is a share of the profits of an investment or investment fund that is paid to the investment manager in excess of the amount that the manager contributes to the partnership.
In private equity, in order to receive carried interest, the manager must first return all capital contributed by the investors, and, in certain cases, the fund must also return a previously agreed-upon rate of return (the "hurdle rate" or "preferred return") to investors.[1] Private equity funds only distribute carried interest to the manager upon successfully exiting an investment, which may take years. The customary hurdle rate in private equity is 7-8% per annum.
In a hedge fund environment, carried interest is usually referred to as a "performance fee". Hedge funds, because they invest in liquid investments, often are able to pay carried interest annually, if the fund has generated a profit for its investors.
The manager's carried-interest allocation will vary depending upon the type of investment fund and the demand for the fund from investors. In private equity, the standard carried-interest allocation historically has been 20% for funds making buyout and venture investments.
But is still kinda opaque. And it's not clear what the 20% really is in this description.
But I'll try for a simple guide:
So basically, you have investors. They supply the money. They are told they will get at least a certain rate of return on that money.
In return for managing said money, the manager of the .... thing gets a fee. In order to motivate said manager to do the best (s)he can, that fee is based on how much money the .... thing makes. Said fee is called "Carried Interest" or "The Carry".
When the .... thing in question makes money, it first pays back the investors their money and their rate of return on that money.
Now, if I understand this correctly, the money on top of those initial funds and rate of return is the "profit" or whatever. It's a big lump of money. The manager gets 20% of that (or some other percentage). This is his management fee, again, called "carried interest".
The rest of said profit, I assume, goes back to the investors in proportion to their investment in the .... thing.
So, in summary, carried interest is the fee the guy managing the ... thing gets for doing all the managing work. He gets a skim off the top, but only after the initial investors are given a guaranteed return on their investment. (though I'm assuming this guarentee doesn't hold if the ... thing makes less money then the ROR or loses money)
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
is a share of the profits of an investment or investment fund that is paid to the investment manager in excess of the amount that the manager contributes to the partnership.
In private equity, in order to receive carried interest, the manager must first return all capital contributed by the investors, and, in certain cases, the fund must also return a previously agreed-upon rate of return (the "hurdle rate" or "preferred return") to investors.[1] Private equity funds only distribute carried interest to the manager upon successfully exiting an investment, which may take years. The customary hurdle rate in private equity is 7-8% per annum.
In a hedge fund environment, carried interest is usually referred to as a "performance fee". Hedge funds, because they invest in liquid investments, often are able to pay carried interest annually, if the fund has generated a profit for its investors.
The manager's carried-interest allocation will vary depending upon the type of investment fund and the demand for the fund from investors. In private equity, the standard carried-interest allocation historically has been 20% for funds making buyout and venture investments.
But is still kinda opaque. And it's not clear what the 20% really is in this description.
But I'll try for a simple guide:
So basically, you have investors. They supply the money. They are told they will get at least a certain rate of return on that money.
In return for managing said money, the manager of the .... thing gets a fee. In order to motivate said manager to do the best (s)he can, that fee is based on how much money the .... thing makes. Said fee is called "Carried Interest" or "The Carry".
When the .... thing in question makes money, it first pays back the investors their money and their rate of return on that money.
Now, if I understand this correctly, the money on top of those initial funds and rate of return is the "profit" or whatever. It's a big lump of money. The manager gets 20% of that (or some other percentage). This is his management fee, again, called "carried interest".
The rest of said profit, I assume, goes back to the investors in proportion to their investment in the .... thing.
So, in summary, carried interest is the fee the guy managing the ... thing gets for doing all the managing work. He gets a skim off the top, but only after the initial investors are given a guaranteed return on their investment. (though I'm assuming this guarentee doesn't hold if the ... thing makes less money then the ROR or loses money)
That is all accurate. To be clear, the carry is paid after the investors' capital is returned and after the investors received their guaranteed profit (usually around 8%) but before the investors receive the pro rata share of the profits in excess of the guaranteed profit. Another way of looking at it is to think of a cash waterfall with the investors as having made a loan to the fund, so principal and interest must be paid before anything else goes to the "equity holders," the next 20% going to the manager as if he had preferred stock, and then the investors sharing in the remainder as if hey were common stock holders.
1. Correct on both accounts. PE funds are generally set up to avoid public regulation.
6/7. There is one class of restricted investor which I do think is exploitative though. One of the requirements for a fund to offer securities privately is that the purchasers be accredited investors, meaning that they are sophisticated investors with a certain amount of available assets. In order to get around this, certain funds set up a corporation for people who would not be accredited investors to invest through, by getting the corporation to hold enough assets to meet the test. Since the purpose of the accredited investors requirement is to protect unsophisticated investors from the risks of investing in a company which does not have to disclose information ont the same scale as a public company, I regard this structure as running directly contrary to a substantive limitation on investors.
10/11. PE funds often do take out loans up front as part of the transaction, but for various timing or business reasons, they may not be able to take out a loan in connection with the purchase. Also, sometimes a dividend recap is used in addition to acquisition debt as a way of recovering the equity portion of the acquisition price. If the company is not sound, then the banks should not lend money (but my view of the banks' diligence process is very low based on my experience) but the thing you have to keep in mind is that the company needs to be sold in a few years of purchase, and if noone will buy it with its debt load, then the investment is a failure.
I don't want to discuss specific funds, but everyone in the industry works basically the same way.
1. I hope you can understand that from a layman's point of view, doing something to avoid public regulations is going to appear very corrupt. At least part of the reason to have public regulations is to protect the public, after all.
6/7. Why is there such a barrier on being a Private Equity? You've stated it's in the hundreds of millions of dollars or more. Having a lot of money doesn't make someone sophisticated, it just means they have alot of assets. If you have to be an accredited investor, who does the accreditation, and what are the requirements?
10/11. If a company makes profit while operated under a PE, is the PE entitled to the profit? Or does the PE only make money at the end of the 7-11 year period?
Does anything prevent a PE from daisy chaining a bunch of loans and purchases? For example, buy company "A" for "X" dollars, take out a loan for "X" dollars with company "A" as collateral, buy company "B" for "X" dollars, then repeat? This would drop all of the risk onto the bank, and if the answer to the previous question (about profit) is yes, then the PE would reap all the benefits.
I think SKFM previously stated that no profit is earned by the fund until the end, when all the assets are liquidated. I don't think they pay out annual dividends or anything like that.
To my knowledge no one lobbies for reform because they just view it as a cost of doing business. They devote their lobbying efforts to fighting carried interest reform.
Rather than fix the system, they're devoting their time and money to making sure they aren't taxed at a higher rate. This sounds increddibly corrupt to me.
To my knowledge no one lobbies for reform because they just view it as a cost of doing business. They devote their lobbying efforts to fighting carried interest reform.
Rather than fix the system, they're devoting their time and money to making sure they aren't taxed at a higher rate. This sounds increddibly corrupt to me.
Certainly it is a matter of self-interest, since I'm guessing the cost of dealing with the regulations and hiring people like SKFM is easily offset by counting carried interest as capital gains, and also things like when SKFM breaks the tax code.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
1. Correct on both accounts. PE funds are generally set up to avoid public regulation.
6/7. There is one class of restricted investor which I do think is exploitative though. One of the requirements for a fund to offer securities privately is that the purchasers be accredited investors, meaning that they are sophisticated investors with a certain amount of available assets. In order to get around this, certain funds set up a corporation for people who would not be accredited investors to invest through, by getting the corporation to hold enough assets to meet the test. Since the purpose of the accredited investors requirement is to protect unsophisticated investors from the risks of investing in a company which does not have to disclose information ont the same scale as a public company, I regard this structure as running directly contrary to a substantive limitation on investors.
10/11. PE funds often do take out loans up front as part of the transaction, but for various timing or business reasons, they may not be able to take out a loan in connection with the purchase. Also, sometimes a dividend recap is used in addition to acquisition debt as a way of recovering the equity portion of the acquisition price. If the company is not sound, then the banks should not lend money (but my view of the banks' diligence process is very low based on my experience) but the thing you have to keep in mind is that the company needs to be sold in a few years of purchase, and if noone will buy it with its debt load, then the investment is a failure.
I don't want to discuss specific funds, but everyone in the industry works basically the same way.
