Let's talk Hedge Fund manager taxes. Kerry had a provision filibustered yesterday.

[beachmom]

http://www.thedeal.com/dealscape/2008/06/hedge_funds_dodge_democratic_t.php

Hedge fund managers can take a big sigh of relief, but watch out for 2009. Legislation that would have eliminated a tax provision allowing some hedge fund managers to defer taxes on billions of dollars of compensation came close to passing the Senate Tuesday, but in the end it was blocked.


Sen. John Kerry, D-Mass., attached a deferred tax provision to a broader energy bill, all of which was rejected by a filibuster from Republican senators. The measure would, in a nutshell, make hedge fund managers pay taxes immediately on income that is now tax-deferred.

"This vote is proof positive that Senate Republicans are more interested in helping hedge fund managers avoid taxes than helping working families," Kerry said on the Senate floor.

And while Kerry and other Democrat lawmakers remain frustrated by the outcome, hedge fund lobbying groups assert that the end of the deferment would have stifled investment and hurt the liquidity that hedge funds provide to the markets.

Here is Kerry's press release on it:

http://kerry.senate.gov/cfm/record.cfm?id=298956

Kerry: Roadblock Republicans Defeat Kerry Provision to Close Offshore Tax Loopholes for Hedge Funds

Block Energy Tax Incentives, Middle Class Tax Relief

WASHINGTON, D.C. – Sen. John Kerry today made the following statement on the 50-44 vote by the Senate to allow hedge funds to defer compensation overseas instead of offering energy tax incentives to Americans in need:

“This vote was a case study in the obstruction and obstinance that defines Senate Republicans and makes Americans coping with record gas prices hate Washington. Today, Republicans blocked tax incentives for renewable energy and tax relief for families and businesses struggling to make ends meet. We could’ve made possible $116 billion in tax relief if the Republicans were willing to close an egregious tax loophole allowing hedge funds to defer compensation offshore. This vote is proof positive that Senate Republicans are more interested in helping hedge fund managers avoid taxes than helping working families.”

However, as far as I know, Kerry has not changed his position on whether the carried interest (currently taxed at 15%) should be taxed at the same rate as everyone else is taxed for work. Both Clinton and Obama came out in favor of raising the tax. Chuck Schumer is against it:

http://www.nytimes.com/2007/07/30/washington/30schumer.html?fta=y&pagewanted=all

June was a busy month for Senator Charles E. Schumer. On the phone, at large parties and small gatherings around the nation, he raised more than $1 million from the booming private equity and hedge fund industries for the Democratic Senatorial Campaign Committee, of which he is chairman.

But there is another way Mr. Schumer has been busy with hedge fund and private equity managers, an important part of his constituency in New York. He has been reassuring them that he will resist an effort led by members of his own party to single out the industry with a plan that would more than double the taxes on the enormous profits reaped by its executives.

Oh, and in case anyone was wondering what precisely is a Hedge Fund, this is helpful:

http://en.wikipedia.org/wiki/Hedge_fund

A hedge fund is private, largely unregulated pool of capital whose managers can buy or sell any assets, bet on falling as well as rising assets and participate substantially in profits from money invested. It charges both a performance fee and a management fee. Typically open only to qualified investors, hedge fund activity in the public securities markets has grown substantially, accounting for approximately 10% of all U.S. fixed-income security transactions, 35% of U.S. activity in derivatives with investment-grade ratings, 55% of the trading volume for emerging-market bonds, and 30% of equity trades. Hedge Funds dominate certain specialty markets such as trading within derivatives with high-yield ratings, and distressed debt.<1>

Alfred W. Jones is credited with inventing hedge funds in 1949.<2>

In the United States, for an investment fund to be exempt from direct regulation, it must be open to a limited number of accredited investors only. While there is no legal definition for "hedge fund" under U.S. securities laws and regulations, typically they include any investment fund that, because of an exemption from the types of regulation that otherwise apply to mutual funds, brokerage firms or investment advisors, can invest in more complex and riskier investments than a public fund might. Hedge funds managed from other countries have similar relationships with their national regulators. As a hedge fund's investment activities are therefore limited only by the contracts governing the particular fund, it can make greater use of complex investment strategies such as short selling, entering into futures, swaps and other derivative contracts and leverage.

