Understanding the concept of "carried interest," or how to make a ton of money

[dcsmart]

and pay very little in taxes.

The first is the controversy over the role of Bain Capital, the investment partnership whose founders included Republican presidential hopeful Mitt Romney. The second is the disclosure by another firm, The Carlyle Group, of how its top executives are compensated.

Carlyle disclosed its executive compensation in some detail, providing a rare glimpse into how investment firm managers are paid. Combined with the Bain flap, it will surely reopen the five-year old debate over the special tax treatment these partnerships receive through a mechanism known as carried interest or, in short, “the carry.”

Carlyle’s disclosure opens a small window into how this works. In 2011, its three founders were each paid about $140 million. But they received just $275,000 in salary and another $3.5 million in the form of a bonus (also taxable at ordinary income rates). But each also got $134 million—or 96 percent of their compensation–from investment profits. Much came from the carry and is taxable at 15 percent.

Carlyle, Bain Capital, and the Tax Treatment of “The Carry”
Howard Gleckman | Posted on January 12, 2012, 3:26 pm

http://taxvox.taxpolicycenter.org/2012/01/12/carlyle-bain-capital-and-the-tax-treatment-of-the-carry/

Much of Romney's income that is taxed at that super-low rate is actually compensation in the form of a "carried interest" in the private equity deals of Bain Capital. While CEO's, actors, and athletes with multi-million dollar salaries, bonuses, or stock options pay income tax rates of 35 percent (and payroll taxes) on their compensation, managers of private equity firms, hedge funds, and other investment funds pay only 15 percent income tax (and no payroll tax) on their share of the funds' profits that they get in exchange for their management services. Even some managers who benefit from the low rate admit it's not justified.

This makes Romney a good poster child for the "Buffett Rule," the principle that millionaires should not pay lower effective tax rates than middle-income people. One step towards implementing the Buffet Rule is to close the loophole that allows "carried interest" (the fund managers' share of the deal they get as compensation) to be taxed at the 15 percent rate even though it is not truly capital gain.

CLOSE THE ROMNEY LOOPHOLE
Citizens for Tax Justice
http://ctj.org/taxjusticedigest/archive/2011/12/close_the_romney_loophole.php



Business Taxation: What is carried interest and how should it be taxed?
http://www.taxpolicycenter.org/briefing-book/key-elements/business/carried-interest.cfm

[CJCRANE]

1. K&R.

[Uncle Joe]

2. Kicked and recommended.

Thanks for the thread, dcsmart.

[librechik]

3. the outrage is that some forms of money-making are exclusive to the wealthy--noone else can play

this is un-American.