[JerryLove]

I thought it might be interesting to have a discussion about raising a specific single tax... it is, not coincidntally, one of the many tax increases which has been proposed by the left and largely poo-poo'd by the right.

I'm talking about the tax rate on earnings fomr hedge funds by hedge fund managers.

A hedge fund manager is essentially an accountant (sans accounting degree) who controls the investing of other people's money. They generally get paid a percentage of what the hedge fund earns (much like a salesman get's a commission).

Here's the odd bit: They pay income tax on their earnings at the capital gains rate (15%), not the standard income rate.

Looking at the general income levels of Hedge Funds managers: their income-tax rates would be north of 25% if they were not specially exempt.

So there's my question. Should someone making a million-dollars a year pay at a lower tax rate than, say, me: because his income is from managing a hedge fund rather than from selling cars? Or, instead, should we repeal their tax cut? (about $2billion per year nationally).

[adamwagg]

Originally Posted by JerryLove

I thought it might be interesting to have a discussion about raising a specific single tax... it is, not coincidntally, one of the many tax increases which has been proposed by the left and largely poo-poo'd by the right.

I'm talking about the tax rate on earnings fomr hedge funds by hedge fund managers.

A hedge fund manager is essentially an accountant (sans accounting degree) who controls the investing of other people's money. They generally get paid a percentage of what the hedge fund earns (much like a salesman get's a commission).

Here's the odd bit: They pay income tax on their earnings at the capital gains rate (15%), not the standard income rate.

Looking at the general income levels of Hedge Funds managers: their income-tax rates would be north of 25% if they were not specially exempt.

So there's my question. Should someone making a million-dollars a year pay at a lower tax rate than, say, me: because his income is from managing a hedge fund rather than from selling cars? Or, instead, should we repeal their tax cut? (about $2billion per year nationally).

That seems bizarre, to me a commission on that is still income and should be at the income tax rate.... I'd have to look up what the rules are here in Australia, but I'd be surprised if they are the same as that.

[jthomas1600]

It sounds to me like they're not claiming it as income right? They probably get paid a base salary (again like salesmen) but then they're getting a return on investment (capital gain) even though it wasn't their money invested? Maybe that's how they're working it. Anyway, yes, I think there are too many loopholes for the ultra wealthy. And this might be one of them. If on the other hand this money is not the result of work they are basically doing, but simply an honest return on their own personal investment it should be left alone unless we're going to change the capital gain tax scam...I mean scheme ... for everyone.

[Epaphras]

I think it's a major loophole that should be closed.

The owner of the hedge fund should be the one paying the capital gains tax, because it's their money that's making money.

The manager of the hedge fund is essentially an employee of the hedge fund. Their "percentage of profits" fee is commission, not capital gains, and last I checked commission income is taxed the same as wage income. Major, major loophole.

The financial sector lobby would argue that lower income taxes (via capital gains rate) results in these managers being incentivized to produce really good gains on their funds, which means more money to lend for mortgages and business loans, which is good for everyone.

Nevermind that it was these idiots who got us into this mess in the first place...

[Chrysostom]

Originally Posted by JerryLove

I thought it might be interesting to have a discussion about raising a specific single tax... it is, not coincidntally, one of the many tax increases which has been proposed by the left and largely poo-poo'd by the right.

I'm talking about the tax rate on earnings fomr hedge funds by hedge fund managers.

A hedge fund manager is essentially an accountant (sans accounting degree) who controls the investing of other people's money. They generally get paid a percentage of what the hedge fund earns (much like a salesman get's a commission).

Here's the odd bit: They pay income tax on their earnings at the capital gains rate (15%), not the standard income rate.

Looking at the general income levels of Hedge Funds managers: their income-tax rates would be north of 25% if they were not specially exempt.

So there's my question. Should someone making a million-dollars a year pay at a lower tax rate than, say, me: because his income is from managing a hedge fund rather than from selling cars? Or, instead, should we repeal their tax cut? (about $2billion per year nationally).

Three issues:

1. Effectiveness: Will this work? There are two reasons to think the net effect of a change would not be significant. First, because a change would probably allow hedge fund investors a new tax deduction -- the manager's fee -- and since investors are in higher brackets than managers (generally) you may not be talking about a net gain for tax revenue; if so, probably a minimal gain. Second, and much more important, is the possibility of a restructuring of managerprofit sharing that would circumvent the tax changes entirely. I'll explain this at the end, where it will make more sense.

2. Should the capital gains rate be different from the personal income rate? This is a complicated issue and I don't have a position, but I'll give you three reasons that a different rate is not as ridiculous as Jon Stewart would suggest: a) A capital gains tax taxes inflation, not just real gains, so a lower rate offsets the fact that you're getting taxed on any assets that have undergone inflation, regardless of whether they're appreciating. b) Any money taxed as capital gains has generally been taxed before (corporate tax). c) Less significantly, a lower cap gains tax helps prevent investors from leaving the country. It's lower in many major European nations, zero in some instances, for reasons just like these three, even though they have much higher tax rates, wealth taxes, etc. Whether it's RIGHT to have a lower cap gains tax is a tough call for me, I'm just saying that if you want to focus on this issue then do that and don't conflate it with the fact that the cap gains rate is lower.

