But when the Fortress Investment Group, the Blackstone Group, the Carlyle Group and other investment firms went public, they used the favorable tax treatment of carried interest (which is treated as investment income, not labor income) to squeeze into an arcane exception to the publicly traded partnership rules for "qualifying income," which includes investment income.
But if Mr. Camp wants to raise some revenue to pay for tax changes elsewhere, like a reduction in the corporate tax or a shift to a territorial tax system, he will have to follow the money to where it disappears — through loopholes like carried interest and the abuse of the publicly traded partnership rules.
Grady spent a decade meeting venture capitalists, learning how to do small deals and petitioning the Securities & Exchange Commission to change its partnership rules.
"When we came to office, city bankers were paying lower tax rates than those who cleaned for them, foreigners were not paying capital gains tax, hedge funds were abusing partnership rules and the richest in our society routinely did not pay stamp duty at all.
Instead, investors provided monthly documentation that they were obeying the partnership's rules.
The partnership tax rules have been in place for a long time, since 1954.
"The partnership-tax rules were designed with small business in mind, not billion-dollar investment funds," he said.
It would also make some useful changes to the partnership tax rules related to basis adjustments and revise some outdated definitions.
For further reading on the use of the partnership tax rules by large asset managers, see Victor Fleischer, "Taxing Blackstone," Tax Law Review (2008).
In my view, there's an additional problem with Mr. Camp's proposal: its failure to address how the partnership tax rules are now being used, and abused, by large businesses.
