Sweetheart tax deal for hedge-fund billionaires may be at risk
Last year, the 25 most profitable hedge-fund managers on Wall Street collected a record $25 billion in income, with one individual manager, David Tepper, collecting an incomprehensible $4 billion. The second-place manager has a name familiar to many — George Soros. He earned a mere $3.3 billion last year in fees and investment gains.
Hedge-fund incomes haven’t drawn the same scrutiny as CEO pay, in part because hedge-fund managers are paid a percentage of the profit that they earn for from investors, rather than salaries and bonuses awarded by a board of directors. However, the sweetheart tax treatment enjoyed by the hedge-fund managers has been an outright scandal for years. They pay a 15 percent tax on their fee income — the rate charged on capital gains — instead of the 35 percent top rate paid for earned income.
Allies in Congress, Democrats and Republicans alike, have protected that little arrangement until now, but that may be about to change, reports the New York Times:
“Peter R. Orszag, the White House budget director, said Wednesday that he expected Congress to change the tax treatment of carried interest income at investment firms and that the impact of higher tax bills would not be as dire for Wall Street as some have suggested….
President Obama has advocated taxing carried interest earned by investment managers as ordinary income….
Lobbyists for the investment industry, particularly those representing private equity firms and hedge funds, have fought hard to keep carried interest from being taxed as ordinary income for years. Two measures introduced in Congress over the last three years to raise the tax rate on carried interest failed to gain traction in the Senate.
The House voted for a tax increase last year and the Senate is still considering it. But getting Senate Republicans to sign agree to raise taxes is expected to be difficult. Their argument is that a higher tax rate would deter private equity and venture capital firms from investing in companies and start-ups.
According to the Hill, money raised from the tax change would be used to finance the extension of a number of more popular tax breaks that would otherwise expire soon, including research and development credits for business and college tax credits for individuals.
“The dispute on hedge fund taxation cuts to the heart of ideology for both parties. Democrats say the tax increase adds a new level of fairness to the tax code, while Republicans warn its enactment will ruin the economy.
“A lot of hedge funds have gone belly up,” Sen. Orrin Hatch (R-Utah) told The Hill.
“Some others aren’t doing as well as they should and others are doing well. And one reason they can survive is if we don’t raise taxes,” said Hatch. “Frankly, this administration will raise any tax it can.”
…. Sen. Chuck Grassley (Iowa), the ranking Republican on Finance, told The Hill that achieving 60 votes is a tall order because of how the legislation treats carried interest. “I think it will be difficult,” Grassley said.
Senate Democratic leaders are hoping to win support from GOP centrists such as Sens. Olympia Snowe (Maine), Susan Collins (Maine), George Voinovich (Ohio) and Scott Brown (Mass.), said a Democratic aide.”
I’ve never thought that the capital gains tax rate should be lower than the rate on earned income. It makes no sense. But allowing hedge-fund fees to be taxed at the capital gains rate is a gross inequity that nobody, Republican or Democrat, should try to defend.
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115 comments Add your comment
Outhouse GoKart
May 13th, 2010
1:39 pm
Raise the captial gains tax rate to be equal with the income rate and watch investors run for the turnstiles…
Gale
May 13th, 2010
1:45 pm
I tend to agree, Outhouse. I was thinking that while I read Jay’s piece. It’s all very well to think we should tax the hedge fund managers more because that is their “job”, so to speak and that would make it earned income. But I see unintended consequences in this proposal.
Jay
May 13th, 2010
1:46 pm
I appreciate the thought, @@, but I’m the one responsible for the tone around here. For that reason, I had to moderate yours as well. Name-calling is strongly discouraged regardless of source or target.
Union
May 13th, 2010
1:47 pm
obama has gotta get a little more to spread around..
Bosch
May 13th, 2010
1:48 pm
Did someone say Olympia Snowe?
JohnnyReb
May 13th, 2010
1:51 pm
Jay, wash your keyboard. You typed George Soros!
Jay
May 13th, 2010
1:53 pm
Simple stuff, @@. Discuss the issues, not each other.
@@
May 13th, 2010
1:57 pm
You’re welcome, jay. In case you didn’t notice, the insults by proxy ensued. So what else is new? Whereas most use the SDDS tag, I’ll go with SDSS.
And with that, I’m off again.
JohnnyReb
May 13th, 2010
1:58 pm
From Wikipedia – George Soros has made his mark as an enormously successful speculator, wise enough to largely withdraw when still way ahead of the game. The bulk of his enormous winnings is now devoted to encouraging transitional and emerging nations to become ‘open societies,’ open not only in the sense of freedom of commerce but—more important—tolerant of new ideas and different modes of thinking and behavior.
