![\"pe-explained\"](\"https:\/\/sites.dwrl.utexas.edu\/liberrimus\/wp-content\/uploads\/sites\/28\/2016\/09\/PE-Explained-300x221.jpg\")
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The amount that each general partner takes home out of this amount of carried interest is currently taxed at the lower capital gains rate (maximum of 20%) rather than the higher income tax rate\u00a0 (maximum of nearly 40% at the federal level).\u00a0 Many argue that this constitutes an unfair loophole in the tax code.\u00a0 Additionally, the Treasury Department has estimated that taxing carried interest as income will raise about $1.8 billion in additional tax revenues each year, revenues that can be spent on public services.\u00a0 I argue, however, that doing so would violate the principle of maximizing utility<\/em>.<\/p>\n Even if the tax code is inconsistent in the way it treats carried interest (which is itself debatable), such inconsistency is only worth remedying through legislation if the $1.8 billion increase in annual tax revenue would benefit society more than the resulting decrease in private investment (and potential outflow of competent fund managers) would harm it.<\/p>\n Private equity and venture capital funds are critically important to business development.\u00a0 When the infusion of capital into a business allows it to survive and expand, everyone is better off for it \u2013 a better business will be more valuable and provide its investors with a greater return while at the same time bringing new products and services to market and creating jobs.\u00a0 Additionally, specialized investment firms are often the only option for smaller or distressed companies who need to raise capital but cannot go to traditional lenders like banks because they\u2019re deemed too risky.\u00a0 The capital gains tax rate is lower than the income tax rate to encourage productive investment and economic growth.\u00a0 Extending this tax break to general partners who risk both their own capital and their time and expertise<\/em> in such ventures is critical to ensuring that the most skilled managers in the industry have the maximum incentive to work to identify potential \u201cdiamond in the rough\u201d businesses.<\/p>\n $1.8 billion a year could pay for a lot of social services, services that would undoubtedly make a lot of people happier.\u00a0 \u00a0Yet while it is difficult to quantify, the encouragement of successful capital allocation and meaningful risk-taking likely generates far more widespread and lasting happiness by fostering entrepreneurial innovation and creating new jobs, products, and markets.<\/p>\n Sources:<\/p>\n http:\/\/www.nytimes.com\/2016\/07\/16\/business\/dealbook\/the-carried-interest-loophole-what-loophole.html<\/a><\/p>\n http:\/\/www.ibtimes.com\/what-carried-interest-tax-loophole-2100059<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Do millionaires and billionaires who run private investment firms really deserve to pay a lower tax rate on the slice of returns they generate?\u00a0 My answer \u2013 who cares whether they deserve to?\u00a0 The highest principle we should adhere to … Continue reading