The Taxation of Private Equity Carried Interests: Estimating the Revenue Effects of Taxing Profit Interests as Ordinary Income
Michael S. Knoll
University of Pennsylvania Law School; University of Pennsylvania - Real Estate Department
November 7, 2008
U of Penn, Inst for Law & Econ Research Paper No. 07-20
U of Penn Law School, Public Law Research Paper No. 07-32
William & Mary Law Review, Vol. 50, No. 1, 2008
In this Article, I estimate the tax revenue effects of taxing private equity carried interests as ordinary income rather than as long-term capital gain as under current law. Under reasonable assumptions, I conclude that the expected present value of additional tax collections would be between 1 percent and 1.5 percent of capital invested in private equity funds, or between $2 billion and $3 billion a year. That estimate, however, makes no allowance for changes in the structure of such funds or the composition of the partnerships, which might substantially reduce tax revenues below those estimates.
Number of Pages in PDF File: 48
Keywords: private equity, profits interest, carried interest, carry, taxation of capital, taxation of services, capital gains, ordinary income, capital gains preference, tax deferral, stock-based compensation, equity-based compensation, option pricing, Black-Scholes formula, tax revenue estimation, H.R. 2834
JEL Classification: H2, H25, D2, D3, D6
Date posted: August 19, 2007 ; Last revised: November 12, 2008
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