Carried Interest Redux

Hedge-fund managers, for whatever obscure reason, were and are paying taxes on their billions of ordinary income as though it were interest income ... at a rate equivalent to the long-term capital-gains rate. This is called a "carried interest" tax rate and has enraged the Obama administration and many ordinary citizens ... including myself. I have blogged about this in the past ... see: Carried Interest. A few years ago the highest capital-gains rate was 15% and this was why Warren Buffet's secretary was paying taxes at a higher rate than her boss.

The solution to this imbalance from our heads-up-their-tushes government was to increase the maximum capital-gains rate to 20% ... and not to eliminate this carried-interest tax treatment. And now the Obama administration, still in a snit, is suggesting that we raise the maximum capital-gains rate to 28% ... again treating the symptom and not the disease.

The result of course is that, in order to extract meaningful income taxes from hedge-fund managers, some non-millionaire ordinary investors are being punished  ... perhaps this is because of many hefty Wall Street political donations?

This is plainly stupid! Fix the problem ... don't paper over it!

The Payoff

Joe Scarborough keeps asking the same question on his Morning Joe show.  How will Obama’s raising the tax rate on the upper 2% of income earners generate any significant amount of revenue?  Were this to happen … Warren Buffet won’t be paying any more taxes.  Michael Moore won’t be paying any more taxes. Harvey Weinstein won’t be paying any more taxes.  Jon Corzine won’t be paying any more taxes.  Hedge fund managers won’t be paying any more taxes.  Anyone who earns money from dividends or capital gains … or those who can afford a good tax attorney won’t be paying any more taxes under Obama’s scheme. 

Do you find it strange that these people are also the ones who have been the big fund raisers for Obama?  So Obama, by being so fiercely adamant in his fiscal-cliff solution, can let his plutocrat friends off the hook while, at the same time, appear to be appeasing the Wall-Street Occupiers.  The people who will be paying more taxes will be those schlemiels who earn $250,000 to $500,000 per year in ordinary income and don’t have any significant offsets.  They are the ones who will be taking in the shorts.  And they are the ones, as the small business owners, who are said to be the major job creators in the country.

On the other hand, how might Obama go after the real millionaires and billionaires?  He could limit total deductions and other income-tax offsets to something like $35,000 or $50,000 or $75,000 … just like what Mitt Romney had proposed in the Presidential debates … and like what the Republicans are currently offering in the fiscal-cliff discussions.  Under this methodology Warren Buffet, Michael Moore, Harvey Weinstein, Jon Corzine, hedge fund managers, and their ilk would be the ones taking in the shorts … instead of the small-business job creators.  And, using this methodology, raising $800 billion in taxes (or much more depending on the limit put on deductions) over ten years would be a piece of cake. 

Therefore, one could reasonably conclude that The Barry’s insistence on just raising taxes-rates on the 2%-ers is really, in truth, a sly payoff to his benefactors by our consummate demagogue-in-chief.

Postscripts:  Please don't assume that, by my not mentioning spending and entitlement cuts, I do not favor them.  I do.  I think they are a must and the ratio of government spending cuts to revenue additions should be at least 6:1.  Also don't infer from the above that I would like to increase the tax rates on dividends and capital gains.  I don't ... however I would be in favor of eliminating the "carried interest" tax loophole that hedge fund managers enjoy.  It is a distasteful  taxing gimmick and it would be a tragedy if this carried-interest tax avoidance loophole was the reason taxes went up on actual capital gains and dividends.