Wednesday, November 07, 2007


Whose Capital Gains?

The Washington Post today pulls back the curtain on one of the little-observed and lesser criticized inequities structurally embedded in the US tax code: high wage earning masquerading as capital investment earnings.

Staff writer Jonathan Weisman’s report ostensibly gives background on a pending vote in the House on a bill designed to stave off the growth of the alternative minimum tax (AMT), offset by taxing the incomes of hedge fund and private equity managers as income, versus treating their incomes as earnings from capital gains.

To us poor slobs who have to work for a living, and pay income taxes on our income, it sure seems strange that these high rollers don’t have to pay tax on their income using income tax rates. I’m glad to hear it’s causing Congressmen and women some discomfort, according to Weisman:

The measure has deeply divided Democrats, pitting a rank and file that has railed for years against inequities in the tax code against the party's money men, who are reluctant to bite the hand that has generously fed them. Hanging in the balance is the AMT, enacted in 1969 to ensure that the wealthiest Americans pay at least some taxes. Instead, it has increasingly affected middle-class taxpayers.

Weisman also notes the confluence of legislative choices made by leading Democrats, and strategically precise donations by major hedge fund managers, quoting a former Treasury Department official:

"If you're a Democrat and you have to choose between the alternative minimum tax and the hedge fund industry, that's one tough ideological choice," said Viva Hammer, who recently left the Treasury Department's Office of Tax Policy and is now a tax partner at the law firm Crowell & Moring. "It's a choice between your votes and your wallet."

For this and any Congress, I’m not making any bets against their wallets. Coincident with some well-timed contributions from hedge fund managers:

By late July, Schumer was off the fence -- and on the side of the hedge funds and private-equity firms in opposing the Democratic legislation.

Glad to see my Senator Schumer knows what constituency he’s serving.

I suppose I can take comfort that the House is expected to pass the legislation, if narrowly, but with leading Democratic Senators on the dole, prospects in the Senate look bleak. Here’s what the legislation would correct:

The legislation would plug two obscure but highly controversial tax loopholes, deftly exploited by an industry that leans heavily Democratic. Private-equity fund managers earn much of their compensation by taking a cut of clients' earnings. It is pay for work, but critics of the arrangement note that it is taxed as capital gains, at 15 percent instead of the 35 percent income tax rate that they would otherwise pay.

Hammer said that about half of all private-equity compensation is taxed that way. About 20 percent of hedge fund compensation also is taxed at 15 percent, a rate lower than the one most secretaries pay.

"It's one thing to allow such generous tax treatment to a small business or perhaps a real estate investment. It's quite another to apply it to a billion-dollar equity fund," said Victor Fleischer, a University of Illinois law professor who has highlighted the issue.

Weisman also reports that the change in tax treatment of this income as income could bring in an additional $26 billion over the next decade.

In Washington, there’s fiscal responsibility, and then there’s fiscal responsibility. It’s only a matter of whose fiduciary interests their minding:

Hedge funds and investment firms have been pouring money into Washington, contributing $11.8 million in the first nine months of this year to candidates, party committees and leadership political action committees.

That is more than the $11.3 million they gave in all of 2005 and 2006, according to the Center for Responsive Politics. More than two-thirds of that money has gone to Democrats.

Their contributions to congressional candidates, congressional campaign committees and congressional leadership PACs total nearly $4.8 million this year, well over the $3 million given in 2005 and 2006. Eighty-three percent has gone to Democrats, compared with the 53 percent they received in the last election cycle. [Dadmanly, emphasis mine]

Absolutely outrageous: that this was ever the law of the land, and that Democrats, kowtowing to the moneyed interests they serve, are trying to close such an offensive loop hole in the tax code.

All you progressives out there, who want to call the GOP the party of the rich and privileged, try to square that circle.

Oh, and as you are writing that “Republicans have been doing that for years blah blah blah,” you’re either against Government corruption, pork, and graft, or you’re not. You can’t find it repulsive from one party and tolerable from another.

We can all agree to throw all the bums out, too; works for me.

(Via Memeorandum)


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