Asness Assails Carried-Interest Proposal

Mar 14 2013 | 11:42am ET

Cliff Asness hasn't been shy about weighing in on matters political. This week, the AQR Capital Management founder takes up his pen to oppose a proposal added on to plans to close the carried-interest tax loophole.

While Asness, who vocally backed Republican Mitt Romney against President Barack Obama in November's election, left the merits of the carried-interest loophole, which allows hedge and private equity fund managers to pay the lower capital-gains rate on performance fee income, aside, he savaged a part of the proposal that would be "a pernicious and economically destructive new tax."

In a column in The Wall Street Journal this week, Asness and AQR chief risk officer Aaron Brown rejected the notion that the carried-interest loophole benefits many hedge fund managers. And they warned that the Enterprise Value Tax, pushed by Democrats in Congress to "claw back" some of the carried-interest savings enjoyed by fund managers, would be much more far-reaching than is claimed.

"The proposed new tax would mostly affect people who don't currently benefit much, if at all, from the tax treatment of carried interest," Asness and Brown wrote.

"The EVT would raise the bulk of its revenue from investment-services partnerships that have little or no carried-interest earnings, or whose carried interest is already taxed at the same rate as ordinary income because the performance fee results from ordinary income or short-term capital gains. That makes the proposed tax less a 'claw back' than a pure claw."

The AQR executives wrote that they pay the ordinary-income tax rate on their earnings, as do most hedge fund managers. And they said that the EVT is merely a convenient way to double or triple the amount raised by the carried-interest proposal, since "simply changing the treatment of carried interest wouldn't raise much."

"The Enterprise Value Tax is a step toward selective punitive wealth taxes. Under the false cover of 'fixing' the treatment of carried interest, it would tax the life's work of one group of entrepreneurs while ignoring all the rest," Asness and Brown concluded. "It would open the door to other targeted wealth taxes, a dangerous and addictive drug. If Republicans regained power, would they pursue taxes only on left-leaning filmmakers? The EVT should be stopped before it starts."

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