Congress's Carried Interest Tax Folly

From the Wall Street Journal:

Nero fiddled while Rome burned, but at least he didn't strike the match. Members of Congress are doing Nero one better. In the middle of the second global financial crisis in two years, Congress is preparing to dramatically raise a key tax rate on long-term investment. This is sure to discourage capital investment, increase the cost of money to start and grow businesses, and depress real-estate and stock prices, all at the worst possible time.

Last week, Senate Finance Committee Chairman Max Baucus (D., Mont.) and House Ways and Means Chairman Sander Levin (D., Mich.) released joint legislation that would among other measures significantly raise the tax on "carried interest." Now the tax rate on these long-term capital gains earned by the general (managing) partners of investment partnerships is 15%. The new law would raise the rate to as high as 38.5% (three-fourths of the gain would be taxed at ordinary income tax rates and one-fourth at capital gains rates, both of which will be increasing as well).

Tax rates matter. And what matters about them is what activities get taxed, not who gets taxed. When you increase the tax rate on an activity, you get less of it. The only question is how much less of it you will get.

Congress should be asking one question: "Is long-term investment something we really want less of, especially now?" Unfortunately, in today's political climate, tax policy discussions focus almost exclusively upon whom, not what, gets taxed. This means singling out specific groups of people—bankers, Wall Street, "the rich," the owners and executives of insurance, oil and drug companies—to punish for our economic difficulties. This may be politically popular but will have bad consequences for the economy.

Swiss Sell UBS AG Stocks, Tax Settlement Already Rewarding

As a result of the yesterday’s announcement that the names of over 4,500 Americans using bank accounts to avoid taxes would get turned over to the US government, Switzerland decided to let go of their UBS AG investments this morning. The sale earned the Swiss government an estimated $1.2 billion Francs – or about $1.1 billion in US currency.

The Swiss state sold 332.2 million shares to institutional investors at 16.50 francs each, the government said in a statement today. Including a 1.8 billion-franc cash payment the state is getting from UBS, the proceeds amount to about 7.2 billion francs.

The government bought 6 billion francs of UBS mandatory convertible notes last year to help the Zurich-based bank split off toxic assets amid the worst economic crisis since the Great Depression. The settlement of a U.S. lawsuit that sought data on 52,000 UBS clients and a 3.8 billion-franc capital increase in June strengthened confidence in the bank, the government said.

“The exit is a positive signal, as it shows the confidence of the Swiss government regarding the situation of UBS,” Stefan Schuermann, an analyst at Vontobel with a “hold” rating on the stock, said in a note. “The placement increases UBS’s flexibility in rebuilding its franchise and will help to keep or hire key employees.”

UBS rose 76 centimes, or 4.5 percent, to 17.50 francs in Swiss trading. UBS shares have risen 17 percent since the U.S. and Switzerland said they had reached an agreement in principle on the tax lawsuit on July 31.

Continued at Bloomberg.com…