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Tax Changes on Carried Interest- Necessity or Nemesis?

April 27th, 2010 No comments

No one wants to be "against" a jobs bill. (Photo: Sierra Club)

In the midst of unrest over budget deficits and November just around the corner, Democrats have been scouring for low hanging fruit. One proposal that keeps surfacing is the idea of changing the tax on carried interest.

For those of you who don’t know, carried interest is an incentive that is commonly used within the investment industry to encourage fund managers to maximize the funds performance. Essentially it is a chunk of the capital gains earned by the fund. Currently carried interest falls under the purview of the long term capital gains tax-roughly 15%. For years, however, Democrats have proposed taxing carried interest as ordinary income, thus raising the rate to as high as 33%.

It is important to note that to receive carried interest, a manager must return all capital contributed by the investors, and, in certain cases, meet a previously agreed upon rate of return (the hurdle rate). The point being, that if these funds don’t do well, the managers get nothing. It takes a trained eye to invest properly, and those individuals need to be compensated for wise investment decisions.

The investment industry is the key driver behind American business-big and small. Private equity funds raised capital totaling $240 billion in 2006 alone. Without these organizations, the capital needed to encourage growth simply wouldn’t exist. And in a time where we are struggling to pull ourselves out of an economic recession, raising tax rates on carried interest by 133% simply isn’t a smart move.

a visual explaination of carried interest

During the recent Jobs bill debate, the idea of taxing carried interest as ordinary income became a serious option of the table. $17.5 billion was a little too much to sweep under the carpet. Democrats knew they couldn’t go back to their districts and say “ we just added this on to your taxes.” At the same time, no one wants to tell their constituents that they voted against a “Jobs” bill. How could anyone be against jobs right?

When it was all said and done Congress decided to fund the Jobs Bill by giving the IRS tools to crack down on oversea tax havens, and by closing a loophole that investors had been using to avoid tax payments on dividends.

But the carried interest debate is far from over. With finance regulatory reform on the table, and congress looking to place shiny pieces of legislation before the president, easy cash grabs like carried interest are likely to come up again.

While finding funding for legislation is becoming more difficult, carried interest is something we should let be.

Rise of the Green Chip Stocks

April 22nd, 2010 1 comment
Girl Smiling Carrying Recycled Bag

Consumers are making corporations go green. (Photo: Getty Images)

To some people, talking about stock market investing on Earth Day would seem a bit odd, if not entirely antithetical. After all, one might ask, aren’t the most profitable companies the ones that can get away with polluting the environment and screwing local communities? Well, not necessarily. Consumers are becoming more and more environmentally aware and voting accordingly with their wallets. Meanwhile, more companies and countries are realizing the benefits to cost efficiency of going green. The Obama administration has been putting real support behind the growth of green industry, and if you think the green movement is more than just a fad (which I do), then we might be seeing the beginning of a seriously profitable investment strategy that doesn’t compromise green values.

With that in mind, I have put together a list of companies that I believe are not only promising stock investments, but also good news for the Earth. None of them are formal recommendations, but ideas to get you thinking. (And if you aren’t already invested, you might want to get started – it’s fun and I hear pensions aren’t exactly growing on trees anymore). Anyway, here they are:

  1. Waste Management (WM) – Although garbage collecting doesn’t sound green, remember that Waste Management is the largest recycler of municipal solid waste in North America. All of their trucks run on natural gas and they are already finding ways to produce bio-energy off of their landfills. The need for their services is only going to keep growing. Add to that good management and a steady, ever-increasing dividend, and you have a recipe for the type of green you can put in your pocket.

  2. Veolia Environmental Services (VE) – Veolia is a French company that operates a variety of services in North America, including water purification and decontamination, as well as solid waste management services. The selling points for Veolia are very much the same as Waste Management, except Veolia has much more exposure to clean water needs.

  3. Wind turbines on a hill

    (Photo: Wiki Commons)

  4. A-Power (APWR) – Wind energy is hard not to like, and China loves it. The Chinese government is putting a lot of money behind going green, and A-Power, the largest provider of distributed power generation systems in China, is getting a chunk of it. Their main push has been in developing wind turbines, but they also have projects for solar, biomass and geothermal energy, and have plans to expand into the US. Unlike Waste Management, this is a young company and a riskier investment, but one with huge potential.

  5. US Ecology (ECOL) – Nuclear energy is definitely going to be part of our movement away from fossil fuels. With that in mind, you might want to consider a company like US Ecology, which is the nation’s most comprehensive supplier of radioactive waste treatment and disposal. We’re going to need companies like this to keep radioactive waste out of our backyards, and since it’s not an easy industry to break into, US Ecology might be a good bet. Plus it pays you a nice dividend while you wait.

  6. Whole Foods (WFMI) – You can roll your eyes or clap with glee. Either way, Whole Foods has made a niche for itself and crafted a positive brand image with a growing segment of the population. The organic/grow local movement it’s helping lead is even making Walmart rethink its ways. Whole Foods is continuing to expand and might have a lot more room to run.

  7. Index Funds and ETFs – I didn’t put any solar companies down here because I think the arena is far too fractured and competitive right now to pick winners. A lot of people feel the same way about most of the green energy field. So the smart way to go might be investing in index funds or ETFs like FAN and TAN (First Trust ISE Global Wind Energy Index Fund & Global Solar Energy Index). These give you exposure to a basket of different stocks in their respective fields. Here’s a article that goes into more depth about it.

So I hope that gives you some ideas. Remember, the stock market’s had a good run since last year’s lows, but we’re still in a recession, so that means there’s plenty more growth if you’re willing to think past the short term.

Happy Earth Day everybody!

(Full disclosure: I own shares of Waste Management, and a family member owns shares of Waste Management and A-Power)

The Democratic Party 2.0: Retooled for the Internet Age

April 14th, 2010 1 comment
The Internet is Serious Business motivational poster

I'd even say it's a BFD. (Photo: Wiki Commons)

Is it just me, or are both parties starting to sound a little repetitive? Ok, there is new stuff to argue about – banking reform, offshore drilling, bailouts, etc. These are all important issues. But on many items of domestic policy it feels like we’re just fighting and refighting the same old wars. We could probably just leave two record players on loop:

Republicans – “Small government, low taxes, free market, Ronald Reagan…”

Democrats – “Social programs, equal rights, corporate greed, George W. Bush…”

But really, those partisan record players have been playing some of the same tracks for over thirty years now. I think it’s time to upgrade to an iParty. So what would the Democratic Party 2.0 look like? Well, first we’ve got to reframe the party platform around some of the biggest issues of the Internet Age – things that the parties are barely dipping their toes into right now.

Examples? I want the Democrats to own net neutrality the way the Republicans own gun rights. I want the Democrats to be the party of national defense when it comes to cyber warfare. I want the Democratic Party to be synonymous with Gov 2.0.

More and more of our social lives and economy are based around the Internet, and our politics should reflect that. There’s a huge opening for either party to grab the ball on this and run with it, and whichever one moves first and decisively will leave the other one scrambling to catch up. I think the Democrats are well positioned to be that party. Obama has already made movements to put more government info online and beef up cyber security. Hillary Clinton made her call to “tear down this firewall” earlier this year. Now it’s time to take it to the next level.