Macro & Micro economics Current Events Paper

Current Events Paper on Taxation,

Private equity managers fear tax hit

According to the financial times articles, private equity fund managers in the United States were worried on how their incomes were taxed. Other fund managers tried to rewrite agreements with their investors so that they may protect themselves from any taxation in their salaries. Many of the private equity fund managers and other people in the equity industry feared that the tax code could be changed if Barrack Obama was elected as the president. Nevertheless, private equity funds investors and limited partners have fought back to stop these tax code changes (Fifield & McCrum, 2012).

Many general partners in the equity industry receive incomes from carried interest deals. This is typically valued about 20 percent of the fund’s yearly profit. The carried interest is usually charged at a rate of 15 percent on all capital gains. The Obama administration proposed different changes that could see carried interest being charged equally as incomes, normally 35 percent. Due to these possibilities in changing taxation, many general partners introduced general clauses in the partnership agreements that would enable them to change the terms incase the tax regime was altered (Fifield & McCrum, 2012).

On the other hand, general partners stated that their investors showed minimum interest in their tax rates and had declined requests for controlling the industry in case tax breaks emerged. This tax breaks benefited buyout groups only. According to Steve Judge, premier of the Private Equity Growth Capital Council, “the political rhetoric surrounding the presidential election certainly brought attention to many aspects of the tax code including carried interest.” If treatments of capital gain could be accessible to the individuals who have money to invest, a policy putting higher values on financial contributions than hard work and vision would be advanced (Fifield & McCrum, 2012).

Europe’s dividend tax policy bites

Due to the ruling made by the European court in France on dividend taxation policies, exchange trade fund providers and securities lending agents are facing a lot of problems in their revenues. The court stated that France dividend taxation policies favoring domestic funds, was different to the European Union’s laws on the free capital movement. This resulted to France not taxing dividend payments differently from funds in the domestic French investment and non domestic funds. Countries such as Spain, Germany and Belgium had the same rules on dividend payments favoring domestic funds. Josh Galper a managing principal in a financial company named Finadium, stated that these countries needed to alter their policies on tax (Flood, 2012).

Kit Dickson stated that European Union countries charging different tax rates on dividends for non resident and resident funds after the ruling by the European Court of Justice were in danger of not complying with the law. These differences in treating taxes of dividends for the local and international investors helped in creating a dividend arbitrage market estimated to be $600 million yearly. In this dividend arbitrage business, foreign venture capitalists facing potential tax charges lend their equity holdings before the dividend is due to local investors who do not face the same tax liabilities. Once the dividend has been paid and stock returned, the two parties are allowed to share the savings on tax (Flood, 2012).

Obama, Boehner Open to Budget Bargain

Lately, House speaker John Boehner and President Obama motioned willingness in compromising tax positions that led to stalemate of the budget in United States. Discussions on how to avoid fiscal cliff in the budget, spending cuts and big tax increase was planned. After president Obama won the election, he asserted that tax was supposed to be increased to the wealthy individuals. On the other hand, he called on the house to authorize a senate bill immediately. The bill was to prolong the Bush – era tax cuts on household incomes under $200,000 yearly for single people and lower than $250,000 for couples. According to a statement made by president Obama, he affirmed that if people are serious on reducing budget deficit, spending cuts and revenues must be combined (Lee & Hook, 2012).

By doing so, the wealthy Americans will be needed to pay more in their taxes. The house speaker was open to the deal that raised tax revenues but not tax rates. The statements from Obama and Boehner show that elements could embrace new limits on deducting taxes for wealthy people and businesses. In this 2013 budget, president Obama has various proposals: the first one is reducing tax deductions for families getting more than $250,000 from the present 35% limit to 28%. He is also proposing to lift tax rates on the investment incomes of these families and returning old limits on the tax breaks for the rich people that were suspended during the Bush – era (Lee& Hook, 2012).

The table charts below show taxation on the rich people. (Nyhan, B, 2011)

(Nyhan, B, 2011)

References

Lee, E., C., & Hook, J. (2012). Obama, Boehner Open to Budget Bargain. The Wall Street Journal. Retrieved from < http://online.wsj.com/article/SB10001424127887324439804578108971200674876.html>

Flood, C. (2012). Europe’s dividend tax policy bites. The Financial Times. Retrieved from < http://www.ft.com/intl/cms/s/0/42474b12-034b-11e2-bad2-00144feabdc0.html#axzz2Cvx0FzmT>

Fifield, A., & McCrum, D. (2012). Private equity managers fear tax hit. The Financial Times. Retrieved from < http://www.ft.com/intl/cms/s/0/6107fac0-0aac-11e2-a5de-00144feabdc0.html#axzz2Cvx0FzmT>

Nyhan, B. (2011). The use and abuse of bar graphs. Retrieved from http://www.brendan-nyhan.com/blog/2011/05/the-use-and-abuse-of-bar-graphs.html