NCPA - National Center for Policy Analysis


June 25, 2010

Carried interest is a share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds.  This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund's performance.  Democrats want to raise carried interest taxes from the current 15 percent rate to the top income tax rate, scheduled to hit 39.6 percent on January 1.  The sales pitch is that this will only whack hedge fund managers and other unsympathetic types.  Yet Democrats wrote the law so broadly that it may sweep up millions of Americans in family partnerships, says the Wall Street Journal. 

For example: 

  • This would be a huge hit to the estimated 6.5 million folks invested in real estate partnerships, who own assets ranging from a local house to a commercial shopping center.
  • The legislation also potentially hits any partnership invested in certain specified assets, including families who own, say, an auto dealership, fishing boat, construction company or securities.  

These family entities have little ability to escape this new tax, says the Journal: 

  • Partnerships are the most common form of business structure for family operations, since they limit personal liability from claims against an asset or business.
  • To retain that liability protection, but also escape the higher taxes, families would have to sell a portion of their company to an outsider to manage the family affairs. 

Mark this down as one more example of how the Democratic scramble for revenue will hurt millions of Americans who are far from wealthy, says the Journal.  Democrats are rewriting a half century of partnership tax law with no hearings, no analysis and little debate.   And they wonder why businesses are creating so few jobs. 

Source: Observers, "The Family Business Revenue Act," Wall Street Journal, June 24, 2010. 

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