From JohnnyReb – in case you don’t know, apparently Soros has decided America, the USA, is an emerging Nation. He has set his sights and fortunes on turning us into a European-Socialist Nation.
Excuse me while I wash MY keyboard.
@@
May 13th, 2010
1:59 pm
Discuss the issues, not each other.
Good advice as long as you apply it to everyone and not just some.
Bosch
May 13th, 2010
2:00 pm
Gee Reb,
Why do you hate rich people so much?
Bosch
May 13th, 2010
2:00 pm
Gee Reb,
Why do you hate people who make their own decisions so much?
(I’m throwing the smiley face)
stands for decibels
May 13th, 2010
2:06 pm
Probably everything you need to know about the potential political fallout from this and other potential tax increases is ’splained here:
http://www.npr.org/blogs/thetwo-way/2010/05/obamas_tax_pledge_carved_in_st.html
TaxPayer
May 13th, 2010
2:06 pm
A 35% tax rate is too low given that after all their deductions and methods used to hide income from the Fed they still would not pay much. There should be a tax collected at the point of sale for each and every “Wall Street” transaction.
TM
May 13th, 2010
2:06 pm
As an invester I am all for keeping the capital gains tax where it is. But I still can’t figure out why the money earned by the hedge fund managers is taxed at that rate nor do I understand how increaseing their tax rate on their income to the same level as mine would affect the hedge fund activities.
scrappy
May 13th, 2010
2:06 pm
So, they only pay 15% because it is classified as fee income? They are still earning a living, why isn’t it earned income?
I don’t have a problem with a 15% capital gains tax, but this is ridiculous. From now on I am going to re-classify my earnings as fees so that I can get a tax break.
stands for decibels
May 13th, 2010
2:06 pm
I’ve never thought that the capital gains tax rate should be lower than the rate on earned income. It makes no sense.
Well of course it makes sense. Those who earn their income by producing absolutely nothing of tangible value, skimming their cut of other people’s worth, are inherently superior human beings and should be rewarded.
Jay, you been asleep for the past thirty years, or what?
JohnnyReb
May 13th, 2010
2:09 pm
Bosch, I expect you know exactly who Soros is. He is hated by the right, which includes me.
Redneck Convert (R--and proud of it)
May 13th, 2010
2:13 pm
Well, take one step forward and pretty soon somebody makes you take one step backwards.
Just yesterday, old Sonny signed a law that lets rich old geezers off without paying state income tax. He says it’s a way to get more rich old geezers to move into the state. Sonny must be a heck of alot smarter than all the TV and radio marketers. They don’t even count old people because the geezers are too tight with a buck to spend anything. But Sonny says it’s a way for them to spend their money right here in GA so us rednecks can build them houses and furniture and stuff like that. It sounds like Trickle Down to me and that’s a good thing.
Now the Obama people want to raise taxes on hedge fund managers. That’s a step backwards. Seems to me if somebody’s smart enough to bamboozle a few million nuts out of their 401ks and stock funds and stuff like that, then he’s smart enough to deserve a 15% tax rate. Or even lower. That hedge fund manager is going to go out and buy yachts and mansions and fancy cars and all that stuff, and that puts rednecks to work. Just like Sonny says the geezers will put people to work when they flock into GA. That’s Trickle Down, and it’s a good thing that Obama wants to put a stop to. This Obama must really hate us rednecks.
Have a good p.m. everybody and when you get old and worthless and real tight with a buck stay right here in GA. We know how to treat you good.
Bosch
May 13th, 2010
2:18 pm
Reb,
Believe it or not, I don’t know who Soros is – I hear his name thrown out here like the Anti-Christ, but I don’t know anything about him other than he’s a hedgefund manager.
jewcowboy
May 13th, 2010
2:22 pm
Bosch,
“I hear his name thrown out here like the Anti-Christ, but I don’t know anything about him other than he’s a hedgefund manager.”
Let’s put it this way…if he backed right-wing candidates instead of left-wing candidates he would be portrayed as a saint…
TaxPayer
May 13th, 2010
2:23 pm
If we imposed a FairTax™ on every “Wall Street” sale, I’ll bet it wouldn’t need to be no 23% in order to collect enough to equal the amount collected as Federal income tax and we wouldn’t need to implement a socialist scheme of sending out monthly prebate checks either. That’s a FairTax™ scheme that I could support. Maybe I just need to put it in book form.
Scout
May 13th, 2010
2:27 pm
Jay ! Jay !
This is an AJC Headline up right now !
“Pregnant woman leads cops on high-speed chase; unborn child killed”
Unborn Child? Unborn “CHILD”? You guys are losing your touch. How did that get out?
Bosch
May 13th, 2010
2:28 pm
jewcowboy,
Ok, good you’re up here now.
