Thomas J. Brennan (Drexel) & Karl S. Okamoto (Drexel) have posted Measuring the Tax Subsidy in Private Equity and Hedge Fund Compensation on SSRN.  Here is the abstract:

A debate is raging over the taxation of private equity and hedge fund managers. This paper offers a new analysis of the subject. We provide an analytical model to measure the relative subsidies being offered by current tax law to private equity and hedge fund managers. We look to relative subsidies because of our goal of answering the simple question of whether or not current tax law favors the services of a private equity fund or hedge fund manager over those of other workers. Our conclusions are that tax law does provide a meaningful incentive for workers to pursue careers as hedge fund and private equity fund managers, relative to careers as corporate managers, entrepreneurs and ordinary wage earners. After taking into account the differing risk/return profiles and the differing knock out risks of each compensation type we examine, we find that an elimination of the preferential tax rate for private equity manager’s carried interest is required in order to achieve parity between private equity fund managers and other workers. Indeed, under our base case model, a tax rate of 51% would be required to achieve parity. This same analysis would require a tax rate of 61% (74% more than the rate for ordinary wage earners) in order to achieve the same parity for hedge fund managers. This analysis is important for two reasons. It provides a perspective on the current issue that has so far been ignored. It answers the question of how taxation affects behavior in the market for allocating human capital. It also provides quantitative precision to the current debate which relies significantly on loosely drawn analogies between fund managers on the one hand and entrepreneurs and corporate executives on the other. This paper provides the mathematics that these comparisons imply.