While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.

Stop Coddling the Super-Rich – NYTimes.com.

Victor Fleischer — the corporate attorney turned academic who wrote a paper that prompted lawmakers to propose raising taxes on private-equity barons — is now targeting the tax treatment of founding entrepreneurs.

Fleischer is finishing up another paper that argues founders of startups should pay the ordinary income tax rate of 35 percent when selling their stock instead of the much lower capital gains rate of 15 percent.

via A dollar & a dream – NYPOST.com.

I’m back in Boulder, teaching Deals and a Deals Colloquium this spring.

It’s been nice knowing you, carried interest.  See you in 2013.

U.S. Senate Finance Committee Chairman Max Baucus, a Montana Democrat, omitted a provision to boost tax rates on so- called carried interest from a bill to extend Bush-era tax cuts for middle-income Americans that is set for a Senate vote tomorrow. The bill also would renew dozens of expired business tax breaks to which the carried interest proposal had been attached as a budget-balancing measure.

The omission closes the door on efforts by Democrats to change the tax treatment of carried interest. Carried interest is the compensatory share of an investment partnership’s profits fund managers receive as part of their pay. The pay can qualify for the 15 percent capital gains tax treatment even though it’s a return on labor rather than capital invested.

“I think, for all practical purposes, it’s in a deep coma, not to come out until the discussion of tax reform,” said Clint Stretch, managing principal at Deloitte Tax LLP, a Washington consulting firm. “It looks like it’s dead for this year.”

via Baucus Drops Higher Private-Equity Levy From Tax Measure – Bloomberg.

I was surprised by the overly simplistic op-ed by Mankiw a couple of days ago — for Mankiw, it’s all substitution effect, no income effect.  Here’s Matt Bodie (SLU) with a snarkier take:

Two years ago, Greg Mankiw threatened to stop working if Obama was elected, basically on the theory that his tax rates would go up and his incentives would thereby go down.  It was one of those “Going Galt” threats that looks ridiculous in retrospect.  Mankiw, of course, is still a professor at Harvard.  But he has stopped working in one respect — hes recycled that old blog post into an op-ed for the New York Times.  A few thoughts:

First, if youre looking for reasons why the print media continues to lose importance and market share, compare this and this.  The New York Times essentially ran a two-year-old blog post in its Sunday edition.  I cant even really blame Mankiw for this — where are the editors?  In fact, I think Mankiws op-ed is an elaborate inside joke on his part.  ”Two years ago, I threatened to stop working.  And I made good on that threat!  Of course, if people want to pay me for not working, Im happy to accept it, even with higher taxes.

via PrawfsBlawg: Greg Mankiw is threatening to stop working again.

This Bloomberg story, among others, reports that fund managers are trying to realize portfolio company exits before year-end tax increases.  For funds in which the investors are tax-exempt, however — most PE fund investors are tax-exempt pension funds and endowments — the GP’s tax planning may violate the GP’s fiduciary duty to its partners in the fund.

The GP’s responsibility to the fund is to maximize the exit valuation and after-tax return to the investors.  Accelerating the exit to avoid additional taxes to the GP is hard to justify.  Fund managers may be accepting lower returns, in other words, to avoid getting hit with higher personal taxes.

To use a simple example, assume that a portfolio company was purchased for $100 and could be sold for $200 in December or $210 next spring.  Further assume that the GP’s tax rate will increase from 15% to 30% at year-end, and that the LPs are tax-exempt.  Clearly the LPs would want the company to be sold next spring, as that’s an extra $10 (or $8 after carry) in their pockets.  The GP, however, would get $17 (20 carry less 3 tax) in December, or $15.40 next spring (22 carry less 6.6 tax).  Thus the rush for the exits.

Of course, it would be hard to prove, in any particular case, that the sale was tax-motivated.  There should be some interesting empirical studies to come.

Tax Driver

Private-equity firms may do more deals in the remainder of the year as they race to sell assets ahead of possible tax changes in the U.S., according to Jeffrey Raich, managing director and co-founder of Moelis & Co. The rate on carried interest, or the share of profits that fund executives earn as part of their compensation, is slated to rise to 20 percent in 2011 from 15 percent currently.“You are seeing a lot of seller deals based on concerns about increases in capital-gains tax rates and potential legislation around carried interest have driven private-equity firms to sell portfolio companies this year,” Raich said. New York-based Moelis advised Connecticut-based buyout firm Littlejohn & Co. on the $890 million sale of Van Houtte Inc. coffee to Green Mountain Coffee Roasters Inc. this month.

via M&A Snaps Back as BHP, Intel Drive Busiest Quarter in 2 Years – Bloomberg.

A mention from the President probably helps the chances of the tax extenders bill in which carried interest reform is embedded.  As always, though, in would be useful to know what the Senators from Maine are thinking.

But Obama held his ground, saying the majority of Americans likely believe he has been too soft on Wall Street. His case in point: the White House has not been able to end the practice of taxing some hedge fund and private equity fees as capital gains rather than income. So-called “carried interest” is taxed at 15% rather than the 36% tax rate that hits the highest income tax bracket.

“The notion that maybe you should be taxed more like your secretary when your pulling home $1 billion a year isn’t me being extremist or anti-business,” the president said.

via Obama Raises Prospects of New Economic Team – Washington Wire – WSJ.

The tax extenders bill, with carried interest reform, is back.  I haven’t looked at the new bill yet, but I suspect there are not a lot of changes from June.

U.S. Senate Democrats on Thursday revived an effort to impose steeper taxes on private equity and other investment fund managers.

The legislation would raise about $14 billion over a decade by taxing most of a fund manager’s income at the higher ordinary income rates, now 35 percent, rather than the current 15 percent capital gains tax rate.

via US Senate Dems revive private equity tax proposal | Reuters.

I think it’s worth noting that in the UK, where private equity and buyout firms are already known as venture capital, the PE guys aren’t exactly loved.

When they were kings of the world in December 2006, eleven of the largest private equity firms banded together to form the Private Equity Council, a Washington-based trade group.

Nearly four years and millions of dollars in lobbying fees later, the council has — are you sitting down? — changed its name.

As of Tuesday, the group is now the Private Equity Growth Capital Council. If that sounds clunky, don’t worry. It looks like the group intends to refer to itself by the mellifluous acronym Pegcc.

via Peter Lattman, Private Equity Council Undergoes a Name Change – NYTimes.com.

I’m in NY for the fall semester as a Visiting Professor of Law at NYU.  I’m teaching Deals to a terrific and interesting set of students that includes 2Ls, 3Ls, Tax LLMs, International LLMs, Corporate LLMs – should be a fun semester.

Being in residence at NYU is just like NY generally – the quality and amount of intellectual stimulation is amazing, extraordinary, and overwhelming.

Between classes and workshops, I’m finishing a paper on the tax treatment of founders’ stock.  I should have a draft on SSRN in about a month.  I’ll also be editing my paper on regulatory arbitrage, which will be published by the Texas Law Review in December.