OT
Off Topic
The primary practical reason not to tax the very rich a high amount isn't the changes in the behavior of the very rich (although they respond to incentives and disincentives as well), as much as it is to avoid reducing the incentive of the merely rich to work hard and smart to become very rich.
As for the "private equity loophole", you might (at least if you didn't carefully read my earlier post that I linked to) be surprised but I sort of agree with you. Not that I have any problem with having a 15% rate as the rate for the mega rich, but they shouldn't pay less than others, so you shouldn't have a thirty something rate for most people and only 15% for the megarich. Now I don't have a problem with capital gains tax being lower than the normal rate (even if it means some very wealthy people pay less direct tax overall) because 1 - A lower capital gains tax rate encourages investment which helps out the less than rich as well, and 2 - At least when your dealing with stocks, you've already in effect paid taxes on your share of the corporation because the company has paid corporate incomes tax (their are exceptions, you might make a capital gain on companies that are losing money, but I'm talking in general terms, not trying to nail down all possibilities)
But the private equity managers aren't really part owners of the company (or if they are, if they do have stock, the gains on that stock are not the only thing that they pay capital gains rates on).
Also while it can reasonably be argued that a portion of their income represents an investment of differed income (they are treated as if they owned a portion of the company instead of getting the cash, they get a percentage of the money the company makes in the future, and they give up upfront cash income to get this later income).
I'm not sure they should pay ordinary income tax on every penny of the money they get from these deals, but it would seem to me that they should clearly pay ordinary income rates on the amount that represents the investment.
Maybe I'm not being clear, let me restate it.
Instead of getting the differed income, the managers of the deal could be paid in cash. That cash would obviously be taxed at ordinary income rates.
They could take that cash and buy stock. The gains on that stock would be taxed at capital gains rates.
The way the deals currently work they are not given cash, but are given a portion of future earnings (or they are given cash, which they would have to pay ordinary income tax on AND a portion of future earnings, that often will be much larger than any up front cash). The effect of this is pretty much the same as if they where given cash and bought in to the company with that cash except that they don't pay ordinary tax rates on the upfront cash income but instead get capital gains rates on the whole thing. I don't think it should work that way. The upfront income (whether actually given in cash, or the value of the upfront portion of future income or revenue that they are given) should face ordinary income tax rates. Then any future increase in that holding would be a capital gain and should face capital gains rates. |
