November 21, 2007

Understanding the "carried interest" issue. This is the reason hedge fund managers pay just 15% in tax on their income rather than the up to 35% others pay in regular income tax, the reason Warren Buffet pays a lower tax rate than his secretary. While some Democrats are fighting to change things, others are...well, some would say they're selling out to hedge fund money.
  • The article is is every argument that contains the line "The issue is no more complex than that." Of course it's more complex than that. The argument that fund performance fees are like lawyers' contingency fees sounds good, but isn't really accurate. Similarly for the argument that fund performance fees aren't capital gains because the managers don't actually own shares in the fund and have no downside risk. While it's true that they don't own shares and have no loss risk, it helps if you look at the fees as a grant of options to buy shares in the fund. Options have zero risk of loss but can be converted to shares in the future and redeemed for a gain, and those gains are considered capital gains. Essentially, this is how the fund managers' compensation works, and if the government passes this legislation change, the funds will just create an actual options-based system and the managers will continue to pay the same as they do now. I'm all for taxing the rich more and the poor less, but this seems misguided and simplistic. As an the only information regarding Warren Buffet's income tax on the entire internet really a youtube video? Youtube has it's place, but I don't think this is it.
  • So we should just let what's an essentially unfair compensation practice continue, because it would be difficult to change it. Makes sense. And the YouTube comment? Get up on the wrong side of the bed, rocket?
  • I wasn't supporting the current tax system...I was criticizing a poorly written article that was based on a weak argument. As for the youtube issue...I googled 'warren buffet pays less tax than secretary' and got this. In text.
  • Congratulations on your ability to search on Google. I happen to have found the Warren Buffet piece entertaining and informative. But then, I'm such a silly billy! I didn't realize that we're supposed to eschew video in favor of text here on MoFi; I must've missed the memo. Next time, before posting, I'll be sure to email you to get your approval first. As far as the carried interest issue goes, I appreciate your thoughts on what you call "the article" (the first of the three articles linked to in the FPP). It makes sense that, given the option to, fund managers will switch to granting themselves options to buy shares of their funds, if it continues to keep their tax burden low. That doesn't change the fact that something's wrong with allowing the richest folks to pay half what the rest of us pay in taxes. And it doesn't mean the effort to force fund managers to pay the same tax rates as everyone else is either simplistic or misguided. At the same time as some are trying to level the income tax playing field, aren't others trying to rein in the shady use of options in executive compensation? Yes, the potential that funds will switch to giving managers options is a part of the story that deserves mention - this will surely be an issue moving forward - but that there's more to the story doesn't mean the FPP is worthy of the scorn you seem to have for it. I found the way Democrats are approaching this and other unfair-taxation issues, an aspect of the FPP that seems to have passed you by completely, to be particularly interesting.
  • This issue is possibly my biggest gripe of all. (And you all know I'm not exactly short on gripes.) I have no problem paying taxes. Without tsxes we wouldn't have highways, public schools (such as they are), health care for the elderly, and all the things we as a nation can be proud of. What makes my blood boil is the people who aren't paying their fair share of the tax burden.
  • This reminds me of a fairly common dodge used by freelancers/contractors - set up a corporation; set contracts between your employer and your corporation; then employ yourself through the corporation on a very basic salary. Depending on the specific tax regime, the corporation can pay you dividends that are subject to corporation tax at a lower rate than would be paid as income tax.
  • MonkeyFilter: I'm such a silly billy! Don't get me started on taxes, corporations, and this regime government.
  • This isn't misguided - the original exception for hedge fund managers is the very misguided decision. It is clearly a fee for services, and regardless about how you feel about capital gains or not, this is not capital gains. This is INCOME. Everyone else pays on their income.* That said, why shouldn't income from capital gains pay the same rate as everything else? Screw the "I risk my money" argument - firefighters risk their lives to make their income, and no one says they should be taxed less. You chose to make money that way, and it often pays quite well. So you pay your taxes. If you don't like paying taxes, go be destitute. I really respect Warren Buffet for taking this cause on - he is a truly upstanding man. This reminds me of the falacious argument that inheritances shouldn't be taxed because that money has already been taxed. If that were a valid argument, then I shouldn't pay sales tax, because I've already paid tax on the income I use to buy things with. Also, the person I pay to clean my house shouldn't pay income tax, because I already paid tax on that money. Of course, I shouldn't pay income tax, because my employer already paid tax on the profits that pay me... and so on ad naseum. Money in an economy is like water through an ecosystem - it never stops flowing, and it gets taxed over and over and over again, because we as a society have decided that we like living in a developed country and not the middle ages.
  • Capital gains are taxed at a lower rate as an incentive to invest. Most governments allow this because it's one of those "rising tide that floats all boats" things that increases tax revenue overall. Personally, I'd like to see it limited so that, say, the first $200,000 of cap gains are taxed low, or not at all, and anything above that is taxed at the highest marginal rate. There's no reason the super-rich should benefit so much from a loophole designed to help the middle-class investor.
  • I agree with your last point, and like the sound of your solution. Also, I think the fact that hedge fund managers don't really receive the benefit of paying the capital gains tax rate instead of the income tax rate "as an incentive to invest" really makes it clear that they may not deserve the benefit as much as they claim.