Exactly. The only people I know who ever talk about Soros are the wingnuts – don’t know if it’s wealth envy or what.
Kamchak
May 13th, 2010
2:29 pm
Bosch
George Soros=moveon.org
Paul
May 13th, 2010
2:30 pm
It’s about time. Better late than never.
Let’s see if Congress really does to this. And let’s see which Congressmen try to block it. This is worth following.
Bosch
The rumors that Soros is the anti-Christ are hysterical gibberish. That ‘666′ on his forehead doesn’t mean a thing.
bugatti
May 13th, 2010
2:30 pm
Damned rich people. Here’s the guy with the answer:
“Hatred as the central element of our struggle! Hatred that is intransigent…hatred so violent that it propels a human being beyond his natural limitations, making him violent and cold- blooded killing machine…We reject any peaceful approach. Violence is inevitable. To establish Socialism rivers of blood must flow! The imperialist enemy must feel like a hunted animal wherever he moves. Thus we’ll destroy him! These hyenas are fit only for extermination. We must keep our hatred alive and fan it to paroxysm! The victory of Socialism is well worth millions of atomic victims!”
– Ernesto “Che” Guevara speaking about Americans, April 1966 Message to the Tricontinental Conference in Havana, Cuba
Here’s a clue folks. Notice he isn’t talking about conservatives Americans. We would have just as soon killed a liberal as a conservative.
He labeled his favorite machette “asesino de la vaca de capitalismo” which roughly translated means assassin of the cow of capitalism. He would have his thugs string up an innocent woman between two trees, spread eagle. Then he would take that machete and see how many chunks of flesh he could cut away from her body without killing her.
If they could find a pregnant woman, it was a whole new display of liberal coolness. But I will spare you the details.
The only thing good about Che is that he was such an idiot that his bullet wound to his face was caused by his dropping his psitoli and it went off, shooting himself in the face.
Hey, but those Tee Shirts look really cool huh? And after all, the CIA made him do it
jewcowboy
May 13th, 2010
2:33 pm
Bosch,
“The only people I know who ever talk about Soros are the wingnuts – don’t know if it’s wealth envy or what.”
I think it falls in line with the topic below
Doggone/GA
May 13th, 2010
2:35 pm
“how increaseing their tax rate on their income to the same level as mine would affect the hedge fund activities.”
I’m trying to figure that one out too.
Outhouse GoKart
May 13th, 2010
2:35 pm
scrappy
May 13th, 2010
2:06 pm
File as 1099 and go for it!
Bosch
May 13th, 2010
2:37 pm
jewcowboy,
I love it when you do the winky thing at me.
Paul,
Yeah, sometimes birthmarks can be weird that way – I have one shaped like that – ‘cept it’s on my ass, weird huh?
~~~~~~~~~~~~
So…Kamchak…….Soros is the moveon.org guy – so he puts out political rhetoric, and the wingnuts hate him? Weird. I thought they loved that crap.
~~~~~~~~~
Okay, off topic, but important – has anyone ever had a puppy dropped on their doorstep followed the next day by another puppy? No, this is no Blog God joke (even though I’m starting to wonder if he’s watching my house). There’s no way these puppies could have just wondered off the street – our drive way is too steep and long.
Outhouse GoKart
May 13th, 2010
2:38 pm
I see no issue with what these fund mgrs are doing as long as within the law. The issue is with the Congress who will adopt some silly retro solution that the bankers and fund mgrs have already contemplated.
These guys have all the angles figured out and I dont view that as a negative.
Normal
May 13th, 2010
2:39 pm
Soros goes against everything the conservative believes. No rich person can ever be progressive minded. It just isn’t done
jewcowboy
May 13th, 2010
2:39 pm
It seems straightforward to me…if the percentage of income from capital gains is the greatest portion of one’s income, it should be taxed as earned income @ 35%…if not, it should be taxed as capital gains @ 15%.
If your greatest source of income is capital gains, it is your earned income.
Normal
May 13th, 2010
2:41 pm
Bosch,
Asparagus and dumplings goes well with those puppies.
Bosch
May 13th, 2010
2:42 pm
Normal!!! I’m serious!!!
wyld byll hyltner
May 13th, 2010
2:43 pm
So, Jay, you say, “I’ve never thought that the capital gains tax rate should be lower than the rate on earned income. It makes no sense. ‘
Well, there are days when it feels as if I wouldn’t have anything to do if I didn’t fill liberals’ heads with knowledge – well, except for chasing hot young flank, cuttin’ cattle on some of the most royally bred horses around, vacationing in tropical paradises around the globe, and cutting alimony checks.
Here’s how it works, Jay. You have a salaried job at the AJC. You go, do your job, and get a check every two weeks. You might get fired, but you never have to give any of the money back, even though someone like Cynthia tucker should have to give all of it bank. Bottom, line what you do does not create any new jobs.
