Murdoch Throws Support to Carried Interest Foes

WASHINGTON, DC-A push to change the tax characterization of carried interest made headlines last week—yet again. Most of the news came from the usual sources: politicians calling for the elimination of this corporate tax break.

Chris Van Hollen (D-MD), the ranking Democrat on the House Budget Committee, declared it had to go on Bloomberg Television’s “Political Capital with Al Hunt.” Rep. Sander Levin (D-MI), the top Democrat on the House Ways and Means Committee, told reporters he plans to reintroduce such legislation later this year.

‘Been there, done that’ was, no doubt, the collective response in the industry, which indeed has weathered a number of legislative attempts to kill off carried interest over the years. Then, on Friday, News Corp. chairman Rupert Murdoch Tweeted his opinion of the tax break. He called it a “racket” that cost “billions over many years”—and with that one Tweet a potential game changer was introduced.

“Rupert Murdoch can create quite a bit of momentum for this issue, especially if he enlists his publishing empire to the cause,” David Johnson, principal of the Atlanta GA-based Strategic Vision, tells GlobeSt.com. “Murdoch has not been shy about supporting politicians in the UK and he has the same propensity in the US. But in the US, I think he is trying to be more of an influencer of public policy.”

Murdoch comes to the fight with the additional appeal of being associated with conservative causes. Similar to the way that only a Democrat—President William Clinton—was able to reform welfare, the conventional thinking is that only a conservative or Republican can push for the elimination of this particular tax break.

Few observers—including Johnson—believe that Congress will have the heart to push through a change in carried interest during an election year. “Nevermind the presidential election,” Johnson says. “There are many Senate and House races that depend on private equity money for donations.”

However, Murdoch’s entrance into the debate—especially if it ignites the public—could put enough pressure on Congress to do something in subsequent years. Yes, it is hard to imagine the public’s imagination on fire over an arcane item in the tax code, however a month ago many would have said the same regarding the Stop Online Piracy Act, or SOPA. Also, the issue is bound to continue to be a talking point on the presidential campaign trail as long as Mitt Romney remains a top Republican candidate. 

“When high-profile people start talking about carried interest it becomes a hot-button issue, and I can’t think of anyone more high-profile than the apparent front-runner in the campaign for the Republican presidential nomination,” Harold Levine, who heads the tax practice at Herrick, Feinstein, tells GlobeSt.com.

For the most part, carried interest is associated with private equity transactions, at least with the larger public, but as the commercial real estate industry well knows, it is also crucial to their own deal volume. “Almost every commercial real estate transaction is structured with carried interest,” Levine notes. “If it’s more costly for the promoter to get his profit out, the whole deal pencils out differently. They look at the after-tax return, not just the return, so if the carried interest laws were to change, I think it would slow down deal volume and kill some deals that would otherwise get done.” 

As far as the fairness of how carried interest is characterized, Murdoch and other critics do have a point, Levine adds—some portion should be taxed at the ordinary rate and some at the long-term rate, he says. However, “it’s important to keep in mind that the investor is taking significant economic risk by not taking a fee and by agreeing to make money only if the asset appreciates,” he says. “I think that risk should be rewarded.”