1. I hope you can understand that from a layman's point of view, doing something to avoid public regulations is going to appear very corrupt. At least part of the reason to have public regulations is to protect the public, after all.
6/7. Why is there such a barrier on being a Private Equity? You've stated it's in the hundreds of millions of dollars or more. Having a lot of money doesn't make someone sophisticated, it just means they have alot of assets. If you have to be an accredited investor, who does the accreditation, and what are the requirements?
10/11. If a company makes profit while operated under a PE, is the PE entitled to the profit? Or does the PE only make money at the end of the 7-11 year period?
Does anything prevent a PE from daisy chaining a bunch of loans and purchases? For example, buy company "A" for "X" dollars, take out a loan for "X" dollars with company "A" as collateral, buy company "B" for "X" dollars, then repeat? This would drop all of the risk onto the bank, and if the answer to the previous question (about profit) is yes, then the PE would reap all the benefits.
1. When I say public regulations, I mean the regulatory scheme that applies to entities who sell their interests to more than 100 persons, and that are therefore subject to the SEC filing and disclosure obligations applicable to public companies. They still comply with the disclosure requirements that apply to private companies, and actually disclose much more than most private entities because the investors require detailed financial information. Sorry for the confusion (sometimes I forget some terms aren't common knowledge).
2. The idea behind the accredited investor requirement is to make sure that the investors entering private investments (to which public company protections do not apply) are sophisticated enough to evaluate the risks. For some reason which I don't fully understand, having money is used as a proxy for understanding the risks of complex investments. A securities lawyer could explain this much better than I can.
3. It is possible to have the portfolio company distribute its profits to the PE fund as dividends, but this is very rare. Normally, you keep the money at the company level, to invest into further growth, with the end game being a sale for the highest possible price.
4. What you have just described is the dividend recapitalization. I described how these work in the OP. It really is up to the banks to make good assessments of the risks of these loans, and in my experience, they are terrible at this. The banks normally just rely on the track records of the PE funds, and assume that if the PE fund is investing in the company, it is probably a safe bet. Since the banks are literally the counterparties to the fund in issuing these loans, this attitude is unacceptable in my opinion. I may spend 30 hours reviewing the benefits and compensation issues with the company prior to a PE investment, and then the bank's lawyers (usually VERY junior people with no partner supervision) spend 15 minutes asking me what I think of the company. Keep in mind that I am representing the interests of the PE fund, who the bank is negotiating with, yet they are obtaining all of their information about the company from their opponent at the bargaining table. If anything in the modern financial system needs an overhaul, it is the process banks use in assessing risk, IMO.
To my knowledge no one lobbies for reform because they just view it as a cost of doing business. They devote their lobbying efforts to fighting carried interest reform.
Rather than fix the system, they're devoting their time and money to making sure they aren't taxed at a higher rate. This sounds increddibly corrupt to me.
Certainly it is a matter of self-interest, since I'm guessing the cost of dealing with the regulations and hiring people like SKFM is easily offset by counting carried interest as capital gains, and also things like when SKFM breaks the tax code.
That is right. You have to keep in mind that noone is obligated to lobby congress. Congress passes the laws, and so it is the body that is responsible for weighing all of the interests and coming to the "right" rule. Private parties lobbying congress always focus on the issues that are most important to them, and while PE would love a simpler system for operating and organizing their funds, the cost to them of the current system in real dollars is pocket change next to the benefit of having the carry taxed at 15%.
Okay, I am going to say some... stuff, based on thoughts that have been rattling in my head. This is based on reading most (though not all) of what has been said in here and in the Election thread as pertains to PE, tax law, scary-rich people, and so on. First, I will lay out the assumptions that underly my thinking, in hopes that you will correct anything that is factually wrong (or, of course, quibble with if your opinion differs). They are:
1. Tax law is omgcrazy complicated.
2. It is this way partly because things have been added piecemeal for the last several decades, and partly because certain lobbying interests benefit from certain elements of omgcrazy complications.
3. Regardless of where the complexity comes from, the upshot of this is that enterprising tax folks, such as yourself, are often able to find ridiculous and unintentional loopholes that allow people to legally get out of paying money that should rightfully be paid. I am thinking in particular of your assertion last week that you effectively broke the tax law as it applies to CEO compensation by finding a legal way to get virtually all compensation taxed at the capital gains rate. This is the sort of thing my "should" is referring to.
4. Part of the problem, you have stated, is that the government, no matter how well-intentioned it might be, is outclassed by the people in your line of work. No matter what sort of laws they might try to make, there are people making extremely good money to effectively game the system. It's largely analogous to the problem of preventing digital copyright infringement - no matter what sort of security is implemented, you have an army of hackers trying to break it. The army will win. Similarly, the private tax code experts will win whenever they go up against the government. The system is simply stacked in their favor.
5. Money is not always the motivating factor, here. A lot of it is, to the people on your end, just a game. You are a given a set of rules and told to maximize and minimize certain numbers based on that ruleset. It is fun. Breaking the tax code is fun. Most truly brilliant people (and here we're dipping into conjecture) are, I think, more motivated by things like challenge and gaming versus money. Money certainly helps, but it's not invariably the principal driving factor.
Okay, there's all that. That is where I'm starting from, so if any of that is wrong, let me know. From there, I think we ("we" being the group of people who want a fair and logical tax code) are collectively trying to get to the following:
A. The tax code should be as complex as it needs to be, and no more.
B. Any element of the tax code that is written in specifically to benefit a certain subset of people by that certain subset of people should be killed with fire.
Now, to get there from where we are, it seems pretty apparent (to me, anyway) that we need to get some of the smart guys out of the private tax-prepping industry and into the public sphere. So what if, instead of private companies paying them to break the tax code for private gain, the government paid them to break the tax code for us?
Maybe something like this already sort of exists, but if it does it's doing a pretty shitty job. But right now, you, skfm, spend some of your time fucking with numbers in order to make them prettier numbers, and you do this in the midst of also doing more mundane stuff (I imagine). Rote number crunching, following whatever templates you follow in order to set up Standard Corporate Profile for Customer #82718. You have mentioned that playing with numbers and finding ways to bend them to your will is the fun part of your job, and is a lot of the motivation for you staying in this industry. What if there was a place where you could basically spend all your time trying to break things? Stress test the tax code, and see what crazy shit you can come up with that goes against the intended purpose of the code.
So what if we set up a non-partisan group that existed solely to find holes in the tax code? Maybe make it an arm of the CBO, or something. It would be important that such a group be viewed as non-partisan, and had as it's goal strictly reporting on ways in which the tax code does not work as intended, and finding "loopholes" in the actual meaning of the word (and not just as a euphemism for "any tax deduction"). Could this sort of thing even work? How many people would it take for it to be effective? What would it take to make a job appealing to the point where the brilliant people we need would be willing to work for something like that? Or is this just a terrible idea, or else something we already have that is not working for other reasons?
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
edited August 2012
I think this is all right, but I disagree with your "B." There are actually a number of code sections that were written in whole or in part by the beneficiaries, but which are really sound from a policy standpoint. What is important is to make sure that any language that will affect the tax code goes through the joint committee on taxation and is generally vetted by experts instead of just being introduced into a bill after it is handed to a senator of member of the house by someone from the outside.
The joint committee on taxation already does what you are describing. The problem is that joint committee is staffed by a mix of younger people who are taking a break from the private sector or career staffers who are out of touch with the market because they don't interact with it enough. They are also woefully understaffed and underfunded, to the point where someone who was spent one year at a law firm can wind up in charge of hundreds of code sections. I think that the solution is to staff them up tremendously, with a mix of career people who really know what they're doing (probably partners from top law firms and directors from top accounting firms) and younger people with some private sector experience who are actually interested in staying for the long haul, instead of the typical 2-4 year stint. The pay needs to be in the 7 figures, which I know is outrageous for government work, but it is the only way to keep them from leaving to return to the private sector, since that is what they're making out there anyway. The government also needs to pay for them to travel to conferences all the time, so that they can keep their pulse on what is happening in the private sector. Right now, the people who are most in tune with the private sector are the ones who are making all their decisions with an eye towards partnership at a law firm, and that is not ideal for getting the best laws possible.
