Life is tough for pundits like Paul Krugman. Yesterday’s outrage seems mild by comparison with today’s. If you write your column a day or two ahead of deadline you risk writing about yesterday’s scandal.
Case in point, today Krugman takes the Democrats to task for slowly walking away from mandating fair taxation of hedge fund managers. The hedge fund crowd has taken the position that their earned income is capital gains, and they have, so far, gotten away with it:
The effect of this redefinition is that income that should be considered by normal standards to be ordinary income taxed at a 35 percent rate is treated as capital gains, taxed at only 15 percent instead. So fund managers get to pay a low tax rate that is supposed to provide incentives to risk-taking investors, even though they aren’t investors and they aren’t taking risks.
For example, the typical hedge-fund manager has a 2-and-20 contract — that is, he gets a fee equal to 2 percent of the funds under management, plus 20 percent of whatever his fund earns. It’s not exactly straight salary, but none of this income comes from putting his own wealth at risk. Except for the fact that he might make a billion dollars a year, he resembles a waitress whose income depends on a mix of wages and tips, or a salesman who lives on a mix of salary and commissions, more than he resembles an entrepreneur who sinks his life savings into a new business.
Outrageous? Yes, but mild compared to this from the front page of the very paper in which Krugman’s column appeared:
The Blackstone Group, the big buyout firm, has devised a way for its partners to effectively avoid paying taxes on $3.7 billion, the bulk of what it raised last month from selling shares to the public.
Although they will initially pay $553 million in taxes, the partners will get that back, and about $200 million more, from the government over the long term.
That’s right. These hedge fund guys just can’t get motivated to pull down billions a year if they have to pay a whopping 15% in income tax. Without us yokels subsidizing them, they might not invest other people’s money at all, and then where would we be? As Abu Gonzalez might say, this new scam renders outrage at the capital gains dodge somewhat “quaint”.
ADDENDUM: There is some good news. No less a corporate coddler than Hillary Clinton has grabbed the hedge fund tax issue to burnish her credentials with us little people:
Senator Clinton, speaking at a rally in New Hampshire, called for ending a “glaring inequity” that allows investment managers in certain partnerships to take large amounts of their compensation in the form of performance fees or “carried interest,” which is taxed at the 15 percent capital gains rate rather than at income tax rates as high as 35 percent.
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