By ANDREW ROSS SORKIN
MORE than a year ago, Victor Fleischer, an untenured professor at the University of Illinois College of Law, finished a draft of a paper about the tax treatment of private equity.
At the time, he was just hoping to get the paper published. Taxes are an unglamorous topic, and, worse, Mr. Fleischer’s paper was about the arcane intricacies of “carried interest,” hardly a household term. The paper argues that private equity managers are using a tax loophole to pay capital gains rates of 15 percent on carried interest, instead of the ordinary income tax rate of 35 percent. Carried interest, which comes out of a private equity fund’s profit, provides most of the compensation for fund managers.
The paper eventually landed with some Congressional staff members, who were looking for ways to pay for a rollback in the alternative minimum tax. Today, carried interest is front-page news. It is the subject of hearings on Capitol Hill and the focus of a proposed bill, whose backers include Representative Sander Levin, Democrat of Michigan, that could cost executives in the buyout industry more than $4 billion.
. . .