If the job paid high six figures or low sevens and there were actually enough people there so that noone was super overworked, I would take that job in a heart beat and never look back.
If the job paid high six figures or low sevens and there were actually enough people there so that noone was super overworked, I would take that job in a heart beat and never look back.
See, this is what I'm hoping can be worked around. There is no way you're going to get a contingent of public-sector workers compensated to the tune of 2-3 times what the president makes. So if the only way we can get savvy people overlooking the tax code is to pay them that much, then it just can't be done.
But I'm not sold on the idea that this is the only way. Studies have shown that the best way to attract good employees and keep them content isn't by just paying them more, but rather by crafting work environments that make them happy. Give someone the freedom to craft their workday as they see fit, or give them designated times to just work on whatever the fuck they want, and you will increase their happiness and productivity more than if you just gave them a raise or bonus. People's motivations, broadly speaking, are not always financial.
Now, it's possible that this doesn't apply to the subset of people who become experts on tax law and financing regulations and wind up in PE and similar vocations. But that would make them outliers. Are you asserting that all of the people you work with - literally all of them - got into their field solely to make wads of cash, and are thus only motivatable with such cash wads? Because if they have other motivations - intellectual or otherwise - then a solution might be possible. Speaking of you personally, is there literally nothing that would ever sway you to take, say, a $150k per year job? I mean, say someone comes to you and says, "Okay, we want you to do stuff to our tax numbers. Your total monetary compensation will be $150k plus health benefits. Beyond that, we will tailor your work environment in whatever crazy-ass way you want. You can work in your underwear and set your own hours and whatever, just name your terms." Do you even begin to approach negotiations? Would anyboy you know of in your line of work do so?
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(As regards your disagreement with my B, fair enough. There may be exceptions, but I think you probably get what I'm going after, here. Generally, if Company X is writing legislation specifically to benefit Company X and then handing it to his pet legislator, that is not good legislation.)
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
If the job paid high six figures or low sevens and there were actually enough people there so that noone was super overworked, I would take that job in a heart beat and never look back.
See, this is what I'm hoping can be worked around. There is no way you're going to get a contingent of public-sector workers compensated to the tune of 2-3 times what the president makes. So if the only way we can get savvy people overlooking the tax code is to pay them that much, then it just can't be done.
But I'm not sold on the idea that this is the only way. Studies have shown that the best way to attract good employees and keep them content isn't by just paying them more, but rather by crafting work environments that make them happy. Give someone the freedom to craft their workday as they see fit, or give them designated times to just work on whatever the fuck they want, and you will increase their happiness and productivity more than if you just gave them a raise or bonus. People's motivations, broadly speaking, are not always financial.
Now, it's possible that this doesn't apply to the subset of people who become experts on tax law and financing regulations and wind up in PE and similar vocations. But that would make them outliers. Are you asserting that all of the people you work with - literally all of them - got into their field solely to make wads of cash, and are thus only motivatable with such cash wads? Because if they have other motivations - intellectual or otherwise - then a solution might be possible. Speaking of you personally, is there literally nothing that would ever sway you to take, say, a $150k per year job? I mean, say someone comes to you and says, "Okay, we want you to do stuff to our tax numbers. Your total monetary compensation will be $150k plus health benefits. Beyond that, we will tailor your work environment in whatever crazy-ass way you want. You can work in your underwear and set your own hours and whatever, just name your terms." Do you even begin to approach negotiations? Would anyboy you know of in your line of work do so?
There are already really great people in government, the problem is that they are all in treasury, writing the regulations. The reason treasury attracts better people (especially when it comes to lifers) is that writing the regulations is more or less carte Blanche. When you work at joint committee, all you can do is advise congress on what the rules should be, but you can't stop them from changing them in stupid ways after you hand something workable to them.
Also, no one comes to joint committee to ask for a new, sound tax code. They have to work on what congress instructs them to, and since most members of congress don't have a tax background, they don't know what to ask for, and ask for stupid things a lot.
If the offer was to draft sound tax policy which you then put before congress for an up or down vote, I think you could get a lot of people to leave the private sector for low to mid six figures. The problem with the current system is that, like the private sector, clients are dumb sometimes, and you have to listen to them. So the end result is high end work in the public and private sector, with better hours in the public sector (really they're amazing) and much better pay in the private sector. The number one incentivizer would be eliminating clients entirely, but unless we turn tax policy into a pure meritocracy and exclude our elected officials, working to their whims will always be a huge turn off.
Okay, given all that - and forgive me if you've already covered this - what would you recommend? You're the first to admit we need to highlight the crazy stuff that's going on and reform the tax code. How do we get there from here? Is there a way to get something along the lines of corporate whistle-blowers? Get tax guys to say, "Hey look, I just completely broke the tax code, and now Crazy Thing X is possible!" on a public stage when it happens? If what's needed is more illumination into how this stuff works, how do we make an appropriate flashlight?
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sportzboytjwsqueeeeeezzeeeesome more tax breaks outRegistered Userregular
Okay, given all that - and forgive me if you've already covered this - what would you recommend? You're the first to admit we need to highlight the crazy stuff that's going on and reform the tax code. How do we get there from here? Is there a way to get something along the lines of corporate whistle-blowers? Get tax guys to say, "Hey look, I just completely broke the tax code, and now Crazy Thing X is possible!" on a public stage when it happens? If what's needed is more illumination into how this stuff works, how do we make an appropriate flashlight?
You could put out "bounties" on breaking the code to give incentive to outsiders to help out.
Your point about pay not determining (always) where people work doesn't really hold up when you're asking people to take something like 1/10th pay for a comparable job. They might at 80% what they could make on the "outside" but when you start getting into 1 slice of the pizza vs the pizza...
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Okay, given all that - and forgive me if you've already covered this - what would you recommend? You're the first to admit we need to highlight the crazy stuff that's going on and reform the tax code. How do we get there from here? Is there a way to get something along the lines of corporate whistle-blowers? Get tax guys to say, "Hey look, I just completely broke the tax code, and now Crazy Thing X is possible!" on a public stage when it happens? If what's needed is more illumination into how this stuff works, how do we make an appropriate flashlight?
Honestly, without the cash incentive, there just isn't a way to make it work. Everyone respects government work, and lots of people think about it wistfully, but like sportz said, taking a huge pay cut when you are already doing market leading high end work is a tough sell.
Edit: Actually, you might be able to get it to work by bringing academics in. Academics are smart, understand the nuances, and want more than anything to see their policy positions realized. The only problem is that they still aren't a match for the top private sector people on pure rules lawyering, because breaking the tax code isn't really incentived in that world.
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sportzboytjwsqueeeeeezzeeeesome more tax breaks outRegistered Userregular
Okay, given all that - and forgive me if you've already covered this - what would you recommend? You're the first to admit we need to highlight the crazy stuff that's going on and reform the tax code. How do we get there from here? Is there a way to get something along the lines of corporate whistle-blowers? Get tax guys to say, "Hey look, I just completely broke the tax code, and now Crazy Thing X is possible!" on a public stage when it happens? If what's needed is more illumination into how this stuff works, how do we make an appropriate flashlight?
Honestly, without the cash incentive, there just isn't a way to make it work. Everyone respects government work, and lots of people think about it wistfully, but like sportz said, taking a huge pay cut when you are already doing market leading high end work is a tough sell.
Edit: Actually, you might be able to get it to work by bringing academics in. Academics are smart, understand the nuances, and want more than anything to see their policy positions realized. The only problem is that they still aren't a match for the top private sector people on pure rules lawyering, because breaking the tax code isn't really incentived in that world.
You could also incentivize with non-cash incentives (full ride scholarships for employee's spouses after 5 years, full rides for the children after 10 years), retirement at 20 years, college loan forgiveness, a "company" car after 3 years, options to buy the car after the lease ends, a nice (free) in-building restaurant (no charge for employees), generous vacations (say 28 days/year), taxfree status, etc that aren't exactly a cash payment to the people but would be perky (and valuable) enough to help bridge the gap while not costing as much, or showing up as a huge charge to the government.
