Dylan Matthews explains carried interest.
Here’s a simple criterion to determine whether managers are earning income or investment returns: If you own an asset (and are eligible to pay cap gains taxes on it), you must have symmetrical exposure to the downside and the upside. If hedge fundies want to take that risk they can do so–they are, in that circumstance, providing the socially valuable service of risk-taking and investment, and we encourage that with a lower tax rate. If your management contract only says you get X% of investment gains, though, that’s ordinary income and you get to pay the full tax rate on it.
It seems like the issue should be more complicated than this. Am I missing something, or is this a reasonable framework?
Note: If you insure against losses, I’m inclined to think that insurance payment ought to be taxed as ordinary income. That might end up being incredibly hard to do in practice, though, and I’m really not certain how to deal with risk mitigation in general.
I have previously defended some of Mitt Romney’s seemingly absurd statements on this blog. I will not do the same for “I’m not concerned about the very poor.” Yes, he clarified that they have a safety net and that’s why he’s not concerned, but it’s impossible to take seriously his promise to “fix it” if it needs repair, while he campaigns on eviscerating the safety net and a massively regressive change in the tax structure. That’s just lying (which, as we have established, he does.)
“How much of immobility is due to “inherited talent plus diminishing role for random circumstance”? Is not this cause of immobility very different — both practically and morally — from such factors as discrimination, bad schools, occupational licensing, etc.? What are you supposed to get when you combine genetics with meritocracy? I do not know how much of current American (or other) immobility is due to this factor, but I find it discomforting that complaints about mobility are so infrequently accompanied by an analysis of this topic.”
This sentence gets at something I’ve wanted to address for a while: is income mobility important, in that it’s a social goal worth pursuing, beyond the notion that we should allow people to rise to their potential? Is high income mobility required for a “just” society?
Imagine a society where 1) high-ability people tend to create useful things, and are rewarded for doing so, 2) people tend to sort themselves into relationships (and thus have children) based, in part, on being of similar intelligence and motivation, and 3) intelligence and other components of ability are inherited (although imperfectly). Inter-generational mobility (in relative income) in that society might be extremely low. People would be largely sorted into their relative income position at birth, because their parents were similarly productive and occupied a similar position in the income distribution.*
Such a distribution could persist even in a perfectly non-discriminatory society, where kids from wealthy families have no socially-conferred advantages (connections, better access to education, &c.) over kids from lower-income families. Would that society be unjust, because it has low mobility?
*Absolute income would hopefully increase across the board; I’m making no assumptions about the pattern or justice of how that growth is distributed.