0704 - Carried

The OO and our on-Staff Senior Counsel have always thought both the U.S. tax system (if "system" is the right term) and the Anguilla tax "system" (same interjection) to be hilarious. Yes, they are funny, often intensely complex and always inexplicable. The latest Washington tax fuss has to do with the arcane subject of "Carried Interests". As you may know, if you are a hapless wage-earner in the U.S. you pay income tax. If you buy something like a building or a stock, that is a "Capital Asset" and if you sell it after a year, or longer, you have a "Long Term Capital Gain", which is blessed, and your tax is limited to 15% of the gain. If your sale takes place after only 11 months, you have a Short Term Capital Gain, which is evil, like under-age sex, and must pay higher ordinary income tax. The Bush Administration proudly got a Cap Gains tax reduction to 15%, as well as lowering the Income Tax rate on big incomes. These may expire, and the threat is called an attack on wealth or such by those threatened.

Anguilla has a somewhat simpler tax regime. There is no Income Tax at all, and no capital gains or estate tax. But, Expats pay their taxes to their countries, and Anguilla has it own special levies on Expats. This is convenient, because Expats cannot vote, and so can't complain. For example, if an Expat buys a house, he must pay a stiff 17 ½% on the purchase for an Alien Landholding Licence. To ease the pain, the annual property Tax is only 1/10th of 1% of the property cost, and does not go up as the property appreciates. Those living in U.S. cities pay – what – 20 times as much. Expats who want to work on Anguilla must get Work Permits, which run to EC$15,000 a year for a doctor – why this island wants to keep out doctors is not clear. The big tax levies here are Duties on imports. They are very stiff, like 25% on cars, and the same on TVs and such electrical stuff. The duty schedules are antique and don't make any sense. Example: an encyclopedia on a CD pays much more than a trashy book on paper.

Now, about Carried Interests. In the U.S. there are now a lot of very active private equity funds. These funds get money from what are rich supposed sophisticates, and buy companies (taking them private), and then re-sell at big profits (they hope). The funds are partnerships, and partnerships don't pay corporate taxes, but the partners do pay on what is earned. The people who run such funds earn huge, but huge, fees, like 20% of the profits. The partner investors get capital gains treatment for their gains on investments. And, surprisingly, the fund-runners call their share of the gains "Carried Interests" and claim these are capital gains, not wages for services, although they did not invest any capital. This has caused some stir in Congress, even among some GOP senators who hate taxes professionally.

Of course, the huge sums involved in U.S. taxation cause all kinds of lobbying for special treatment by those who are taxed. The tax code grows like a weed and complexifies daily, and is all but unintelligible. This has caused the parallel growth of a horde of lawyers and accountants who devise tax-reduction schemes, which sometimes when overdone turn into prison-sentence schemes. Anguilla's system is simpler, of course, but there are annual attempts to tax the Expats and not the Belongers. Raising taxes on Belongers is taboo unless they are somewhat hidden like fees or taxes on gasoline (called "petrol" for historic reasons).

For those who like intellectual games, there are endless arguments about whether taxes should be more or less "Progressive". The OO Staff has no opinion on whether the top tax bracket percent should be five percent more or less. The "spin" on all tax arguments is transparent, in the U.S. or on Anguilla. The idea is: don't tax me, tax thee.

Next time: Staffing [OO #705]

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