Monday, 15 August 2022

private equity (10. 064)

Reinforcing the reality that the US is the biggest tax haven, the carried interest loophole, whose perennial but feeble attempts at reform nearly cost the US government and people a significant legislative win in terms of environmental protection and financial recovery, represents the bonus cut an investment manager—arguably a fee earned for enhancing the performance of stock portfolio—which are not in America taxed as regular earnings. Although the concept dates back to the sixteenth century and the age of colonialism—ships’ captains taking a share of profits ultimately earned on goods carried or transported as a way to build and maintain boat and crew and avoiding the prohibition against usurious loans, the idea was not codified, incentivised until 1913 and the explosion of domestic hydrocarbon exploration. Applying a lesser tax liability to the explorers’ profit (versus the share that the partners received) based on the above reasoning that the explorers were also shouldering a risk if their venture was unsuccessful, the immediate returns were classified as capital gains and due to the difficulty of assessing future value, taxes on carried interest can be deferred until cashed out. This is why poor-mouthing billionaires take out successive loans rather than reify their worth on paper. Moreover, with this continued concession to current regulations, wealth managers, hedge fund operators and the like are able to further exploit the returns on an investment above and beyond their individual exposure to the total profits earned by gambling with other people’s money, taxed at about half what earners in a much lower income bracket would be liable for.