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November, 26th 2007

Here's why not to hike taxes on carried interest

– Liz Mair

I’m not normally one to tout Al Gore or anything that he does, but today I am—kind of. That’s because Gore is joining a venture capital firm that invests in companies pursuing environmentally-friendly technologies-- a good thing, in my opinion. And, it turns out that Gore is going to take away from his position with the firm-- and keep-- his share of the carried interest that gets paid to partners, and which relates directly to the amount of capital growth experienced in the firm's portfolio (Gore is apparently donating his actual salary to a non-profit group he founded). That's something that leads me back to an old, and favorite, topic—and the real reason I’m talking about Gore, without a blog-evident grimace.

Readers may remember that it's just this kind of payment-- in respect of carried interest-- that congressional Democrats are trying to hike taxes on, and by quite a large amount, too (essentially, based on my understanding, we're talking a minimum of an extra 20% payable to the government in tax). I wonder, were such high rates of tax in place already, back when Gore was approached by the firm (or was approaching the firm) would he have decided to make the move that he has, in joining the firm as a partner? If he had gone ahead, would he (and presumably the other partners) have sought to extract a greater percentage corresponding to growth in the value of the firm's portfolio in order to compensate for higher taxes being levied on carried interest payments?

These are important things to ponder as the debate over hiking taxes on carried interest continues. Had Gore either not joined the firm, or had he and the other partners taken a bigger "cut" corresponding to increases in the portfolio value—both very easily conceivable responses to higher taxes being levied on carried interest payments-- you can bet the result would have been bad with regard to increasing investment into green companies which, incidentally (in my opinion), do a lot of good work. Had Gore not joined the firm, you can bet that less investment money would flow into it, and ultimately out of it, into new and important green ventures. Had Gore with the other partners taken a bigger cut, less money would be returned to investors—a good way of diminishing the amount available for re-investment, and also a good way of potentially making investment with the firm look less appealing, vis a vis other investment options, to could-be investors. None of that would mean positive results in terms of more money going into green companies—something we need, and not just courtesy of government subsidies. And since all of that can be predicted, easily, to flow from tax increases, perhaps we ought to think about whether those currently being proposed by Democrats in Congress are really such a good idea.

To be clear, I think not. We need more private investment into green companies, not less, and I fear that these tax hikes, if enacted, will have the latter effect.

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