Former U.S. Treasury Secretary Robert Rubin says carried interest should be taxed as regular income rather than at the lower capital-gains rate.
“I’m on public record, and you all aren’t going to agree with this, but I think carried interest should be treated as ordinary income. I don’t expect that’s a prevailing view in this room,” he said in a keynote at PartnerConnect East in Boston, which included VCJ‘s annual East Coast conference Venture Alpha East.
Rubin, who supports former Secretary of State Hillary Clinton for the presidency, does not expect Congress to take any substantive action in the near term.
“I wouldn’t worry too much about [changing the tax treatment] because I think the politics of that are going to protect you for a long time,” he said.
Democratic political leaders and populist segments of the Republican party have had their sights set on carried-interest-taxation for years, and several sources have identified it as a likely target of comprehensive tax reform.
In an election year, however, congressional leaders have shown little appetite for the level of compromise necessary for tax reform, Rubin said.
“President [Bill] Clinton used to say, you can do all the good policy thinking in the world, but it doesn’t matter if the politics [don’t] work,” said Rubin, who served in Clinton’s cabinet after a long career at Goldman Sachs. Right now, he said, “the politics [don’t] work.”
Difference in tax rates
The tax code currently treats carried interest as a long-term capital gain, which is taxed at a maximum 20 percent. If it were treated as regular income, general partners’ share of investment profits could be taxed as high as 39.6 percent.
Rubin has maintained his position on carried interest’s tax treatment since at least 2007, when, while on a Brookings Institute panel, he said fund managers “are basically performing a service and the service is running the capital.”
Proponents of changing the tax treatment argue that firms benefit from investment earnings without bearing much of the up-front costs. Many GPs contribute only a small fraction of the capital used in their funds’ initial investments.
Others, like the Private Equity Growth Capital Council, say taxing carried interest at a higher rate would discourage long-term investment.
“Carried interest is appropriately taxed as a long-term capital gain because it is a profits interest in a long-held capital asset,” a council spokesman, James Maloney, said. “Changing the taxation of carried interest would upend a longstanding, successful policy that rewards entrepreneurial risk.”
Although his opinion on carried interest differs from many who work in the industry, Rubin said he views private equity favorably. More than a third of his net worth is invested in the asset class, he said.
“They have long-term strategies that are not subject to the pressures of the quarterly report, as public companies are. They manage companies, they build companies,” Rubin said. “As an investor, what worries me is there’s just so much money coming into it.”
As of June 2015, data provider Preqin estimated the industry held a record $1.3 trillion of unspent committed capital, so-called dry powder. The total includes $755 billion of private equity capital in addition to private debt, real estate, natural resources and infrastructure funds.
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Photo: Former U.S. Treasury Secretary Robert Rubin speaks at the PartnerConnect East conference in Boston on April 5, 2016. Photo by Alastair Goldfisher. © Buyouts Insider