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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

Abstract:     
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

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Date posted: August 19, 2007 ; Last revised: November 12, 2008

Suggested Citation

Knoll, Michael S., The Taxation of Private Equity Carried Interests: Estimating the Revenue Effects of Taxing Profit Interests as Ordinary Income (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. Available at SSRN: http://ssrn.com/abstract=1007774 or http://dx.doi.org/10.2139/ssrn.1007774

Contact Information

Michael S. Knoll (Contact Author)
University of Pennsylvania Law School ( email )
3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-6190 (Phone)
215-573-2025 (Fax)
University of Pennsylvania - Real Estate Department ( email )
Philadelphia, PA 19104-6330
United States
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