September 11, 2007
Politico reports on the hottest tax issue in DC: How much revenue would be raised by the carried interest bill -- or, as the tax nerds say, how will the Joint Committee score it?
The Joint Committee on Taxation has responsibility for scoring tax bills, and they've been mum for some time. That's understandable. It's a difficult proposal to estimate, as one has to make and justify a lot of assumptions about how the industry works and how it might adapt to the new rules.
The word on the street, from a couple of different sources in DC, is that the proposal will score "way higher" than the current estimates, including both Professor Knoll's $2-3 billion estimate or my own back of the envelope $4-6 billion annual estimate. (The Politico story refers to Knoll as an "academic deity", which is even better than an "intellectual godfather." Something to aspire to.)
One reason for the higher score is that we just looked at private equity, while the Levin bill would reach real estate, venture capital, and certain hedge funds as well. The Levin bill would also raise a lot of revenue from the Medicare tax, which, by treating carry as ordinary income, subjects those wages to a 2.9% tax (uncapped, unlike social security). Add it all up and I wouldn't be shocked by a score over $10 Billion annually. Not enough to repeal the AMT by itself, but enough to make a dent. Or maybe a dimple.
I should note that my sources are non-governmental, so who the heck knows what the Joint Committee -- the only source that matters -- is actually thinking. Maybe someone will set up a prediction market.
TrackBack URL for this entry:
http://www.typepad.com/t/trackback/38673/21524303
Links to weblogs that reference What's the Score?:
1. Posted by Jake on September 11, 2007 @ 20:28 | Permalink
C'mon, Vic, you know fully well the JCT is imprisoned by static scoring methodology.
While converting the income realized from carried interest to ordinary income treatment, as opposed to the current (perceived) capital gain treatment, is sound policy, the fact remains that the investor -- including a hedge fund or private equity manager -- can control the timing of realization. Should Congress clarify that carried interest yields ordinary income, rather than income taxable as capital gains, the targets of this legislative reform will leave their carried interest income locked up as "unrealized," and monetize such holdings by means that are more indisputably nontaxable (assuming they don't go over the line and trigger the economic substance doctrine), like purported secured borrowings.
2. Posted by andy on September 12, 2007 @ 16:50 | Permalink
This reminds me of how repeal of the General Utilities doctrine was supposed to create billions and billions of dollars. Actually, it doesn't "remind" me of that, since I was in elementary school when General Utilities was repealed, but the lessons learned from that mis-scoring should be applied to the PE bill.
$10 Billion *ANNUALLY* seems shocking. By way of comparision, economic substance codification is supposed to get around $15 billion over TEN YEARS.