3. Different kinds of capital gains. (Disclaimer: FOr my business I receive short-term capital gains, which is taxed like personal income, so I'm not personally invested in having these long-term tax rates lower or higher.) The point of distinguishing between cap gains and personal income is to recognize a distinction between salary, commission, etc. and building a business. When you receive income by building a business you have capital gains -- I'm a big fan of entrepreneurship generally and so insofar as it encourages entrepreneurship I'm a big fan of recognizing this distinction. Now, sometimes business partners contribute different things. This guy has the idea or the know-how or makes the business run, and this other guy has the money to invest; they get together, form a partnership, and split their business up between partners. I know someone who manages a chain of gyms in this way: he does all the work, the other guy puts up all the scratch, and they split ownership. They both shares in the profits, so they both receive long-term capital gains, not salaries or commissions. (The technical terms are carried and purchased interest, as I recall, and they correspond to these partners respectively.)

Now, a hedge fund is treated as long-term capital gains, as growing a business. Whether that's appropriate is a separate issue; I'll admit to you I find a lot of things about hedge funds weird and hope to see them go the way of the dodo. The investors pay the capital gains rate, and they normally pay a management fee to the manager. That fee is taxed at the personal income rate because it is like a salary or commission; this is where the manager is just like the used car salesman. But a manager will also be compensated by sharing in the fund's profits. He is seen as a partner who contributes sweat-equity ("carried interest") and the government recognizes him as profiting by growing the business (rather than by receiving a salary or commission) because his profit comes from growing the business, from turning capital into more money.

Is it right to recognize my friend who manages the gyms as a full partner in the business? From my perspective it's clearly a "yes", and hedge funds organize themselves such that the manager is recognized as a partner in the business.

So now that other way of getting around changes in tax law: Just make the manager a full partner in a more explicit way. For instance, anybody who invests in the fund puts part of his money in the fund and lends a percentage of it to the manager; the manager then invests that loan in the fund and so becomes an investor who would, accordingly, receive long-term capital gains as an investor. It would involve some restructuring but you would get basically the same net result as you already get with the current structures. In the end, then, who would suffer? The only change for the hedge fund managers would be on paper. The real people who would be affected would be folks like my friend who became a partner in the gym business by running all of them; he would no longer be recognized as a full partner. Maybe deals like his could be restructured to turn him into a full partner, but maybe they wouldn't have the financial savvy or necessary scale to adjust.

Either way, I doubt that "closing this loophole" would have any effect. And I'd suggest that if the Democrats want to move tax rates to pre-80s levels they should start CREATING more tax shelters, since that was how the government could get away with such high top tax brackets in years past.

[JerryLove]

Don't get me wrong: I don't oppose capital gains tax being different.

That said: I believe your friends are abusing a loophole.

For one thing: the profit a coropration makes (profit representing the difference between gross income and expenses) isn't a capital gain.

For another: If your friends gave themselves stock at the beginning (which means they should have paid income tax on the stock value at that moment), and have since been selling their stock; then the profit from that sale (actually: the appriciation of the stock itself while they posess it) is a capital gain.

I assume by "share in the profit", you mean "they are paying the stockholders dividends"... which I assert is income, not gains.

I could, by rearranging the wording on the contract, make *all* income "capital gains" under the descruption you've given.

I'm also not asserting that this will "fix the deficit" or anything of the kind. I'm just attempting to discover if we can all agree that some "tax increases" are not bad things... that (such as this one) they can possably improve fairness.

[Chrysostom]

Ugh this tablet is not the bestt for posting. Yesterday I lost one post, today I'm having to retype this post.

- sorry, with the tablet confusion I didn't make it clear that they are selling these gyms, making it cap gains. Regular profits would be, as best I can tell, business income or something?

- the point I was driving at was that because restructuring is so easy, if the law is passed it can only be as theater. And maybe that's the intent: hedge funds are a big constituency for dems, and repubs ideologically knee-jerk, so maybe the point is to be able to tell the public "we're taking on the rich" while keeping the hedge fund guys happy. I hope we can agree that this is not a good tax "increase" if that increase is ephemeral, mere posturing.

- in terms of tax increases, while the dems are naive in thinking taxes are the big solution (the problem is exponential spending growth, but tax revenue wouldn't grow exponentially), I think it's also clear that Ryan's reticence to raise taxes and/or desire to cut taxes is equally naive. Sometimes you've got to pay the piper, especially after two big government-aided bubbles and a decade of war, and that means taxes.

Or maybe, just maybe, we could come up with something big that's worth raising taxes for? Banning gay marriage and building light rail seem to be the best these parties can come up with -- get a real plan and the discussion will shift away from the fear of taxes and/or rocking the boat to seeing where we can come up with the money to do this great new thing. A compelling vision will shift the debate such that tax rhetoric will matter only to relatively insignificant fringe voters.

[JerryLove]

I'm not sure I'm quite clear on the germaine portion of your position.

Do you believe that the law should be changed so that hedge-fund managers pay income tax on their (commissions paid from accounts they manage) income?

Or do you believe that Hedge-fund managers should continue to pay at a lower tax rate than everyone else (except the poor)?

[Chrysostom]

I'm saying, that's irrelevant because the actual execution will be ineffective.

And, more broadly, I don't see a good reason to say things should change unless you want the whole structure of capital gains to change.

Edit: I should be more explicit. Managers *do* pay regular income tax on the portion of their income that is most like a commission or salary. They pay long-term capital gains only on the portion that comes from their sharing in the capital gains of the fund. Therefore, if you want to change things it must either be by changing how capital gains as a whole are treated, denying that a partner whose part in the partnership is earned by work is indeed a partner, or singling out hedge funds. #3 is obviously shady and I can't see a good justification for #2, so unless you want to overhaul capital gains they do, indeed, pay taxes just like the rest of us, it just happens that they go where the tax incentives are.

Do farmers not pay taxes like the rest of us because they get special subsidies? Those who qualify as head of household because of the special tax status it affords? Should the self-employed complain that cubicle workers receive unfair treatment because of self employment taxes? The hedge fund managers went where the tax incentives were.