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sportzboytjwsqueeeeeezzeeeesome more tax breaks outRegistered Userregular
Also: you could put this (or part of it) as a military branch concern; if the USAF has a tech wing, why not have a tax wing? You could theoretically have 100 whip-smart young people who just finished MBAs in tax/finance/related areas working under highly paid professionals (think SKFM) and academics, so you'd have to pay the top people a ton, but the muscle at the bottom would be dedicated to the group for 10+ years and would probably stick around afterwards (either as a civilian or to retirement, then rejoin the group as a civilian)
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Also: you could put this (or part of it) as a military branch concern; if the USAF has a tech wing, why not have a tax wing? You could theoretically have 100 whip-smart young people who just finished MBAs in tax/finance/related areas working under highly paid professionals (think SKFM) and academics, so you'd have to pay the top people a ton, but the muscle at the bottom would be dedicated to the group for 10+ years and would probably stick around afterwards (either as a civilian or to retirement, then rejoin the group as a civilian)
This is a model that could really work. People would be willing to make the commitment, because then if they left they would walk I to partnerships at firm's, most likely, and the ones that stay could replace the original outside hires from the private sector over time.
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sportzboytjwsqueeeeeezzeeeesome more tax breaks outRegistered Userregular
Also: you could put this (or part of it) as a military branch concern; if the USAF has a tech wing, why not have a tax wing? You could theoretically have 100 whip-smart young people who just finished MBAs in tax/finance/related areas working under highly paid professionals (think SKFM) and academics, so you'd have to pay the top people a ton, but the muscle at the bottom would be dedicated to the group for 10+ years and would probably stick around afterwards (either as a civilian or to retirement, then rejoin the group as a civilian)
This is a model that could really work. People would be willing to make the commitment, because then if they left they would walk I to partnerships at firm's, most likely, and the ones that stay could replace the original outside hires from the private sector over time.
Yes. And it's arguably a competitive offer during those 10 years; you're getting topflight experience, military connections, financial connections, full health, meal, and housing pay (I mean, you might need to bump up normal housing allowances), and you'd probably be able to cover college costs too.
Walkerdog on MTGO
TylerJ on League of Legends (it's free and fun!)
So how do you sell the tax wing as a military concern? I mean, if you could pull it off, that's brilliant - people will throw crazy-stupid amounts of money at anything if they think it will keep us safer from terrorists or commies or whatever is the threat du jour. But how do we get there given a contingent in the government who consider employing fucking firemen and teachers to be giant bureaucratic big-gummint boondoggles? (Which is why I was trying to come up with non-financial incentives to woo smart people.)
I mean really, if we can come up with a feasible plan for implementing something like this, I will craft a letter and start spamming the relevant congresscritters.
I submitted an entry to Lego Ideas, and if 10,000 people support me, it'll be turned into an actual Lego set!If you'd like to see and support my submission, follow this link.
So how do you sell the tax wing as a military concern? I mean, if you could pull it off, that's brilliant - people will throw crazy-stupid amounts of money at anything if they think it will keep us safer from terrorists or commies or whatever is the threat du jour. But how do we get there given a contingent in the government who consider employing fucking firemen and teachers to be giant bureaucratic big-gummint boondoggles? (Which is why I was trying to come up with non-financial incentives to woo smart people.)
I mean really, if we can come up with a feasible plan for implementing something like this, I will craft a letter and start spamming the relevant congresscritters.
The same way you decide that the Air Force is in charge of the Tech War stuff.
Blah blah tax evasion by foreign companies and big business is threat to the nation blah blah military finest men and woman blah blah educated blah best in field blah blah will protect our country's ability to pay its bills blah.
And it really wouldn't cost much, relatively speaking. You'd make a real finance/tax squadron, throw ~$50 million/yr at the officers you'd hire to work there (probably 0 enlisted, not much point, but maybe you could grab some of the 99 pointers on the ASVAB to work as interns/researchers/pages), and then another $50 million/yr for the team of experts you'd put in place. It might even cost twice that, but even at 5x that ($500 million) for a team to revamp the tax code and then oversee it, it's a steal. It would pay for itself if the team was as good as it should be.
Walkerdog on MTGO
TylerJ on League of Legends (it's free and fun!)
There actually is a bounty system for reporting people that are not paying their taxes. However, the bounty system does not kick in unless the person was under reporting by a large amount. This is totally anecdotal, but I've been told by people who tried to collect that the system is not organized properly and that people who should get the bounties often don't.
It seems to me there is a fairly substantial anti-tax culture in some parts of the US. This is related to a general anti-government sentiment. A lot of people will try to avoid taxes because they view the government as immoral, and their tax payments as funding sin/decadence/murder. There is a fairly large group of people that will do everything they can to avoid paying taxes that they should pay, and you will have to have tax collectors breathing down their neck to get them to pay up.
I'm an accounting major, I want to work for the government for a whole bunch of reasons that I won't get into. I've done a lot of research into applying for government jobs... I've been told by local state and federal government employees that there is substantial cronyism in government employment, and that if I don't "Know someone," I should not expect to get hired for any position. I'm of the opinion that this is generally true, and is a big part of why the government has a lot of it's problems.
(As regards your disagreement with my B, fair enough. There may be exceptions, but I think you probably get what I'm going after, here. Generally, if Company X is writing legislation specifically to benefit Company X and then handing it to his pet legislator, that is not good legislation.)
You have to consider that most (if not nearly all) tax code changes are driven by special interest groups, and that not all special interest groups are bad. For example, tax code changes to make things better for non-profit organizations are probably driven by non-profits and charities, and not by big oil. You'd be throwing out the baby with the bathwater.
You don't sell the tax wing as military (I think that was just an analogy), but you could sell it as national security. Look at the recent HSBC fiasco. How much money did they funnel to drug lords and terrorists? Would having a simpler tax system have prevented some or most of that?
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sportzboytjwsqueeeeeezzeeeesome more tax breaks outRegistered Userregular
I'll try to come up with the wording/plan minus the blahs later, that was just my kneejerk reaction. I mean, we have military representation/grunt work in a lot of areas that are a little surprising (a.e. at the cool observatory in Australia for example), so why not here, where it is both to the benefit of the military and a legitimate concern (say, because foreign companies and nationals buying US land and business interests and evading taxes is a "threat" to national security).
Walkerdog on MTGO
TylerJ on League of Legends (it's free and fun!)
I'm going to try to draft a letter in the next few days. I'll post it here for feedback.
I submitted an entry to Lego Ideas, and if 10,000 people support me, it'll be turned into an actual Lego set!If you'd like to see and support my submission, follow this link.
There are also problems like this, the government has to want to collect taxes in order to do it. If someone decides, "we need government cutbacks to be across the board" that will end up including tax collectors even if eliminating, or in this case furloughing them will cost the state more revenue than it would to keep them on.
I suspect that in many cases governments could generate large amounts of tax revenue simply by hiring more tax collectors.
Well, there are two separate (but likely related) problems. One is collecting taxes from those who legally owe them but are not paying. The other is changing the tax code to make sure that what is "legally owed" is in line with our stated goals and expectations. People like Romney aren't (as far as we know) tax cheats, but they are likely paying far less than what most people would deem fair or reasonable, because the tax code allows crazy gaming.
I submitted an entry to Lego Ideas, and if 10,000 people support me, it'll be turned into an actual Lego set!If you'd like to see and support my submission, follow this link.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
There are also problems like this, the government has to want to collect taxes in order to do it. If someone decides, "we need government cutbacks to be across the board" that will end up including tax collectors even if eliminating, or in this case furloughing them will cost the state more revenue than it would to keep them on.
I suspect that in many cases governments could generate large amounts of tax revenue simply by hiring more tax collectors.
The return on revenue examiners is insane. The US currently has one of the lowest costs of collection in any country, thanks to our self reporting system, but even if hiring additional personnel reduces this efficiency, it absolutely raises real dollars. It is not ethical to advise clients on audit risk, so we don't do it, but the reality is that the odds of being audited are so low (unless you are under continuous audit) that all the precision and thought people like me provide is just an insurance policy against audit.
Well, there are two separate (but likely related) problems. One is collecting taxes from those who legally owe them but are not paying. The other is changing the tax code to make sure that what is "legally owed" is in line with our stated goals and expectations. People like Romney aren't (as far as we know) tax cheats, but they are likely paying far less than what most people would deem fair or reasonable, because the tax code allows crazy gaming.
