There are a few issues in the world of finance when it comes to entrepreneurship. I’ll talk for a minute about two of the. Todays post will be about Carried Interest. The next one will be on Crowdfunding.
Carried Interest: Investment funds make money on carried interest. What that means is profits from investing. Investment typically invest OPM (other people’s money) and then they get carry on the results. Right now Carried Interest is taxed at a lower rate than income. The key to the issue is understanding that the tax code rewards value creation (entrepreneurship, investment) more than work. Value creation is rewarded in the form of Capital Gains which is a lower tax rate than doing work. Is this fair? Somewhat. Value creation leads to greater productivity and job creation for others so why not reward those that create jobs for others? It makes sense. Entrepreneurship should always be rewarded. Where this goes off course is in the range of hedge funds which are skinning the cat more for small profits and use leverage (risk) which is the opposite of value creation. An argument can be made that it creates more efficiency in the market which is true however at the risk of destabilizing the market with leverage it’s a pretty poor argument.
The best idea I’ve heard here is that carried interest should be taxed lower as long as its made unlevered. So that it is about creating efficiency and productivity and not just about maximizing a small opportunity with a lot of risk (leverage).