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Tuesday, July 12, 2011

The carried interest deduction

Anybody who has any doubts about the complete corruption of Congress should take a look at the carried interest deduction. For those of you not familiar with it, it is the loophole which allows hedge fund managers to have their income taxed at long term capital gains rates rather than regular income rates.

It makes absolutely no sense. Hedge fund managers take a cut of their investors' earnings, as they should. But they're not investing their own capital, they're simply taking an investment management fee. So why do they get to be taxed at the much lower capital gains rate? I know of no one who's examined this situation who feel it is fair.

But they get away with it because it is never mentioned in the press, and very few even know about it.

It all boils down to one thing: campaign contributions. Take two morally flexible groups, hedge fund managers and politicians, put them together, and what do you get? A 15% tax rate for the hedge fund managers, some of whom make over a billion a year. (I wouldn't be surprised if some of those "campaign contributions" were off the books, though I certainly can't prove that.)

These are the real millionaires and billionaires who ought to be taxed more, not the married couples who together make $250,000 a year.

Addendum, 7/16: Someone just wrote in to explain that  the hedge fund managers only get that long term capital gains rate for their share of the profits on positions they carry for over a year, which for most of them is less than half of their positions. (They shouldn't get it at all, but at least they don't get it on most of their income.) 


Dave Moriarty said...

i have gone full circle and think hedge funds should be taxed at double the rate . they add zero to the society . i do not buy the are efficient at allocating capital. some are better than others but they are really not value added players to a society. tax them at 100%!

John Craig said...

Dave --
Not a bad suggestion. But then the same would have to apply to mutual fund managers and even stock and bond traders, all of whom do nothing more than shift paper around. (But at least those guys pay regular taxes.)

Much as it pains me to say so, Obama is right about this one.

RACCAR said...

Good summary, including peripherals. Dan Malloy dodged questions on this topic, among others, on his CNBC interview yesterday. I have to admit that I was not up to speed on the subject.

John Craig said...

And you're in the finance business, too, which proves that 99.99% of people are unaware of this, which is why they get away with it. This issue needs to be exposed to more sunlight.

Anonymous said...

The hedge fund managers only get the long-term capital gains rate to the extent that the income they generate is long-term capital gains to their investors--that is, the asset is held for at least a year and a day. Most hedge fund managers are active traders whose positions are held for less than a year, and their short positions are all taxed at regular income rates, regardless of holding period. The group that most benefits from this is private equity fund managers, another overprivileged group who arguably add little value. To paraphrase Abe Lincoln: "A government of the special interests, by the special interests, and for the special interests, shall not perish from the earth."

John Craig said...

Anonymous --
Thank you for making that distinction clear. Your level of understanding is obviously better than mine.