The complexity of the US tax code is staggering. I can barely even carry the entire code plus regulations. It takes up a full book shelf in my office, and that isn't even counting the interpretive guidance and rulings (the volume of these is insane). I dont keep the volumes with all the guidance because they would literally take up all the bookshelves in my office. Tax related crimes are the only type of crime where you can use "my lawyer said it was ok" as a defense, because there isn't an expectation that people can understand it without their lawyers. We have a seperate tax court system, in addition to the adjudicative branch of the IRS, and the two adjudicative bodies at the DOL (EBSA and the PBGC). There are single tax code sections where the regulations are longer than most entire tax codes. I contribute to a 1000+ page book on one code section. In addition to my main Tax and ERISA practices, I do HIPAA work, which is considered one of the most complex statutory regimes in existence, but is kind of how I shut my brain off since its so much simpler than the tax code (I'm actually able to keep most of the ststute and regulations in memory, but i can't do that with the tax code). No matter how you slice it, our system is incredibly complex.
To give you an idea of the resource gap between the public and private sectors, I can pull up every single piece of guidance and legislative history on my iPhone through a subscription service which the government can't afford to subscribe to, which results in a knowledge gap because they forget certain old guidance even exists. That's part of how I was able to render a complex corporate structure immune to a new tax a month or so ago based on 30 year old guidance which the IRS forgot existed, but which is still binding on them. My firm has a whole department of experts who handle mundane issues, and then there are a handful of people like me who just focus on the most complex issues and do the highest end work coming up with creative solutions. There are probably 50 firms in America who are basically exactly comparable to mine, and we are each deeply superior to the government in expertise, resources, and man power. I would virtually guarantee that a team of people like me would increase revenue to a significant extent even if the government paid us each eight figures.
Well, there are two separate (but likely related) problems. One is collecting taxes from those who legally owe them but are not paying. The other is changing the tax code to make sure that what is "legally owed" is in line with our stated goals and expectations. People like Romney aren't (as far as we know) tax cheats, but they are likely paying far less than what most people would deem fair or reasonable, because the tax code allows crazy gaming.
You know, I hear alot about how low Romney's tax rate is, but my federal income tax after deductions like interest on my house is, percentage wise, comperable. You can also tell that Romney isn't getting all of his income as capitcal gains because if he was, with the deductions available, his overall tax rate would be much lower than 13.9%.
A) The fact that a multi-millionare like Romney pays a tax rate comparable to Random Middle Class Dude's is a problem in itself.
Romney only gave us one part of one year's returns. God know what's in the returns that he won't release, but it pretty clearly does not paint a rosy picture of his tax burden.
I submitted an entry to Lego Ideas, and if 10,000 people support me, it'll be turned into an actual Lego set!If you'd like to see and support my submission, follow this link.
@spacekungfuman, @sportzboytjw
Okay, here's a first draft of a letter. Yes, it's wordy and probably riddled with typos; I'll work on that. Am I getting the gist of this right? Any other suggestions?
Dear XXXXX,
I have spent the last several months in witness of the national discourse as regards our nation’s tax code. The code is a great and bloated labyrinth of convoluted law, tens of thousands of pages long. It is so immensely complex that even dedicated tax lawyers, even tax law experts employed by the IRS, cannot hope to understand all of it. Part of this problem stems from a tax code assembled piecemeal over a span of decades, and part of this problem results from highly-paid lobbyists fighting for the most favorable tax code their employers’ money can buy. These are certainly weighty issues, but the problems go deeper.
Around the complexities of our tax code has arisen an industry dedicated to mastering the nuances of that code. A handful of people in this country have focused their careers around combining the minutae of tax code in ways that were never intended, and in so doing they can reduce the taxes paid by exceedingly wealthy individuals and massive corporations to a pittance. These tax wizards are brilliant people, paid exceptionally well to effectively break the system. This is not meant to disparage these people - they are honest people given a job to do, and they do it amazingly well, all without breaking a single law. But the fact remains that there is a game being played. On one side, we have the legislators and public servants who craft tax law. On the other side, the tax experts hired to exploit it. And in this game, the public side is out-manned, out-spent, and, put bluntly, out-classed. It is tantamount to putting a highschool football team against an NFL All-Star team and expecting it to be a fair fight. The system as it exists is, if not completely broken, then at least severely bent. And the very nature of the system means that even if, through some miracle, we were gifted with a perfectly functional tax code tomorrow, it would just be broken again over time. It would be gamed to death, just as the current system has been.
I don’t think it has to be this way. The deck is stacked against those who want a fair tax code that functions as intended, but that doesn’t make us powerless. We need to tap into the brilliance and expertise that is, right now, strictly employed by the private sector. We need to fight fire with fire. And while I recognize the political difficulty in devising a new government program staffed with the small army of seven-figure-salaried tax code geniuses necessary to make this a fair fight, especially in this economic and political environment I propose that there may be another way.
The military has numerous divisions dedicated to research in all manner of areas, not just those fields directly related to war, but to other technologies that have non-obvious (though still existent) military applications. The fields of research include information technology, human resource studies, drug studies, environmental health. Perhaps we could add a new program under this military umbrella dedicated to exploring the finer details of our nation’s tax code. We could have it overseen by a staff of well-paid private sector experts, directly culled from the same pool of brilliance from which the private sector draws, and staffed by young military officers and interns who want to build their experience and their resumes. In the course of their employment in this tax research wing, they would develop their skills and their contacts, in the same way that many technically-minded individuals currently seek employment in military-affiliated technical research endeavors to build similarly impressive resumes. After their stint, these employees would be perfectly positioned to move to the private sector, or to remain with the tax research wing, perhaps transferring to one of the more lucrative high-level positions.
Such a program could have an important impact on national security, ensuring that foreign investors cannot manipulate the complexities of our tax code in order to evade the taxes they should rightly pay. And, of course, it would allow our own team of legislators and tax policy authors to gradually adopt our system into one that makes sense. They would be a direct and effective response to those individuals and corporations who employ the brilliance of our nation’s financial experts so as to avoid paying their fair share of taxes. And if we could shore up the inefficiencies and loopholes that plague our tax system, this new program would pay for itself.
We could, at last, have a tax code that works for us rather than against us. And it could be sold to congress and to the public as a bipartisan endeavor that helps ensure fairness to every American while improving our nation’s security from those abroad who might seek to exploit our nation’s laws to do us harm.
Thank you for your time.
Sincerely,
XXXXX
ElJeffe on
I submitted an entry to Lego Ideas, and if 10,000 people support me, it'll be turned into an actual Lego set!If you'd like to see and support my submission, follow this link.
There are also problems like this, the government has to want to collect taxes in order to do it. If someone decides, "we need government cutbacks to be across the board" that will end up including tax collectors even if eliminating, or in this case furloughing them will cost the state more revenue than it would to keep them on.
I suspect that in many cases governments could generate large amounts of tax revenue simply by hiring more tax collectors.
The return on revenue examiners is insane.
For a non-tax example, my mother works in the Wisconsin Inspector General's office for medicare and medicaid fraud investigation. It's a new department that officially started last year, but she's been working with the creation of the department for a few years and just her and a small team (I believe it's 4 or 5 office workers) collected over $60 million that was originally paid out to fraudulant claims, or just paid out in error. Now that the office is official and with a decent amount of workers she said they're looking at recovering over $200 million a year.
There are also problems like this, the government has to want to collect taxes in order to do it. If someone decides, "we need government cutbacks to be across the board" that will end up including tax collectors even if eliminating, or in this case furloughing them will cost the state more revenue than it would to keep them on.
I suspect that in many cases governments could generate large amounts of tax revenue simply by hiring more tax collectors.
The return on revenue examiners is insane.
For a non-tax example, my mother works in the Wisconsin Inspector General's office for medicare and medicaid fraud investigation. It's a new department that officially started last year, but she's been working with the creation of the department for a few years and just her and a small team (I believe it's 4 or 5 office workers) collected over $60 million that was originally paid out to fraudulant claims, or just paid out in error. Now that the office is official and with a decent amount of workers she said they're looking at recovering over $200 million a year.
Isn't the $ value return on the IRS something like 7 to 1? (each dollar spent nets 7 dollars in recovered taxes, currently - presumably one should just keep increasing it's budget till that falls to 1:1).
