ALTLOOK: The Alternative Investments Podcast

In episode four of ALTLOOK: The Alternative Investments Podcast, David Larsen and Megan Greene, Kroll’s Global Chief Economist, discuss how alternative asset funds are taxed and the implications investors may face if tax rates change. What are the ramifications of changing tax rates for certain alternative asset investors from 23% to 65%? Could there be unintended consequences from such an increase? Is it ok that many if not most investors pay no tax at all?

David Larsen is a managing director in the Alternative Asset Advisory practice, based in Seattle, and a Kroll Institute Fellow. David has more than 37 years of transaction and accounting experience. He specializes in fair value accounting, specifically for valuation, accounting and regulatory issues faced by alternative asset managers and investors.

Megan Greene is Global Chief Economist for the Kroll Institute. With an international focus drawn from a career split between the UK and U.S., Megan examines the intersection of macroeconomics, financial markets and politics. She has a breadth of experience working in financial services, academia and policy and tailors her insights and forecasts specifically for her audiences.

Passages from the episode

“The Biden administration obviously has a really aggressive spending program, and in order to pay for it and not blow out the budget deficit and inflate our stock of debt, there are tax changes that will cover some of that. Now for years, I feel like both political parties, depending on who's in power or not have vowed to get rid of the carried interest rate. And so, as the Biden Administration was campaigning, that was one of their promises—that they would get rid of it all together as a so-called tax loophole—and yet we've still got it. And I think that's thanks in part to the power of the business lobby with both parties, the ways and means committee initially tabled a tax bill. And there was very little change in terms of carried interest. In particular, the holding period was shifted from three to five years.” – Megan Greene

“The argument that the Biden administration has had on this is that effectively you've got hedge fund managers paying lower taxes than Joe Sixpack, who's also investing. And so that doesn't seem fair. The general partners are investing their own money, but also money from limited partners, of course. So, the profits that they're getting are being taxed after a certain period as if it were all their own investment, rather than as if it's an income. So should hedge fund managers and private equity be paying less than regular people who are engaging in similar activities? And the Biden administration has argued, no, though, they've gone back on that in the face of lobbying.” – Megan Greene

“I would highlight though that according to the CBO’s estimates for how much changing this tax structure scrapping carried interests would generate, they did it back in 2018 and estimated that it would raise about $14 billion over 10 years, which is really a drop in the bucket. So, that's pretty underwhelming. So, you have to ask whether it's worth it. It doesn't look like it would generate that much in tax revenues. I have seen other estimates that are much higher, of course, and it's all dynamic scoring. So, it depends entirely on what your inputs are, but according to the Congressional Budget Office, and also the Joint Tax Committee, this wouldn't actually generate that much in terms of revenues.” – Megan Greene

“You’re basically asking if everyone should pay their fair share and the easy answer to that is yes, but the harder piece of that is what is the fair share? Should pension funds be paying less in taxes because they're essentially going to pay out people's pensions as they get older? And that's better for the economy. That's a deeply political question. Maybe they should be paying less. How much less is another question though. And I think that economics doesn't underpin that. It's much more politics.” – Megan Greene

“Paying a fair share of tax is a political question. Changing tax laws can have unintended consequences. How do people react to a different tax regime? And how will that impact behavior? Does it change the investment risk profile to obtain the same after-tax return? And will that change in behavior be good from a public policy perspective?” – David Larsen