Capital Strains: Vic Fleischer's War on Investment Tax Breaks

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By Marc Heller

Oct. 23 — William Gentry, a professor of economics at Williams College, had just finished telling a few dozen tax law professors at a conference that debating the future of the capital gains tax preference—one of the pillars of U.S. tax policy—generates “a lot less light than heat,” when Victor Fleischer rose to take a turn at the podium.

Fleischer, a tax law professor at the University of San Diego who supports higher taxes on investment fund managers, was at the conference at the University of California at Los Angeles to present his latest paper: a proposal to eliminate the lower tax rate for capital gains, which he has said is partly responsible for widening income inequality in the U.S. He sensed the setup by Gentry, who told the group that economists don't have a good enough handle on the distortions such a change could bring.

“So I guess I'm the one who brings the heat, and not the light,” Fleischer said.

Most of his colleagues laughed. To them, Fleischer is something of a celebrity, an academic who mixes deep-in-the-weeds knowledge of tax policy with an eye for politics and ease at public speaking.

He writes a column, “Standard Deduction,” for the New York Times and talks about the need for “distributive justice” in tax policy. Amid criticism from some tax lawyers that he takes up popular causes without weighing the effects, he walks a line between academics and advocacy that, if blurred, could sacrifice his credibility. The prospect worries him, he said in an interview with Bloomberg BNA.

‘Godfather' of Carried Interest Criticism

Because of his willingness to challenge conventional thinking with plain talk on tax policy, Fleischer is a familiar figure on Capitol Hill, where lawmakers and staffers on congressional tax-writing committees seek his advice. In recent weeks, he spoke directly with Rep. Tom Reed (R-N.Y.) after hearing that the congressman, a member of the House Ways and Means Committee, was drafting a bill to require college endowments to direct earnings toward reducing tuition, or lose the funds' favorable tax treatment. Fleischer said he likes Reed's approach.

If Congress ever raises taxes on carried interest, Fleischer, 43, may deserve some of the credit. He has been pushing Congress on the issue for a decade, after catching on to carried interest when he was in private tax law practice at Davis Polk & Wardwell LLP in New York and being “stunned,” he said, that the tax code treated fund managers to a sharply lower tax rate on much of their compensation. He has been dubbed the “intellectual godfather of private equity tax hikes” for his calls to end the lower tax rate.

He represented clients who might be put off if he publicly criticized the policy, so he kept his mouth shut. “I mean, it wasn't my job at the time to have sensibilities about distributive justice,” he said.

Not until he started teaching, beginning at the University of Colorado, did Fleischer take a more slanted approach. He gained particular attention in 2008 for his paper “Two and Twenty: Taxing Partnership Profits in Private Equity Funds,” published in the NYU Law Review, and named for the 2 percent management fee and 20 percent profits interest taken by private equity fund managers.

His positions have been picked up mainly by Democrats, but he doesn't describe himself as faithful to any political party. Fleischer said he is aware that taking political positions risks sacrificing his academic credibility.

“I'm definitely concerned about that, and I think about that,” Fleischer said. He isn't alone among tax professors in his policy views, he said—just more willing to take a stand. “I think most academics have an agenda, and some don't talk about it.”

One of Fleischer's professional peers, Lily Batchelder, shares the perspective. Batchelder, a tax professor at New York University, was on the staff of the Senate Finance Committee when Fleischer presented his views on carried interest to staff members in 2007. Advocating for certain tax policies is one thing, she told Bloomberg BNA, “but I don't think he's partisan.”

Once Alone

Fleischer's most serious dive into public policy came that year, when he spoke at a closed meeting of nearly 100 Senate staffers about carried interest, the income that fund managers receive that's tied to the profits of the funds they oversee.

That income is taxed at the top capital gains rate of 20 percent, as long as the capital asset that generated the profit was held for more than a year.

