[drumdance]

My understanding is that the carried interest rule was originally created as an incentive for mining exploration. It wasn't until the 80s that Wall Street hedged funds started taking off, and that they really started making use of it.

My feeling is, if you don't have actual capital at risk, you shouldn't get a break. Or put another way, if it's not possible for you to experience a capital loss, then it's not possible to experience a capital gain. Most VCs and hedge funds also invest a substantial amount of their own capital in the funds they manage, so it's not like it would be a radical change.

A few years ago I went to the Aspen Ideas Festival. One of the speakers was David Rubinstein of the Carlyle Group. Someone cheekily asked him what the tax on carried interest should be. He said "It should be zero. But politicians 'earn' so much money in donations by by threatening to repeal it, I predict it will always come up as an issue every three or four years, and will always stay about what it is now."

[harryh]

I generally agree with you about risk, though the counter argument is that they are putting capital at risk. They are taking some portion of their compensation as equity that may or may not turn out to have any value. It might not be actual dollars coming out of a bank account but the risk is still there.

Incidentally, since this is HN, one might ask if startup employees are doing the same thing to which I would generally nod and agree with you.