While agreeing with Jon Walden that the typical characterisation of private equity is very misleading, I do not agree with his proposal for taxing the carried interest as capital gain (“Tax should be lower if PE bosses put own cash at risk”, Letters, July 29).
Certainly if the PE executive has invested his own capital a portion of the total profit should be taxed as capital gain. But the “preferred return” that Walden refers to — which he says arises because of the individual’s role in making a success of a fund’s investments — is due to the intellectual business acumen and experience of the executive.
The investment is a byproduct of the executives’ activity — which is to earn a profit by improving the performance of the companies they’ve invested in — and of their reselling skills. That’s their job! It’s earned income.
It’s the reverse of employee stock options, where the difference between market price and allocated price is treated as income to the employee (in most jurisdictions) because the benefit is strictly related to your employment.
The capital gain on the improvement in price, over which employees have minimal direct influence, is taxed as a capital gain.
Gains on real estate for private individuals, other than their primary residence, is normally subject to capital gains tax. If we were to apply Walden’s logic, whoever builds the properties should only be subject to CGT and not income tax.
Plainly not the case because builders are subject to income tax on their profit. And to make a profit on the construction is their job!
John A Stewart
Chairman, WST, Milan, Italy
