Unlocking the Mystery of Private Equity A New Tax Paradigm

Abstract

The taxation of carried interests has been one of the hottest topics in the tax world for the last 15 years with the issue first raised over 30 years ago. A number of tax scholars have proposed various alternatives to the current tax regime for carried interests with little agreement on the proper taxation of such interests. In addition, over the last 30 years, tax scholars have made a number of breakthroughs in understanding the taxation of supernormal returns, sometimes referred to as excess profits. The income or profits associated with a carried interest appears to be a classic example of supernormal returns. As a result, applying our relatively newfound understanding of supernormal returns to the taxation of carried interests can unlock the key to the proper taxation of such interests and solve a decades-old mystery.