I like the piracy analogy, but to an extent you actually can accomplish what you want. Yes people will find loopholes, but it's not as if the new loopholes will always be as good as the old loop holes. It's possible to squeeze money out of this stone and (perhaps more importantly) force the money to flow through channels that benefit the economy as a whole more as it tries to avoid taxation
I remember my econ professor talking about working as an arbiter for the SEC and how soul crushing it was. Nearly every case he was a part of, the fine they issued was less than the amount of money gained by breaking the rules. In addition to that, they simply didn't pay him enough to pay off his student loans, it's why he left government work and worked for a firm and then opened his own investment company.
Let me repeat that: This is a great financial mind who desperately wanted to help out his country by using his talents for that goal, and for his PHD in economics the government couldn't pay him enough to both live comfortably and pay off his student loans, while he was beating back high six figure offers from New York in the private sector (which apparently after a few years in the SEC come more frequently with higher dollar amounts attached).
Isn't the $ value return on the IRS something like 7 to 1? (each dollar spent nets 7 dollars in recovered taxes, currently - presumably one should just keep increasing it's budget till that falls to 1:1).
Why do you want to raise spending just to punish hard-working Americans by making them pay the taxes they are legally required to pay? Why, ELM?
I submitted an entry to Lego Ideas, and if 10,000 people support me, it'll be turned into an actual Lego set!If you'd like to see and support my submission, follow this link.
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Giggles_FunsworthBlight on DiscourseBay Area SprawlRegistered Userregular
@spacekungfuman, @sportzboytjw
Okay, here's a first draft of a letter. Yes, it's wordy and probably riddled with typos; I'll work on that. Am I getting the gist of this right? Any other suggestions?
Dear XXXXX,
I have spent the last several months in witness of the national discourse as regards our nation’s tax code. The code is a great and bloated labyrinth of convoluted law, tens of thousands of pages long. It is so immensely complex that even dedicated tax lawyers, even tax law experts employed by the IRS, cannot hope to understand all of it. Part of this problem stems from a tax code assembled piecemeal over a span of decades, and part of this problem results from highly-paid lobbyists fighting for the most favorable tax code their employers’ money can buy. These are certainly weighty issues, but the problems go deeper.
Around the complexities of our tax code has arisen an industry dedicated to mastering the nuances of that code. A handful of people in this country have focused their careers around combining the minutae of tax code in ways that were never intended, and in so doing they can reduce the taxes paid by exceedingly wealthy individuals and massive corporations to a pittance. These tax wizards are brilliant people, paid exceptionally well to effectively break the system. This is not meant to disparage these people - they are honest people given a job to do, and they do it amazingly well, all without breaking a single law. But the fact remains that there is a game being played. On one side, we have the legislators and public servants who craft tax law. On the other side, the tax experts hired to exploit it. And in this game, the public side is out-manned, out-spent, and, put bluntly, out-classed. It is tantamount to putting a highschool football team against an NFL All-Star team and expecting it to be a fair fight. The system as it exists is, if not completely broken, then at least severely bent. And the very nature of the system means that even if, through some miracle, we were gifted with a perfectly functional tax code tomorrow, it would just be broken again over time. It would be gamed to death, just as the current system has been.
I don’t think it has to be this way. The deck is stacked against those who want a fair tax code that functions as intended, but that doesn’t make us powerless. We need to tap into the brilliance and expertise that is, right now, strictly employed by the private sector. We need to fight fire with fire. And while I recognize the political difficulty in devising a new government program staffed with the small army of seven-figure-salaried tax code geniuses necessary to make this a fair fight, especially in this economic and political environment I propose that there may be another way.
The military has numerous divisions dedicated to research in all manner of areas, not just those fields directly related to war, but to other technologies that have non-obvious (though still existent) military applications. The fields of research include information technology, human resource studies, drug studies, environmental health. Perhaps we could add a new program under this military umbrella dedicated to exploring the finer details of our nation’s tax code. We could have it overseen by a staff of well-paid private sector experts, directly culled from the same pool of brilliance from which the private sector draws, and staffed by young military officers and interns who want to build their experience and their resumes. In the course of their employment in this tax research wing, they would develop their skills and their contacts, in the same way that many technically-minded individuals currently seek employment in military-affiliated technical research endeavors to build similarly impressive resumes. After their stint, these employees would be perfectly positioned to move to the private sector, or to remain with the tax research wing, perhaps transferring to one of the more lucrative high-level positions.
Such a program could have an important impact on national security, ensuring that foreign investors cannot manipulate the complexities of our tax code in order to evade the taxes they should rightly pay. And, of course, it would allow our own team of legislators and tax policy authors to gradually adopt our system into one that makes sense. They would be a direct and effective response to those individuals and corporations who employ the brilliance of our nation’s financial experts so as to avoid paying their fair share of taxes. And if we could shore up the inefficiencies and loopholes that plague our tax system, this new program would pay for itself.
We could, at last, have a tax code that works for us rather than against us. And it could be sold to congress and to the public as a bipartisan endeavor that helps ensure fairness to every American while improving our nation’s security from those abroad who might seek to exploit our nation’s laws to do us harm.
Posts
But is still kinda opaque. And it's not clear what the 20% really is in this description.
But I'll try for a simple guide:
So basically, you have investors. They supply the money. They are told they will get at least a certain rate of return on that money.
In return for managing said money, the manager of the .... thing gets a fee. In order to motivate said manager to do the best (s)he can, that fee is based on how much money the .... thing makes. Said fee is called "Carried Interest" or "The Carry".
When the .... thing in question makes money, it first pays back the investors their money and their rate of return on that money.
Now, if I understand this correctly, the money on top of those initial funds and rate of return is the "profit" or whatever. It's a big lump of money. The manager gets 20% of that (or some other percentage). This is his management fee, again, called "carried interest".
The rest of said profit, I assume, goes back to the investors in proportion to their investment in the .... thing.
So, in summary, carried interest is the fee the guy managing the ... thing gets for doing all the managing work. He gets a skim off the top, but only after the initial investors are given a guaranteed return on their investment. (though I'm assuming this guarentee doesn't hold if the ... thing makes less money then the ROR or loses money)
That is all accurate. To be clear, the carry is paid after the investors' capital is returned and after the investors received their guaranteed profit (usually around 8%) but before the investors receive the pro rata share of the profits in excess of the guaranteed profit. Another way of looking at it is to think of a cash waterfall with the investors as having made a loan to the fund, so principal and interest must be paid before anything else goes to the "equity holders," the next 20% going to the manager as if he had preferred stock, and then the investors sharing in the remainder as if hey were common stock holders.
Now, that's what I call...
*sunglasses*
Liquid Assets.
Awesome.
A waterfall is a mechanic for showing how cash gets distributed out of a partnership like a PE fund.
1. I hope you can understand that from a layman's point of view, doing something to avoid public regulations is going to appear very corrupt. At least part of the reason to have public regulations is to protect the public, after all.
6/7. Why is there such a barrier on being a Private Equity? You've stated it's in the hundreds of millions of dollars or more. Having a lot of money doesn't make someone sophisticated, it just means they have alot of assets. If you have to be an accredited investor, who does the accreditation, and what are the requirements?
10/11. If a company makes profit while operated under a PE, is the PE entitled to the profit? Or does the PE only make money at the end of the 7-11 year period?
Does anything prevent a PE from daisy chaining a bunch of loans and purchases? For example, buy company "A" for "X" dollars, take out a loan for "X" dollars with company "A" as collateral, buy company "B" for "X" dollars, then repeat? This would drop all of the risk onto the bank, and if the answer to the previous question (about profit) is yes, then the PE would reap all the benefits.
Rather than fix the system, they're devoting their time and money to making sure they aren't taxed at a higher rate. This sounds increddibly corrupt to me.
Certainly it is a matter of self-interest, since I'm guessing the cost of dealing with the regulations and hiring people like SKFM is easily offset by counting carried interest as capital gains, and also things like when SKFM breaks the tax code.
1. When I say public regulations, I mean the regulatory scheme that applies to entities who sell their interests to more than 100 persons, and that are therefore subject to the SEC filing and disclosure obligations applicable to public companies. They still comply with the disclosure requirements that apply to private companies, and actually disclose much more than most private entities because the investors require detailed financial information. Sorry for the confusion (sometimes I forget some terms aren't common knowledge).
