Essay Outline

Intro

• Taxation of carried interest allows general partners of investment funds to share funds' profits.
• However, there are issues raised because of carried interest taxation, which ought to be understood.

Overview

• However, there are issues raised because of carried interest taxation, which ought to be understood.
• Equally, using carried interest instead of salary does not transform ordinary earnings into capital gains and dividends at the net level.
• Notably, Viard (2008) prompts the article's primary question: Can tax-reducing allocation be allowed.

Strengths

• One of the strengths moted in Viard's (2008) article is outlining how investment funds get allocated and the tax rates.
• Further, the article effectively describes how the carried interest the flexibility enjoyed by partnerships during the allocation of various income and expense categories among partners.

Weakness

• However, Viard’s (2008) entirely raises negative claims against taxation of carried interest.

Conclusion

• Ultimately, I agree with Viard (2008) that the changing taxation of carried interest is detrimental to the economy.

TAXATION

Taxation of carried interest allows general partners of investment funds to share funds' profits. However, congress considered taxing private equity fund managers' carried interest at ordinary ratios instead of the 15 percent rate previously applied to this kind of revenue. The primary objective of taxing the carried interest is promoting objectivity between labor reimbursement of fund managers and other various types of labor wages. However, there are issues raised because of carried interest taxation, which ought to be understood.

 Viard (2008), in his article, outlines that the primary reason for taxing managers is because managers get compensated for their labor. The carried interest, therefore, gets shared among fund managers. When the income comprises eligible dividends or long-term capital gains, a 15 percent tax rate gets imposed on the managers, applicable to this kind of income. Since the managers get compensated for their work, they should be like other labor income rates instead of lower rates than dividends and capital gains. For that reason, Viard (2008) states that managers' labor income, which also consists of the carried interest, ought not be taxed at a marginal rate lower than other subordinate staff’s incomes such as the secretaries.

Equally, using carried interest instead of salary does not transform ordinary earnings into capital gains and dividends at the net level. However, it alters the allotment of both incomes. The use of carried interest results in managers receiving capital gains and dividends instead of ordinary income, eventually lowers their tax obligation. Nevertheless, this adversely affects the fund investors instead of the managers. Instead of taxing the salary payment of the managers, which would reduce their ordinary earnings, the fund investors experience reduced dividends and capital gains income, which reflect the dissemination of parts of revenue allocated for the managers. If instances where the fund investors are taxable, they suffer a tax surge, which offsets the manager’s tax savings. In cases of tax-exempted organizations, when the aggregate tax gets deduced, the tax-exempted investors will have received no tax benefits. Through this instance, he outlines circumstances in which managers enjoy tax deferral and how fund investors can become tax-exempt.

Notably, Viard (2008) prompts the article's primary question: Can tax-reducing allocation be allowed. Several aspects need to be considered, such as the extent to which managers can reallocate the income through means other than carried interest. That is assuming the non-tax reasons prompted using carried interest and the extent to which, the extent to which the tax savings offset over taxation in other portions of the tax system. On the contrary, Viard (2008) argues that the manager's initial award for carried interest while establishing a private equity fund remains untaxed. Prepayments for future labor services are equal to borrowing against future labor earnings, which is a valid reason not to be taxed.

One of the strengths moted in Viard's (2008) article is outlining how investment funds get allocated and the tax rates. Viard (2008) adds that the fund's partners divide the income since the investment funds us a partnership. The general partners and the managers get a yearly fixed fee equivalent to 2 percent of the invested capital and a carried interest that is relatively equivalent to 20 percent of the net income. He further adds that the carried interest designs vary among companies. In the case of venture capital organizations, usually, the carried interest is a fifth of the revenue. For buyout companies, the rate of return on investment clears a hurdle rate of 8 percent before the managers receiving any carried interest, with the managers subsequently receiving 2 percent points of return and one-fifth of the returns beyond 10 percent (Viard, 2008).

Viard (2008), in his article, effectively outlines the internal revenue code, which reports that the maximum individual income tax rate for eligible dividends and gains on capital assets for more than one year should be 15 percent. Other sections depict that the maxim rate for other ordinary incomes such as interests, short-term capital gains, and wages is 35 percent. Another clause indicates that the preferential rates for dividends and gain income apply to individual alternative maximum tax. In cases of individual-owned portfolio firms held for more than a year, their sale should generate. The distribution from these portfolios is a refereed to a C corporation, on which its income received a 15 percent rate if the managers and other persons directly own the firm (Viard, 2008).

Further, the article effectively describes how the carried interest the flexibility enjoyed by partnerships during the allocation of various income and expense categories among partners. To determine these factors, companies note them in the partnership agreement. This article’s strengths can be recognized when Viard (2008) adds to the legislative proposals regarding taxation. For example, the H.R 2834 bills apply than ordinary tax rates to income imposed on partners performing a significant amount of investment management services excepting to the magnitude of the earnings attributable to the partner's capital investments. However, the bill was not acted upon and did not state the effective dates. Later, the house passed the H.R 3996, which had similar provisions of revenue loss from a 2007 AMT and other tax exemptions, whose targets to raise revenue by $25.6 billion. Notably, the democratic presidential candidate also proposed closing the various interest loophole (Viard, 2008).

However, Viard’s (2008) entirely raises adverse claims against taxation of carried interest. Although the validity argues that the reallocation of carried interest affects the tax rules of the vast economy and allows managers to avoid tax restrictions, he does not outline the reallocation benefits. The article illustrates the negative aspects of the reallocation but does not include the positive aspects to create a clear image of the reallocation of carried interest. The article does also not affirm whether it is evident that the reallocation is inappropriate.

Ultimately, I agree with Viard (2008) that the changing taxation of carried interest is detrimental to the economy. It allows managers to defer taxation and tax restrictions. The article outlines various aspects of carried interest taxation and how managers become tax-exempt. It also illustrates that managers should enjoy tax exemptions on carried interest and flexibilities that they want. I also support Viard’s (2008) argument because the tax reallocation threatens to increase the growing income inequality by giving a tax break to the wealthiest individuals who comprise fund investors. Although I agree with the article's argument, it clearly outlines whether the reallocation has detrimental effects on the United States Economy. The reallocation creates a loophole that allows owners or fund owners to monetize carried interest at meager tax rates. With such a loophole, investors will save more than $30 billion in taxes for the next decade, which is a loss to the U.S economy (Herzig, 2009).