Monday, May 24, 2010

More on the "carried interest" scandal

To their credit, Congressional Democrats have proposed legislation greatly reducing the ability of investment fund managers to get away with paying a 15% capital gains rate income tax on their sometimes billion dollar earnings.

This morning the Wall Street Journal published an attack on this proposed legislation. Unfortunately, the article is available on-line only to subscribers to the on-line WSJ, so I cannot direct you to it here.

I have sent a letter to the editor responding to this article. It follows:

To the editor:

John Rutledge’s defense of allowing investment partnership managers to pay a 15% federal income tax on their often huge compensation is not lacking in nerve.

Rutledge points out that no special loophole was created to allow them to get away with this, since it just “reflects two long-accepted tax practices.” But the very fact that these “practices” allow managers who make a billion dollars a year to pay a much smaller percentage of their income than do the custodians who clean their offices suggests that these practices should no longer be accepted.

This injustice is just one more example of the pernicious gamesmanship encouraged by taxing income from different sources at different rates in the first place. The proposed legislation that Rutledge criticizes does not go far enough. Congress needs to tax all personal income----salaries, dividends, capital gains, you name it!----at the same rate. While this might produce adverse economic effects in the short run, in the long run it would make our economy more efficient by eliminating much complexity and releasing a lot of accountants and tax lawyers to more productive activities.

Paul F. deLespinasse, Ph.D.

Corvallis, Oregon

A version of this letter appeared in the Wall Street Journal on May 28, 2010.

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