STOCK MARKET WATCH -- Friday, 18 April 2014

[Demeter]

13. The Hedge Fund Managers Tax Break: Because Wall Streeters Want Your Money DEAN BAKER

http://truth-out.org/opinion/item/23074-the-hedge-fund-managers-tax-break-because-wall-streeters-want-your-money

The coming of tax day provides a great opportunity for everyone to focus on their favorite tax break, and there are many from which to choose. However for all the sneaky and squirrelly ways that the rich use to escape their tax liability, none can beat the hedge fund managers' tax break. This is the way the rich tell the rest of us, because they are rich and powerful, the law doesn't apply to them. The hedge fund managers' tax break, which is also known as the carried interest tax deduction, is different from other tax breaks in that it has no economic rationale. With most other tax breaks there is at least an argument as to how it serves some socially useful purpose. That is not the case with the hedge fund managers' tax break. This is simply a case where the rich don't feel like paying taxes and are saying to the rest of us, "what are you going to do about it?"

The hedge fund managers' tax break applies to the portion of their earnings that are contingent on the performance of their fund. It's standard for hedge fund managers to be paid a flat fee of 1-2 percent of the money they manage. In addition, they will typically get performance pay that is equal to 10-20 percent of what the fund earns above some threshold. Managers of private equity funds and real estate investment trusts have similar arrangements with the same tax break. The portion of their pay that depends on the fund's performance is the "carried interest." It often runs into the tens of millions or even hundreds of millions of dollars. While this money is clearly and explicitly pay for the work of managing the fund, under the current tax law managers get to have this income taxed at the capital gains rate. This translates into a huge savings for the fund managers. If their earnings were taxed as normal income they would pay a 39.6 percent tax rate, compared to just a 20 percent capital gains tax rate. For a successful manager earning $10 million, the savings come to $1,960,000. If they earned $100 million, the savings would be equal to $19,600,000.
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The fund managers' tax break first became a major political issue seven years ago. It seemed so obviously corrupt that it couldn't stand up in the light of day. When I first heard about it from a friend I assumed that he had misunderstood its nature since no tax break could be such a blatant give away to the rich. I then looked it up and realized that he was right.

I then asked a prominent conservative economist how he would justify this tax break. He told me that the fund managers are rich and powerful people. I assured him I knew this, but I wanted to know what sort of economic rationale there could be for this sort of tax break. He said there isn't one.

So there you have it. The richest people in the country don't pay their taxes because they don't feel like it. Happy Tax Day.