (2) tax the returns at ordinary income rates at the back end, or (3) a hybrid approach (like my Cost of Capital or loan approach), or (4) even repealing the capital gains preference altogether. Some of us would apply the changes to all partnerships, others would limit it to smaller partnerships. But as more tax academics weigh in, it's clear that there's a consensus that this is an issue worthy of legislative action. There's myself, Mark Gergen (Texas), Joe Bankman (Stanford), Dan Shaviro (NYU), Lily Batchelder (NYU), Noel Cunningham (NYU), Darryll Jones (Stetson), Alan Auerbach (Berkeley), Chris Sanchirico (Penn), and many others -- everyone agrees that there's a case for reform. And this isn't a bunch of lightweights; nor is it a group that generally believes in higher taxes, or more redistribution. We tend to believe in a broader base and lower rates, and that's one way of viewing carried interest reform. There are really few academic voices in dissent; the most prominent voice in dissent had his research sponsored by the Private Equity Council [blogged here], so I'm not sure he counts on this issue.
What's remarkable about all this is that we tax profs are not a group that agrees on much -- there's division in the tax academy about income tax vs. consumption tax, corporate tax vs. full integration, territorial vs. worldwide taxation, whether to have an estate tax.
See also Linda Beale (Wayne State), Partnership Carried Interests: The Weisbach Study