Friday, February 08, 2008

Tax policy colloquium session on private equity

Yesterday at week 4 of the NYU Tax Policy Colloquium, Chris Sanchirico presented his paper, "The Tax Advantage to Paying Private Equity Funds Managers With Profit Shares: What Is It? Why Is It Bad?"

These afternoon meetings follow a morning session with just the students, and then lunch with the speaker to hash things out. One nice thing about the morning session, I felt it was the first time this semester that it became entirely clear that the morning class had established a good vibe or dynamic and come to life as an institution with a history. Just as the New York Giants need to start from ground zero all over again next year, one funny thing about teaching is that each new class you teach is an organic entity unto itself - you collectively start without any established chemistry even if the teacher and a number of the students know each other. This takes time, which can be an adjustment if you know that in the past you've had a good vibe, as I think has usually been true in the colloquium. Anyway, at the risk of being too optimistic or out of touch, I did feel that we've now gotten there to a degree this year.

As for the PM discussion of the paper, though Kevin Hassett was the discussion leader I made some points about the private equity issue that I won't repeat here as they've appeared in past blog entries. The central focus of the discussion was on two related aspects of Chris's analysis. First, though reasoning by analogy is generally a bad idea in the tax policy realm - one needs to think about substitutes for a given activity that you are deciding how to tax, but that is different - it has arguably been so central to the private equity debate that the paper takes it on. In particular, David Weisbach arguably influenced the politics of the debate (assuming that it wasn't just an interest group story) by raising the ever-popular analogy to sweat equity. Chris rejects the analogy, although the degree of its applicability turns out to rely on semantic aspects of how one defines everything. This of course is one of the problems with reasoning by analogy, leaving aside the problem of its normative emptiness.

More substantively, Chris argues for the relative importance of tax rate differences between the players in the private equity world (e.g., tax-exempt limited partners paying incentive-based compensation to a taxable general partner), as compared to the problems of timing and conversion of ordinary income into capital gain. The main reason for downplaying the latter, which I consider the heart of the issue, is that in practice people are getting the conversion anyway, independently of these arrangements, even if they shouldn't. There was what I would call a spirited debate concerning the importance and implications of the point Chris emphasized about tax rate-driven joint planning.

At times it was a bit more like the McLaughlin Group than a typical academic seminar. The big plus to this, from my standpoint, though I might have preferred more light and less heat, is that it reflected the PM sessions' having established an institutional life of their own. When something has a life of its own, the organizers can't control it entirely any more, which, in this case at least, really is good on balance. Better for the thing to have a life of its own than to find oneself droning to an empty room, which certainly has not been my experience this semester.

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