The other type of compensation that managers receive, a performance fee, is taxed as ordinary income at the higher rate. Fleischer told staffers that carried interest should be treated as compensation, not investment income, and be taxed at ordinary rates, which now top out at 39.6 percent. Although he said he saw that work as mainly scholarly, he had the feeling he was under a microscope.

“I felt very alone,” Fleischer said. Lobbyists for investment funds also received invitations to speak, criticizing Fleischer's analysis. Fleischer said he suggested other witnesses who might agree with his views—and they contradicted him. “I don't think I appreciated the theater aspect of it.”

Fleischer's work wasn't universally well-received among Senate staff members, Batchelder said. “I think he did a good job. There was a huge lobbying effort to oppose it. People just got deluged with tax lawyers from around the country coming in to talk about it.”

The idea, which lawmakers initially applied only to publicly traded partnerships, eventually sank in the Finance Committee when Sen. Charles E. Schumer (D-N.Y.) tried to broaden the scope. That only attracted more opposition, which Fleischer came to believe was Schumer's intention.

Fleischer was in his mid-30s then and not much older than many of the aides he was addressing. A decade later, he maintains a boyish look attributable to short-cropped red hair that once earned him the moniker “Bazooka Joe” from critics. He skipped a tie for the tax law conference, opting for a gray button-down shirt with the collar open and a black sports coat.

When Edward D. Kleinbard, a former chief of staff of the congressional Joint Committee on Taxation who now teaches tax law at the University of Southern California, deadpanned from the podium that he and Fleischer “share a common bond for being in the limelight,” Fleischer winced a little. Only his jungle-green watchband seemed flashy.

Wings and the Working Class

Fleischer grew up in Buffalo and Rochester, N.Y.; his parents were English professors at the State University of New York at Buffalo and had a house full of books. In upstate New York, he said, he gained an appreciation for good chicken wings and working-class people.

His early jobs were bagging groceries at the supermarket and delivering pizza. He played football in high school, on the offensive and defensive lines. Later, as an undergraduate at Columbia University, he majored in American history.

His wife, Miranda, is a tax professor at San Diego as well—they joined the faculty together—and he has a 7-year-old daughter, Penelope, who he said can't escape the reach of private equity herself; childhood attractions such as Legoland and SeaWorld are in the portfolio of Blackstone Group LP, the buyout firm about which he has written repeatedly. He realizes he's no friend of Blackstone, though he reaches out to the firm for the columns he writes.

“They generally don't return my phone calls,” Fleischer said. The firm declined through a spokesman to comment for this story.

Fleischer's ideas continue to attract attention, both among colleagues and in political circles. His criticism of carried interest has been adopted nearly a decade later by a handful of Senate Democrats and lately by some Republicans, including Donald Trump in his presidential campaign.

More recently, Fleischer has said in a paper that the Obama administration could eliminate the carried interest “loophole” on its own, without congressional action. That's the most advocacy he has taken on, Fleischer said.

“I wrote Two and Twenty to advance knowledge, not to help Hillary Clinton or Donald Trump get elected,” Fleischer wrote in a footnote in the new paper. “Two and Twenty started out as a tax paper. Now, improbably, it's an applause line at chicken dinners.”

Cutting Out Congress

In the paper, Fleischer makes the case that the Treasury Department should issue regulations under tax code Section 707(a)(2)(A) declaring that if a service partner contributes less capital to the partnership than the aggregate amount of capital contributed by tax-exempt partners, any allocation of income to the service partner would be treated as compensation for services, taxed at the higher rate. Doing so would be “legal, sensible, wise, and just,” he said.

At the tax law conference at UCLA, Fleischer went further still, suggesting Congress do away with the favorable tax rate for capital gains altogether. Fleischer's point: The lower rate for capital gains has outlived its purpose, goes disproportionately to a small number of fund managers and unfairly taxes the income as capital when it more closely resembles labor income, which Fleischer tags with the name “alpha” income.

Congress should repeal the preference, Fleischer said, although with a few nods to political realities and smart policy. Those would include a million-dollar lifetime exemption and making sure to treat disposition of capital assets by gift or bequest as a realization event that triggers a tax liability.

