John Bogle is one of my idols of the financial world.  He is best known for revolutionizing the mutual fund industry by demonstrating the superiority of index funds over traditional actively-managed mutual funds over the long term.  In the mid-70’s, Bogle established The Vanguard Group and subsequently created the Vanguard 500 Index Fund as the first index mutual fund available to the general public.

Bogle’s investment values center on favoring the little guy, the individual investor who doesn’t have the capital nor the advanced trading technologies that are at the disposal of professional traders and investment banks.

By lashing out yesterday against the tax rate on carried interest, Bogle remains classically true to form in leveling the playing field for the average joe.  “Carried interest is a bit of a technical fraud,” as he says.

The debate about the tax on carried interest has surged in the U.S. thanks to revelations that potential Republican presidential candidate Mitt Romney paid an overall effective tax rate of less than 14% in 2010.  One of the principal reasons that Romney, whose income was in the tens of millions, paid such a low effective rate is the fact that most of his income came in the form of carried interest from his time at Bain Capital, which was taxed at the long-term capital gains rate of 15%.

I admire John Bogle.  Just as he saw the 2~5% annual management fees on actively-managed mutual funds as a hoodwinking of the public, he exposes the low carried interest tax as a fiscal boondoggle to most private equity and VC general partners who are investing other people’s money.

Perhaps as a VC myself, I should fall firmly on the side of keeping the carried interest tax at rock-bottom.  However, I have two major objections to not raising it substantially.  First, financially, I am not in the same boat as GPs in the U.S.  The effective carried interest tax in France is over 30% when counting all auxiliary social charges.  Moreover, as a U.S. citizen with a French salary, I am paying tax to two countries, setting my cumulative effective income tax rate at an obscene 67%.  So Romney pays 14%; I pay a whopping two-thirds.  I find this infuriating.

Even more importantly, however, giving carried interest a tax break is totally unfair.  Carried interest is essentially a fee paid for managing other people’s money.  This fee happens to be based on performance, but it is a fee nonetheless.  The logic of rewarding investment risk with a lower tax rate is not relevant for a GP whose carried interest income is by and large pure gravy (granted, with a tad of personal investment, but this is extremely limited).

Fred Wilson presents a third compelling argument that taxing carried interest as ordinary income is good policy.  I encourage you to read Fred’s post if you haven’t seen it.

Perhaps it took a circus of in-fighting in the U.S. Republican primaries to bring this issue to light, but I am glad that the media and the public are taking notice.