Tax private equity carried interest as income

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The FT reports this morning that in the States:

Most experts believe that the carried interest paid to general partners in private equity firms and hedge funds should be viewed at least in part as income that should be subject to income tax, Peter Orszag, director of the US Congressional Budget Office said on Wednesday.

His reasoning was clear:

He said most analysts agree that a general partner who manages a fund's investments has a different economic role to the fund's passive investors.

Most also agree that the carried interest paid to the general partner is not primarily based on a return to capital he or she puts at risk, he added.

"If the purpose of the preferential rate on long term capital gains is to encourage investors to put financial capital at risk, there is little reason for that preference to be made available to a general partner, whose risk involves his or her time and effort rather than financial capital," Mr Orszag said.

I agree. There is no argument for this being treated as capital. What these people earn is income. In that case there is no point tinkering with capital gains tax taper rules or anything like that in the UK to increase the rate of tax: the only proper solution will be for carried interest to be subject to UK income tax. That also overcomes the abuse of this source of income under the domicile rules: it will become UK source income not offshore, and so untaxed gains for those not domiciled in the UK.

The economic logic of this is obvious. Will the Chancellor have the courage to act?