Derivatives was a name that popped up in the sub prime mortgage collapse. They are so complex that nobody can figure them out.

Here is the thing: mutual fund managers pay the same tax rate as we do, so I am growing skeptical of this tax hike amounting to "killing" the hedge fund managers. Frankly, I am a bit perplexed why they exist at all, especially since they are unregulated.

As of this past fall, Kerry remained skeptical of raising the tax:

http://www.politico.com/news/stories/0907/5771.html

Many Republicans and several Democrats, including Sens. Chris Dodd of Connecticut, John F. Kerry of Massachusetts and Charles Schumer of New York, have expressed reservations about raising taxes on private equity firms.

http://www.accountingweb.com/cgi-bin/item.cgi?id=103848&d=883&h=884&f=882&dateformat=%25o%20%25B%20%25Y

Democratic Finance Committee members, Senators Charles Schumer of New York and John Kerry of Massachusetts do not support the Senate bill in its present form because, according to Schumer, it singles out publicly traded partnerships in the financial sector and does not apply equally to partnerships in the oil and energy sector or in real estate that enjoy a similar tax benefit. An exception to the tax code was granted to these firms in 1987 that gives favorable tax treatment to publicly traded partnerships earning more than 90 percent of their income from passive investments, bloomberg.com reports.

The Senate bill, which would tax private equity funds, would also extend the 1987 break to publicly traded partnerships that transport and store ethanol, a corn- based fuel additive, expanding the special treatment, bloomberg.com says.

Senator Kerry told the Senate hearing on Tuesday that they "had to think carefully" about any unintended impact that might come from singling out one piece of the tax code for reform, Reuters reports.

So why the talk now? Because Ed O'Reilly is definitely going to run on this. Watch his video below:

http://www.openleft.com/showComment.do;jsessionid=10EAD00FDA5599AE03B17D1146F9431F?commentId=18391">One of his supporters left a comment on Open Left with the video plus links

Kerry's argument is that one small industry should not be singled out over the others, and that it would only tax "public" firms, not "private" ones. But in this case, that is not true: mutual fund managers pay the regular tax rate, and I do not understand why the private/public issue can't be dealt with. Another argument not uttered is that there are quite a few Hedge Fund managers in Boston, so perhaps this is a matter of jobs in state. I really don't know. But this still strikes me as an outstanding matter and question mark.

[TayTay]

1. Let me get a more complete answer for you.

This is very complex. I would ask you to consider for a second a project near and dear to Sen. Kerry's heart, the search for a way to get cleaner coal. (Hang on for a second, this is relevant.)

The US Government is pulling back from funding research into this kind of technology as well as other kinds of technology that will result in greener energy and help to mitigate what we can of the effects of global warming. No government money means no research. UNLESS, some other way of funding risky ventures that might not pay off for years or decades. Think about that for a second.

Consider, for a second, this article from the NYTimes:

About $50 million has been spent on FutureGen, about $40 million in federal money and $10 million in private money, to draw up preliminary designs, find a site that had coal, electric transmission and suitable geology, and complete an Environmental Impact Statement, among other steps.

But in January, the government pulled out after projected costs nearly doubled, to $1.8 billion. The government feared the costs would go even higher. A bipartisan effort is afoot on Capitol Hill to save FutureGen, but the project is on life support.

The government had to change its approach, said Clarence Albright Jr., the undersecretary of the Energy Department, to “limit taxpayer exposure to the escalating cost.”

Trying to recover, the Energy Department is trying to cut a deal with a utility that is already planning a new power plant. The government would offer subsidies to add a segment to the plant dedicated to capturing and injecting carbon dioxide, as long as the utility bore much of the risk of cost overruns.

