I wrote a few weeks ago about the debate on carried interest that has been waged in congress and is now being waged on the more erudite media outlets such as AskDong. Before we go any further, I just want to inform people what my stance on taxing carried interest is: Tax the general partners performance based “carried interest” as income and not capital gains. For people who are not familiar with carried interest, carried interest are the profits made by general partners from capital gains which in the case of private equity partnership would be part of the performance based 20% of profits in the 2-20 fee structure. 

What I find fascinating is how different individuals have come down on this issues. To me this really does separate the good conservatives from the potentially bad ones. Below are a list of institutions and or people who support the changes to make carried interest earned by general partners taxed as regular income.

Below is the list the opposition

I’m not surprised by Donald Luskin’s take on the issue, though I’m particularly disspointed by how he tries to confuse the issue to his readers. His article is more a defense on lower capital gains rate than it is defense on why general partners should receive favorable capital gains taxation. But then again he’ll support anything that means lower taxes. He’s little more than a mouthpiece for the corporate right wing branch of the republican party.  I think corporate interests should be upheld, but only within reason and sensibility.

For anyone who is particularly interested in this topic, I would read the comments on the Mankiw and and VC blogs. Within the comments there are some lively debates. I’ve especially appreciated reading comments by those who do not agree because they raise legitimate issues. Bill Burnham both in his own blog, and on the A VC in New York blog makes some very reasonable arguments that shed light on the potential complexity of the issue. I don’t agree with those opinions, but his points are reasonable. The problem with taxes because they are in reality an artificial construct, they often have unintended consequences. The current situation with carried interest is a reflection of that. The main credible argument against taxing carried interest as ordinary income is that it could penalize entrepreneurs who have no capital of their own. Such entrepreneurs are analogous to general partners in a private equity fund. Supporters of lower taxation on carried interest want to protect “sweat equity.” While it’s unclear where distinction between labor and “sweat equity” is, I do think that entrepreneurs deserve favorable tax treatment to support the value they create for the economy. I just don’t see how properly implemented closure of the loopholes will affect start-ups. Most entrepreneurs can effectively grant themselves equity at a nominal cost from which they can they receive capital gains upon via “sweat equity.” However, it also seems that smart private equity, venture capital, and other partnerships would be able to easily circumvent the changes via tactics like loans and such. What I find patently laughable is Donald Luskin’s argument that there will be fewer people who want to be hedge fund managers because of these changes.