The Taxation of Private Equity Carried Interests: Estimating the Revenue Effects of Taxing Profit Interests as Ordinary Income

Authors

Michael S. Knoll, University of Pennsylvania Carey Law SchoolFollow

Document Type

Article

Publication Date

11-7-2008

Abstract

In this Article, I estimate the tax revenue effects of taxing private equity carried interests as ordinary income rather than as long-term capital gain as under current law. Under reasonable assumptions, I conclude that the expected present value of additional tax collections would be between 1 percent and 1.5 percent of capital invested in private equity funds, or between $2 billion and $3 billion a year. That estimate, however, makes no allowance for changes in the structure of such funds or the composition of the partnerships, which might substantially reduce tax revenues below those estimates.

Keywords

private equity, profits interest, carried interest, carry, taxation of capital, taxation of services, capital gains, ordinary income, capital gains preference, tax deferral, stock-based compensation, equity-based compensation, option pricing, Black-Scholes formula, tax revenue estimation, H.R. 2834

Publication Title

William & Mary Law Review

Publication Citation

50 Wm. & Mary L. Rev. 115 (2008).

Repository Citation

Knoll, Michael S., "The Taxation of Private Equity Carried Interests: Estimating the Revenue Effects of Taxing Profit Interests as Ordinary Income" (2008). All Faculty Scholarship. 166.
https://scholarship.law.upenn.edu/faculty_scholarship/166