The Homa Files

The punch lines: 

(1) “The House raises taxes on carried interest”

(2) Obama says “we’re proposing a complete elimination of capital gains taxes on small business investment” for one year.

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Ken’s Take:

(1) Oh, those poor private equity guys.  The taxation of so-called carried interest is complicated, but reduces down to the fact that private equity firms have enjoyed a massive tax break for years.  Whether that tax break has fueled innovation and growth or simply lined the pockets of the equitists is subject to debate. My view: more the latter than the former.  So, I say: go get ’em.

(2) From a personal standpoint, I favor low or no capital gains taxation.  Why not?  I have some horses in that race.

But, for the life of me, I can’t figure out how a 1-year suspension of small business capital gains taxes helps small businesses and promotes hiring. 

What appreciated assets is a typical small business going to sell in the next 12 months that would qualify for a gain?  Except for small financial firms that hold and trade securities and family farms that are passing down generationally,  I can’t figure out how small businesses benefit from this move.

Does seem that — if we have any appreciated assets — we should all become small businesses and sell them in 2010.

If somebody can explain this to me, please hit the reply button … I must be missing something.

* * * * *

Excerpted from WSJ: Zero to 35 in 24 Hours, Dec.10, 2009 

On Tuesday, Mr. Obama announced that “we’re proposing a complete elimination of capital gains taxes on small business investment” for one year.

On Wednesday, the House voted to change the capital gains rate for venture capitalists, private equity fund managers and managers of real-estate and oil-and-gas partnerships. But rather than eliminating the tax, the House more than doubled it, moving the tax rate to 35% from 15% by reclassifying such gains as ordinary income.

The new 35% rate applies to what is known as “carried interest,” which is income that only materializes if fund managers wisely invest the fund’s capital and only after other investors in the fund have benefited. Venture and private equity fund managers already pay normal income taxes on their regular salary derived from management fees. The carried interest, no sure thing, represents a capital gain on a successful investment and has therefore been taxed that way.

Some argue that partnerships should be taxed just like other corporations before money is distributed to partners. We think that’s a reasonable argument in the context of lowering the 35% U.S. corporate tax rate to something remotely competitive in the world economy. By itself, this tax increase is simply a drag on investment and job growth.

Mr. Obama now has a chance to respond with similar speed and show his commitment to lower capital-gains taxes on start-up investments. A Statement of Administration Policy condemning the House bill would discourage the Senate from making a similar mistake.

Full article: 
http://online.wsj.com/article/SB10001424052748704240504574586274278223030.html?mod=djemEditorialPage

This entry was posted on December 10, 2009 at 7:59 am and is filed under Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.