A number of academics and pay consultants say that carried interest should be taxed as ordinary income. They contend that fund managers receive carried interest as compensation for a service performed—managing other people’s money—making the carried interest nothing more than labor wages.

University of Colorado tax law professor Victor Fleischer, whose views caught the attention of Congress two years ago, agrees with this approach. He notes that profits earned by managers from their own money invested in their funds—typically a small percentage of the total fund size—are appropriately taxed at capital-gains rates. But he said the portion of pay managers get for investing other people’s money should be taxed at ordinary income rates, just like other forms of salary.

“It’s amazing to me that at the same time the U.K. is imposing a 50% excise tax on bankers’ bonuses, the private-equity guys aren’t even willing to pay the usual ordinary income rate,” Mr. Fleischer said. “You would think they would recognize a fair deal when it’s offered.”

Link to the article

A couple of years ago, Victor Fleischer published a research paper that helped put the entire private equity industry on the defensive about the taxes they paid (or didn’t pay).

Now, Mr. Fleischer, a professor at the University of Illinois College of Law, may be stirring up a new controversy. This one relates to sovereign wealth funds, government-controlled investment pools that have been pumping billions of dollars into troubled American companies.

The issue, according to a post Mr. Fleischer wrote this week for the Conglomerate blog, is that sovereign wealth funds pay no taxes on passive investments made in the United States.

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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.

. . .

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I was on NPR’s On Point today – my segment begins around 23:30.

Peter Brooke: Private Equity Now | WBUR and NPR – On Point with Tom Ashbrook.

I was pleased to hear Mr. Brooke agree with me that paying tax on carried interest at 15% wasn’t appropriate.  In fact, we seemed to agree about an awful lot.