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September 06, 2007

20070906.jpgSuper-smart tax blogger Jim Maule wasn't really gone this summer, but he has spent it doing a 7,345-part (I'm estimating - I'm not good with Roman numerals) series on how to teach a basic tax course.

He's back with a long, thoughtful, and ultimately wrong call for the elimination of capital gain treatment for "carried interests" (treatment we discussed here). The difficulty of dealing with the purported problem - the idea that hedge fund partners shouldn't get capital gain rates on their partnership interests like other partners - is evident when Dr. Maule says:

...there's no unanimity in the mechanics of the reform, but once the competent put their minds together it ought not take long to work out the details.

It's not the competent that enact legislation. It's Congress.

It is probably impossible to draft legislation that would only affect the "bad guys" - hedgies - without disrupting the management structures of any number of LLCs operating real businesses. "Carried interests" are really just "profits interests," which are a way to let management share in the growth of a business without having to make a big cash investment or pay a bunch of taxes before they earn anything. They provide a result very similar to a grant of restricted stock coupled with a Section 83(b) election - and I don't see Senator Grassley going after that "abuse."

Dr. Maule's argument is really an argument against lower rates for capital gains; at the end of his piece, he pretty much says as much. This is a defensible position; eliminating the capital gain preference would do much to simplify the tax law. But as long as the preference is there, trying to eliminate it in small bites just mucks up an already baffling area of the tax law.

UPDATE: Dr. Maule responds.

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