2. The idea behind the accredited investor requirement is to make sure that the investors entering private investments (to which public company protections do not apply) are sophisticated enough to evaluate the risks. For some reason which I don't fully understand, having money is used as a proxy for understanding the risks of complex investments. A securities lawyer could explain this much better than I can.
Here is the definition: http://www.sec.gov/answers/accred.htm
3. It is possible to have the portfolio company distribute its profits to the PE fund as dividends, but this is very rare. Normally, you keep the money at the company level, to invest into further growth, with the end game being a sale for the highest possible price.
4. What you have just described is the dividend recapitalization. I described how these work in the OP. It really is up to the banks to make good assessments of the risks of these loans, and in my experience, they are terrible at this. The banks normally just rely on the track records of the PE funds, and assume that if the PE fund is investing in the company, it is probably a safe bet. Since the banks are literally the counterparties to the fund in issuing these loans, this attitude is unacceptable in my opinion. I may spend 30 hours reviewing the benefits and compensation issues with the company prior to a PE investment, and then the bank's lawyers (usually VERY junior people with no partner supervision) spend 15 minutes asking me what I think of the company. Keep in mind that I am representing the interests of the PE fund, who the bank is negotiating with, yet they are obtaining all of their information about the company from their opponent at the bargaining table. If anything in the modern financial system needs an overhaul, it is the process banks use in assessing risk, IMO.
That is right. You have to keep in mind that noone is obligated to lobby congress. Congress passes the laws, and so it is the body that is responsible for weighing all of the interests and coming to the "right" rule. Private parties lobbying congress always focus on the issues that are most important to them, and while PE would love a simpler system for operating and organizing their funds, the cost to them of the current system in real dollars is pocket change next to the benefit of having the carry taxed at 15%.
Okay, I am going to say some... stuff, based on thoughts that have been rattling in my head. This is based on reading most (though not all) of what has been said in here and in the Election thread as pertains to PE, tax law, scary-rich people, and so on. First, I will lay out the assumptions that underly my thinking, in hopes that you will correct anything that is factually wrong (or, of course, quibble with if your opinion differs). They are:
1. Tax law is omgcrazy complicated.
2. It is this way partly because things have been added piecemeal for the last several decades, and partly because certain lobbying interests benefit from certain elements of omgcrazy complications.
3. Regardless of where the complexity comes from, the upshot of this is that enterprising tax folks, such as yourself, are often able to find ridiculous and unintentional loopholes that allow people to legally get out of paying money that should rightfully be paid. I am thinking in particular of your assertion last week that you effectively broke the tax law as it applies to CEO compensation by finding a legal way to get virtually all compensation taxed at the capital gains rate. This is the sort of thing my "should" is referring to.
4. Part of the problem, you have stated, is that the government, no matter how well-intentioned it might be, is outclassed by the people in your line of work. No matter what sort of laws they might try to make, there are people making extremely good money to effectively game the system. It's largely analogous to the problem of preventing digital copyright infringement - no matter what sort of security is implemented, you have an army of hackers trying to break it. The army will win. Similarly, the private tax code experts will win whenever they go up against the government. The system is simply stacked in their favor.
5. Money is not always the motivating factor, here. A lot of it is, to the people on your end, just a game. You are a given a set of rules and told to maximize and minimize certain numbers based on that ruleset. It is fun. Breaking the tax code is fun. Most truly brilliant people (and here we're dipping into conjecture) are, I think, more motivated by things like challenge and gaming versus money. Money certainly helps, but it's not invariably the principal driving factor.
Okay, there's all that. That is where I'm starting from, so if any of that is wrong, let me know. From there, I think we ("we" being the group of people who want a fair and logical tax code) are collectively trying to get to the following:
A. The tax code should be as complex as it needs to be, and no more.
B. Any element of the tax code that is written in specifically to benefit a certain subset of people by that certain subset of people should be killed with fire.
Now, to get there from where we are, it seems pretty apparent (to me, anyway) that we need to get some of the smart guys out of the private tax-prepping industry and into the public sphere. So what if, instead of private companies paying them to break the tax code for private gain, the government paid them to break the tax code for us?
Maybe something like this already sort of exists, but if it does it's doing a pretty shitty job. But right now, you, skfm, spend some of your time fucking with numbers in order to make them prettier numbers, and you do this in the midst of also doing more mundane stuff (I imagine). Rote number crunching, following whatever templates you follow in order to set up Standard Corporate Profile for Customer #82718. You have mentioned that playing with numbers and finding ways to bend them to your will is the fun part of your job, and is a lot of the motivation for you staying in this industry. What if there was a place where you could basically spend all your time trying to break things? Stress test the tax code, and see what crazy shit you can come up with that goes against the intended purpose of the code.
So what if we set up a non-partisan group that existed solely to find holes in the tax code? Maybe make it an arm of the CBO, or something. It would be important that such a group be viewed as non-partisan, and had as it's goal strictly reporting on ways in which the tax code does not work as intended, and finding "loopholes" in the actual meaning of the word (and not just as a euphemism for "any tax deduction"). Could this sort of thing even work? How many people would it take for it to be effective? What would it take to make a job appealing to the point where the brilliant people we need would be willing to work for something like that? Or is this just a terrible idea, or else something we already have that is not working for other reasons?
The joint committee on taxation already does what you are describing. The problem is that joint committee is staffed by a mix of younger people who are taking a break from the private sector or career staffers who are out of touch with the market because they don't interact with it enough. They are also woefully understaffed and underfunded, to the point where someone who was spent one year at a law firm can wind up in charge of hundreds of code sections. I think that the solution is to staff them up tremendously, with a mix of career people who really know what they're doing (probably partners from top law firms and directors from top accounting firms) and younger people with some private sector experience who are actually interested in staying for the long haul, instead of the typical 2-4 year stint. The pay needs to be in the 7 figures, which I know is outrageous for government work, but it is the only way to keep them from leaving to return to the private sector, since that is what they're making out there anyway. The government also needs to pay for them to travel to conferences all the time, so that they can keep their pulse on what is happening in the private sector. Right now, the people who are most in tune with the private sector are the ones who are making all their decisions with an eye towards partnership at a law firm, and that is not ideal for getting the best laws possible.
If the job paid high six figures or low sevens and there were actually enough people there so that noone was super overworked, I would take that job in a heart beat and never look back.
See, this is what I'm hoping can be worked around. There is no way you're going to get a contingent of public-sector workers compensated to the tune of 2-3 times what the president makes. So if the only way we can get savvy people overlooking the tax code is to pay them that much, then it just can't be done.
But I'm not sold on the idea that this is the only way. Studies have shown that the best way to attract good employees and keep them content isn't by just paying them more, but rather by crafting work environments that make them happy. Give someone the freedom to craft their workday as they see fit, or give them designated times to just work on whatever the fuck they want, and you will increase their happiness and productivity more than if you just gave them a raise or bonus. People's motivations, broadly speaking, are not always financial.
Now, it's possible that this doesn't apply to the subset of people who become experts on tax law and financing regulations and wind up in PE and similar vocations. But that would make them outliers. Are you asserting that all of the people you work with - literally all of them - got into their field solely to make wads of cash, and are thus only motivatable with such cash wads? Because if they have other motivations - intellectual or otherwise - then a solution might be possible. Speaking of you personally, is there literally nothing that would ever sway you to take, say, a $150k per year job? I mean, say someone comes to you and says, "Okay, we want you to do stuff to our tax numbers. Your total monetary compensation will be $150k plus health benefits. Beyond that, we will tailor your work environment in whatever crazy-ass way you want. You can work in your underwear and set your own hours and whatever, just name your terms." Do you even begin to approach negotiations? Would anyboy you know of in your line of work do so?
There are already really great people in government, the problem is that they are all in treasury, writing the regulations. The reason treasury attracts better people (especially when it comes to lifers) is that writing the regulations is more or less carte Blanche. When you work at joint committee, all you can do is advise congress on what the rules should be, but you can't stop them from changing them in stupid ways after you hand something workable to them.
Also, no one comes to joint committee to ask for a new, sound tax code. They have to work on what congress instructs them to, and since most members of congress don't have a tax background, they don't know what to ask for, and ask for stupid things a lot.
