Carried Interest

PEGCC CEO Steve Judge in Letter to PEI: Carried Interest is not Ordinary Income

Carried interest is not ordinary income

Raising taxes on carried interest is contrary to the American ideal of incentivising entrepreneurship and risk-taking, writes Steve Judge.

Mitt Romney’s presidential bid has put a spotlight on private equity and the politics of the election – should he capture the GOP nomination – will continue to create challenges for the industry. After all, modern day political campaigns revolve around 30-second attack ads and ever-shortening sound bites made for cable TV. Private equity will be attacked, sometimes unfairly and often with imprecise information.

But we choose to view the increased attention as an opportunity, one that allows us to educate media, policy makers and the public about today’s private equity industry and the positive impact it has on American companies, workers, investors and the U.S. economy.

We also think it will allow us to more clearly explain the rationale behind our advocacy efforts and our strong support for policies that foster the kind of capital investment that drives entrepreneurship, economic growth, innovation and jobs.

In that spirit, we respectfully disagree with Private Equity International’s viewpoint expressed in the article “End this futile debate” that taxes on carried interest should be raised. The tax code has treated carried interest as a capital gain for more than 50 years, and here’s why.

Capital gains are taxed at a low rate to incentivise risk-taking, entrepreneurship and capital investment. The tax code, appropriately, does not distinguish between those who invest expertise to grow a business and those who invest capital. To do otherwise would be unfair and enshrine into law a policy that puts a higher value on the financial contributions of those with wealth than the contributions of vision and hard work from those who lack wealth and resources.

Private equity firms raise money from investors, including pension funds, university endowments and charitable foundations. They invest their own money alongside their investors, as well as time, energy and expertise to buy and grow companies. They typically receive an ownership stake in the fund for these investments, called a carried interest. Over time, the fund invests in, improves and sells companies at a profit. The companies are a capital asset and therefore the gain on their sale is treated as a capital gain for the owners of the fund.

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