It is unclear whether any utility will agree to such a deal. The power companies, in fact, have been busy pulling back from coal-burning power plants of all types, amid rising costs and political pressure. Utility executives say they do not know of a plant that would qualify for an Energy Department grant as the project is now structured.

More at: http://www.nytimes.com/2008/05/30/business/30coal.html?ref=todayspaper&pagewanted=all

Sometimes politics is about choices that you wish you didn't have to make. This might be one of those situations where you have to sit down and think, should there be an investment change that does benefit the middle and lower-income people or should some investment be taxed in such a way that it funds research that could, quite literally, save the planet.

What would you do?

[beachmom]

2. So you are saying hedge funds will fund green technology research?

Say, Obama becomes president, and the Congress increases their Democratic majorities, do you foresee the government getting more involved in funding that research? Or will the risky nature of it keep the government out of it? I am just trying to ascertain whether this is a Bush administration problem or a systemic problem that is not going to go away.

I guess I am still unclear as to the history of the hedge fund, what it is they're doing. Does it now boil down to a tax haven place to plunk money that can invest in a wide variety of industries? I certainly have read of hedge funds buying whole companies. And I am well aware that hedge fund managers overwhelmingly give their donations to Democrats, and at the beginning anyway, it wasn't to receive favors, but due to having the same ideological outlook as the Dems. Now they are in the special interest biz, trying to stop this tax increase.

Say you can convince me (I'm not there yet), how will Kerry convince voters, and be able to respond effectively from an O'Reilly attack (I know, he's minor, but still)? Will he give your explanation? Or the lame excuse in the NYT? I don't buy that excuse one iota. Your explanation is better but more complicated.

[TayTay]

3. It is a careful argument

And one that is difficult to put together. The US tax system is awful. There are thousands and thousands of pages in the US tax code devoted to exemptions. It is a special interest bonanza and not easily readably by anyone who isn't a tax attorney. Read anything by http://topics.nytimes.com/top/reference/timestopics/people/j/david_cay_johnston/index.html?inline=nyt-per">David Cay Johnston at the New York Times and you will see a tax code designed to help the super-rich at the expense of everyone else.

Our tax code needs a top to bottom revision, something Sen. Kerry wants to do in the new year with a new Congress and new President. (The planning for this is underway, of course.) Tax rates have to be made more fair and the super-rich have to start paying their share.

But, don't throw the baby out with the bath water. A lot of investment money goes to investments that never return a profit. The renewable energy field, is one such place. There are a lot of extremely expensive projects to be funded, only some of which will turn into real usable technologies.

The current Administration doesn't believe in clean coal or want to put money into developing cleaner coal technology. They need the money to fund the wars in Iraq. The "free market" people think that this technology will simply come into existence because the free market will push it. Sen. Kerry disagrees with that and is not a pure "free market" guy. Some investments should be pushed to areas that do public good.

This is not a sound-byte concept and is very difficult to put into a few sentences. An opponent of Sen. Kerry's could easily play the class card here and say that Kerry wants to keep the tax rates that give more money to his friends. The opponent never mentions the effort to reform the entire tax code to make it more fair and equitable from page one. That is inconvenient for him and he doesn't understand it anyway.

We do need more more to invest in green energy. While a lot of investors are good citizens and what to do things for altruistic reasons, a lot of others want a return on their investment. How do you direct that money, that much needed money, into good projects? What are the protections and incentives for investors to put money into projects that may not pan out but are much needed.

The US government is not likely to have the money for a long, long time to do this kind of investment. What is the solution here?

[TayTay]

4. BTW, I wanted to thank you for this thread

I *LOVE* taking questions and getting answers. It is probably, above all else, the reason I love politics.

I also adore people who ask the questions and demand the answers. Accountability is a wonderful thing. It makes people better at their jobs and it benefits that nation. The problem with the Bush years is not that too many question were asked, but that too few were asked and too few people in positions to do so held out for real answers.

Ask away! And I thank you in advance for this.