If the offer was to draft sound tax policy which you then put before congress for an up or down vote, I think you could get a lot of people to leave the private sector for low to mid six figures. The problem with the current system is that, like the private sector, clients are dumb sometimes, and you have to listen to them. So the end result is high end work in the public and private sector, with better hours in the public sector (really they're amazing) and much better pay in the private sector. The number one incentivizer would be eliminating clients entirely, but unless we turn tax policy into a pure meritocracy and exclude our elected officials, working to their whims will always be a huge turn off.
You could put out "bounties" on breaking the code to give incentive to outsiders to help out.
Your point about pay not determining (always) where people work doesn't really hold up when you're asking people to take something like 1/10th pay for a comparable job. They might at 80% what they could make on the "outside" but when you start getting into 1 slice of the pizza vs the pizza...
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Honestly, without the cash incentive, there just isn't a way to make it work. Everyone respects government work, and lots of people think about it wistfully, but like sportz said, taking a huge pay cut when you are already doing market leading high end work is a tough sell.
Edit: Actually, you might be able to get it to work by bringing academics in. Academics are smart, understand the nuances, and want more than anything to see their policy positions realized. The only problem is that they still aren't a match for the top private sector people on pure rules lawyering, because breaking the tax code isn't really incentived in that world.
You could also incentivize with non-cash incentives (full ride scholarships for employee's spouses after 5 years, full rides for the children after 10 years), retirement at 20 years, college loan forgiveness, a "company" car after 3 years, options to buy the car after the lease ends, a nice (free) in-building restaurant (no charge for employees), generous vacations (say 28 days/year), taxfree status, etc that aren't exactly a cash payment to the people but would be perky (and valuable) enough to help bridge the gap while not costing as much, or showing up as a huge charge to the government.
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This is a model that could really work. People would be willing to make the commitment, because then if they left they would walk I to partnerships at firm's, most likely, and the ones that stay could replace the original outside hires from the private sector over time.
Yes. And it's arguably a competitive offer during those 10 years; you're getting topflight experience, military connections, financial connections, full health, meal, and housing pay (I mean, you might need to bump up normal housing allowances), and you'd probably be able to cover college costs too.
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I mean really, if we can come up with a feasible plan for implementing something like this, I will craft a letter and start spamming the relevant congresscritters.
like, that'd be amazing to do.
The same way you decide that the Air Force is in charge of the Tech War stuff.
Blah blah tax evasion by foreign companies and big business is threat to the nation blah blah military finest men and woman blah blah educated blah best in field blah blah will protect our country's ability to pay its bills blah.
And it really wouldn't cost much, relatively speaking. You'd make a real finance/tax squadron, throw ~$50 million/yr at the officers you'd hire to work there (probably 0 enlisted, not much point, but maybe you could grab some of the 99 pointers on the ASVAB to work as interns/researchers/pages), and then another $50 million/yr for the team of experts you'd put in place. It might even cost twice that, but even at 5x that ($500 million) for a team to revamp the tax code and then oversee it, it's a steal. It would pay for itself if the team was as good as it should be.
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http://www.irs.gov/compliance/article/0,,id=180171,00.html/
It seems to me there is a fairly substantial anti-tax culture in some parts of the US. This is related to a general anti-government sentiment. A lot of people will try to avoid taxes because they view the government as immoral, and their tax payments as funding sin/decadence/murder. There is a fairly large group of people that will do everything they can to avoid paying taxes that they should pay, and you will have to have tax collectors breathing down their neck to get them to pay up.
I'm an accounting major, I want to work for the government for a whole bunch of reasons that I won't get into. I've done a lot of research into applying for government jobs... I've been told by local state and federal government employees that there is substantial cronyism in government employment, and that if I don't "Know someone," I should not expect to get hired for any position. I'm of the opinion that this is generally true, and is a big part of why the government has a lot of it's problems.
You have to consider that most (if not nearly all) tax code changes are driven by special interest groups, and that not all special interest groups are bad. For example, tax code changes to make things better for non-profit organizations are probably driven by non-profits and charities, and not by big oil. You'd be throwing out the baby with the bathwater.
You don't sell the tax wing as military (I think that was just an analogy), but you could sell it as national security. Look at the recent HSBC fiasco. How much money did they funnel to drug lords and terrorists? Would having a simpler tax system have prevented some or most of that?
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I'm going to try to draft a letter in the next few days. I'll post it here for feedback.
I suspect that in many cases governments could generate large amounts of tax revenue simply by hiring more tax collectors.
The return on revenue examiners is insane. The US currently has one of the lowest costs of collection in any country, thanks to our self reporting system, but even if hiring additional personnel reduces this efficiency, it absolutely raises real dollars. It is not ethical to advise clients on audit risk, so we don't do it, but the reality is that the odds of being audited are so low (unless you are under continuous audit) that all the precision and thought people like me provide is just an insurance policy against audit.
The complexity of the US tax code is staggering. I can barely even carry the entire code plus regulations. It takes up a full book shelf in my office, and that isn't even counting the interpretive guidance and rulings (the volume of these is insane). I dont keep the volumes with all the guidance because they would literally take up all the bookshelves in my office. Tax related crimes are the only type of crime where you can use "my lawyer said it was ok" as a defense, because there isn't an expectation that people can understand it without their lawyers. We have a seperate tax court system, in addition to the adjudicative branch of the IRS, and the two adjudicative bodies at the DOL (EBSA and the PBGC). There are single tax code sections where the regulations are longer than most entire tax codes. I contribute to a 1000+ page book on one code section. In addition to my main Tax and ERISA practices, I do HIPAA work, which is considered one of the most complex statutory regimes in existence, but is kind of how I shut my brain off since its so much simpler than the tax code (I'm actually able to keep most of the ststute and regulations in memory, but i can't do that with the tax code). No matter how you slice it, our system is incredibly complex.
To give you an idea of the resource gap between the public and private sectors, I can pull up every single piece of guidance and legislative history on my iPhone through a subscription service which the government can't afford to subscribe to, which results in a knowledge gap because they forget certain old guidance even exists. That's part of how I was able to render a complex corporate structure immune to a new tax a month or so ago based on 30 year old guidance which the IRS forgot existed, but which is still binding on them. My firm has a whole department of experts who handle mundane issues, and then there are a handful of people like me who just focus on the most complex issues and do the highest end work coming up with creative solutions. There are probably 50 firms in America who are basically exactly comparable to mine, and we are each deeply superior to the government in expertise, resources, and man power. I would virtually guarantee that a team of people like me would increase revenue to a significant extent even if the government paid us each eight figures.
You know, I hear alot about how low Romney's tax rate is, but my federal income tax after deductions like interest on my house is, percentage wise, comperable. You can also tell that Romney isn't getting all of his income as capitcal gains because if he was, with the deductions available, his overall tax rate would be much lower than 13.9%.
Okay, here's a first draft of a letter. Yes, it's wordy and probably riddled with typos; I'll work on that. Am I getting the gist of this right? Any other suggestions?
For a non-tax example, my mother works in the Wisconsin Inspector General's office for medicare and medicaid fraud investigation. It's a new department that officially started last year, but she's been working with the creation of the department for a few years and just her and a small team (I believe it's 4 or 5 office workers) collected over $60 million that was originally paid out to fraudulant claims, or just paid out in error. Now that the office is official and with a decent amount of workers she said they're looking at recovering over $200 million a year.
Isn't the $ value return on the IRS something like 7 to 1? (each dollar spent nets 7 dollars in recovered taxes, currently - presumably one should just keep increasing it's budget till that falls to 1:1).
I remember my econ professor talking about working as an arbiter for the SEC and how soul crushing it was. Nearly every case he was a part of, the fine they issued was less than the amount of money gained by breaking the rules. In addition to that, they simply didn't pay him enough to pay off his student loans, it's why he left government work and worked for a firm and then opened his own investment company.
Let me repeat that: This is a great financial mind who desperately wanted to help out his country by using his talents for that goal, and for his PHD in economics the government couldn't pay him enough to both live comfortably and pay off his student loans, while he was beating back high six figure offers from New York in the private sector (which apparently after a few years in the SEC come more frequently with higher dollar amounts attached).
this is goddamn bananas
Why do you want to raise spending just to punish hard-working Americans by making them pay the taxes they are legally required to pay? Why, ELM?
This is a thing I could get behind.