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1 Q&A on the Carried Interest Debate 1 (2007)

handle is hein.taxfoundation/ffbabxz0001 and id is 1 raw text is: OUNT ON Q&A on the Carried Interest Debate Fiscal Fact No. 101 September 7, 2007 Introduction Recently business taxes have gotten more attention, after six years of almost constant change to the individual code. Just weeks after Treasury Secretary Henry Paulson pointed to the high U.S. corporate tax rate as an obstacle to American competitiveness, Congress is reviewing the taxation of private equity funds, especially the carried interest earned by some fund managers that is taxed as capital income. This discussion is timely and, perhaps, inevitable because rapid changes in the business world and the global economy are unmasking the schizophrenic way in which businesses are taxed under the U.S. tax code. Despite the fact that for the first time in modern tax history the top individual tax rate and the top corporate tax rate are the same (35 percent), there are still large differences between how businesses are taxed under the individual tax code and under the traditional corporate code. A recent Treasury Department report illustrates how incremental changes in personal and corporate tax law over the past 30 years have caused some sectors of the economy to pay low rates and others high rates. This uneven tax policy is distorting investment decisions, making the economy less efficient and the nation less competitive. One of the guiding principles of sound tax policy is that taxes should be neutral and not affect business decision making. As lawmakers study the taxation of fund managers, they should be cautious about rushing into a one-off solution. A more thoughtful approach would be to join with Secretary Paulson to review all of the unevenness of the business tax system and look for ways to make the tax code more rational. If lawmakers fail to consider a more comprehensive approach, they will find themselves facing these tax firestorms with increased frequency. This Q&A is designed to help the lay reader put the current debate over carried interest in the larger context of business taxation in the U.S. today.