September 24, 2022

Maybe Dave Camp’s Pass-through Proposal Doesn’t Address Carried Interest So It Won’t Invite Unfortunate War Analogies

Victor Fleischer writes at DealBook that Michigan Congressman Dave Camp's proposal to simplify partnership and S-Corp tax law may be too simple. It's not that Professor Fleischer doesn't like simple, it sounds like he does. And he also likes that Camp gave everyone a couple of options. But Camp's more "radical" option is missing some details that has Prof Fleischer concerned:

Option 2 would replace the labyrinth of rules for determining whether allocations of income will be respected for tax purposes with a simple rule: the tax consequences should track the economic gains or losses. This sounds great in theory, but it’s hard to implement in a system where Congress likes to single out certain activities for special tax treatment.

Ah, yes. Congress does like to single out certain activities for special tax treatment and that makes things quite not simple, doesn't it? I suppose when special interest types are meeting with Ways & Means working groups, that can certainly complicate things. You know, because of the special interests and all.

Anyway, one of these special interests is the enormous businesses that organize as partnerships. Like accounting firms. Like asset management firms. The partners in these firms avoid the corporate tax, double taxation, etc. etc. and that's kind of nice but partnership taxes also allows for some pretty fancy strategery, most notably, carried interest: 

[T]he proposal doesn’t contain so much as a whisper about carried interest, the most controversial partnership tax issue in recent years. Of course, Mr. Camp has pitched the proposal as being about simplification of the tax rules for small business. Avoiding the topic of carried interest is consistent with that message.

Yes. Because by avoiding the topic of carried interest, unfortunate situations like this are also avoided:

Stephen A. Schwarzman is well-known for being an outspoken éminence grise on Wall Street. But the Blackstone Group chairman and chief executive has an unfortunate history of sometimes using inapt analogies. […] At a meeting of a nonprofit’s board last month, according to Newsweek, Mr. Schwarzman compared the administration’s plans to raise the carried interest tax rate to war. Then he elaborated: “It’s like when Hitler invaded Poland in 1939.”

Sure, the nature of carried interest as compensation is up for debate but who wants to risk mixing in the Hitler stuff? That'll just make things awkward. 

A Plan to Simplify the Tax Code That May Be Too Simple [DealBook]

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