I, on the other hand, have a pile of money. My choices are to: a) invest it something riskless like a T-Bill; or b) invest it in a commercial venture that bears significant risk. Now, when I invest in a risky commercial venture, I create new jobs which has a very positive ripple effect through the economy – that called the “trickledown effect.” Now, why would I invest in a risky venture when I can invest in a sure thing? Well, it is because I get paid a “risk premium” to invest in a risky venture rather than taking a sure bet. How much and how often I invest (which creates new jobs and positive economic ripples) depends on the level of risk premium I receive. The lower capital gains rate provides a risk premium that incents me to invest and create more jobs, more often than I would without that portion of the risk premium that is attributable to the lower tax rate.
So, in summary. Your regular income creates no new jobs, but my investment creates new jobs. So the lower capital gains rate is a net positive becuase it increases the frequency and magnitude with which I cjhoose to create new jobs and positive economic ripples.
The better question is why should my capital losses be taxed at the capital gains rate when the money was taxed in the top bracket when i earned it.
Jay, you have my email address, you can send the blogs to me and i”ll sign off to prevent further embarrassing comments.
But allowing hedge-fund fees to be taxed at the capital gains rate is a gross inequity that nobody, Republican or Democrat, should try to defend.
Doggone/GA
May 13th, 2010
2:43 pm
“There’s no way these puppies could have just wondered off the street ”
Probably someone dumped them both at the same time, and it just took one longer than the other to make himself known to you. Don’t be surprised if there’s more…whoever might have dumped a whole litter.
Normal
May 13th, 2010
2:44 pm
Bosch,
I’m serious too. Make sure you bake them like chicken with cornbread dressing and lots of onions. Yummy!!!
AmVet
May 13th, 2010
2:45 pm
Didn’t look at any of the retorts but loved that piece downstairs on fake conservative paranoia, JB.
Vis a vis the right wing psychobabble machine, the loonier the headline the more likely it is true.
This effort to ameliorate the welfare for the wealthy scheme and properly tax the casino capitalists might just be the first shot fired in the ongoing attempts to dismantle the oligarchy as the owners of our government and the usurpers of our sovereignty.
This type of income should be taxed MORE than income earned from actually working and doing something of value, known as earned income – not LESS!
One of the ongoing failures begun by Trickle Down Your Thigh Voodoo economics…
jewcowboy
May 13th, 2010
2:45 pm
Bosch,
“as anyone ever had a puppy dropped on their doorstep followed the next day by another puppy?”
I work with a dog rescue organization…in the past week we’ve had 16 intakes…all owner intakes of adult dogs. It’s amazing to me that they have these dogs their entire lives, then one day decide that they no longer want it…
Kamchak
May 13th, 2010
2:46 pm
Normal!
Paul
May 13th, 2010
2:46 pm
Bosch
“Yeah, sometimes birthmarks can be weird that way – I have one shaped like that – ‘cept it’s on my ass, weird huh?”
So I guess that means Soros is a thinker AND an ass, eh?
Weird about those puppies. Maybe the cat lovers heard about your sacrifices and are trying to give you an alternative -
Bosch
May 13th, 2010
2:47 pm
Doggone,
I didn’t think about that. I thought maybe the mama had them somewhere and is sneaking them up to my house — oh, but maybe the mama is dead somewhere. Oh no. I’m gonna have to go search now.
Outhouse GoKart
May 13th, 2010
2:47 pm
“If your greatest source of income is capital gains, it is your earned income.”
Its not quite that simple…read the tax codes.
Capital gains is just that.
Income Tax is just that.
Its these silly idiots on capital hill that make laws that are contradictory…thats the problem. Not the bankers, not the investors, not the hedge fund mgrs. As usual its the politicians.
Bosch
May 13th, 2010
2:47 pm
Normal — that is so wrong.
Normal
May 13th, 2010
2:49 pm
jewcowboy
May 13th, 2010
2:45 pm
I was talking to a Cherokee adoption center at Pet Smart. He said most dogs coming to them are because, due to the economy, the ownerts can’t take care of them anymore. It is sad. I can’t tell you how much money I spend on my “special care” kitties, but, at least IO have a job.
scrappy
May 13th, 2010
2:49 pm
Did you happen to see the article about Chinese astronauts eating dog while in space?
Mick
May 13th, 2010
2:50 pm
Let’s do the math: If I make 4 billion and get taxed at 25% that means I still made 3 billion. Now, considering that 1 billion is 10 hundred million, I think most could handle it and still have plenty left to play with.
Normal
May 13th, 2010
2:50 pm
Y’all, what?
It’s a recipe I picked up in ‘Nam.