Realistic Taxes on Private Equity Managers

The determined lobbying by the managers of Private Equity against increased taxes on 'carried interest' makes for depressing reading. In a time of general belt-tightening that will hit those on low income hardest the industry should do the honorable thing and admit that the light-touch taxation of the past years was an oversight by politicians and the public. It can be explained by the fact that 20 years ago the industries were tender plants that were hardly visible on the investment scene. Only the past 15-10 years have seen an explosive growth that made it hard to explain why people whose earnings in a good year can be larger than the GDP of many small nations should little tax - or even no tax at all in the case of 'non-domiciled' in the UK.
Carried Interest should never have been treated as capital gain, the only exception could be the returns on the actual cash that has been invested by the managers of the Private Equity Funds. Even there they may benefit from loopholes. They may allot themselves a higher share of the equity interest than is reflected by the amount of cash they put in. The same loophole may benefit the management of the portfolio companies, their equity interest usually differs widely from their actual cash investment. Maybe this tax treatment explains some - or even most - of the ability of the private equity industry to convince managers in public companies to join them (or facilitate their purchase of companies or subsidiaries at advantageous terms). We always had our reservations about the industry's claim of superior management performance. It would be much cheaper for the ultimate owner of industry - the public investors - to simply change management rather than sell out only to later buy the same businesses back at a much higher price.