The proposal is part of a bigger project he's doing on inequality in the tax code, Fleischer said.

“The old arguments for a capital gains preference were pretty weak, and they're even weaker if you recognize that a lot of income at the top end is really alpha income,” Fleischer told colleagues. “This is what's driving inequality.”

‘Not a Loophole.'

Lobbying groups for private equity firms maintain a firm defense. For the past four or five years, the Private Equity Growth Capital Council has brought portfolio company chief executive officers to Washington to brief lawmakers on how private equity works, said James Maloney, the group's communications director. Private equity contributed about $522 billion to the U.S. economy in 2014, the group said.

In 2014, the council launched a “Carried Interest Champions” campaign on Capitol Hill that the group said helped convince 47 House members to publicly state support for the current tax treatment of carried interest. The council's spending on lobbying hit $3.6 million in 2009—when the carried interest issue was brewing in the Senate—and totaled $2.5 million in 2014, according to the Center for Responsive Politics, citing the organization's filings with Congress.

“Our view is that carried interest is not a loophole,” Maloney told Bloomberg BNA. In a business partnership, he said, some partners invest money, and others expertise. “We shouldn't place higher value on one group over the other.”

To change the tax treatment, Maloney said, “would be discriminatory against some types of partnerships.”

Treating income from investment gains as labor income—and including so-called founders' stock in that category—is an oversimplification that runs counter to the spirit of entrepreneurship, Pinar Cebi Wilber, a senior economist at the American Council for Capital Formation, told Bloomberg BNA. Many countries have lower capital gains tax rates than the U.S., Wilber said.

“Governments all around the world use tax policy to encourage desirable activities such as research and entrepreneurship; the capital gains tax is an example of this,” Wilber said.

The fight on carried interest illustrates where Fleischer's work sometimes falls short, said Eric B. Sloan, a partner at Gibson, Dunn & Crutcher LLP in New York, who specializes in taxation of partnerships and private equity funds. In Sloan's view, Fleischer hasn't spelled out enough about how dramatic changes in tax policy would affect partnerships, the taxation of which is outlined in Subchapter K of the tax code.

“It is really, really complicated to figure out how the things that Vic talks about would filter through Subchapter K,” Sloan told Bloomberg BNA. “I would have hoped that a tax academic would have done that stitching.”

Speaking the Language

Fleischer's ability to whittle down the tax code to plain language works as well in the classroom as on Capitol Hill, colleagues said.

“First, you've got to know tax. And you've got to be able to explain it in a way that's understandable and interesting,” said Jordan M. Barry, a colleague of Fleischer on the San Diego law school faculty. “Humor doesn't hurt, either.”

Teaching tax law requires a balance between burying students in detail—and losing their interest—and watering down the subject so much that they miss the point, said Paul Caron, a tax law professor at Pepperdine University.

Caron, who writes a blog called “TaxProf,” told Bloomberg BNA he invited Fleischer to speak at a tax institute event there a few years ago and that he “hit a home run” with students because of his ability to marry the theoretical with the practical on carried interest and other issues.

“It's rare in this business,” Caron said.

Fleischer teaches students about business and finance as much as tax law, figuring preparation for the business world may be just as valuable. He models his teaching after one of his own professors, David M. Schizer, dean emeritus at the Columbia Law School, who he said has a “magic ability” to teach law in language accessible to anyone.

At the UCLA conference, Fleischer's message resonated with Michel Kim, a second-year law student from Torrance, Calif., in the back row. She said she was struck by one of Fleischer's charts, showing that most investors in Blackstone are tax-exempt organizations such as pension funds; only about 10 percent are the individuals who benefit from the capital gains preference.

“It changes what I initially thought about capital gains taxes,” said Kim, who suddenly wasn't so sure average investors would be hurt by the preference's elimination. “It seems like it might not make a difference.”

To contact the reporter on this story: Marc Heller in Washington at

To contact the editor responsible for this story: Brett Ferguson at