Clipping Hedge Funds

I criticize President Obama quite a lot.  So when I get a chance to agree with him, I feel to be out of step with myself.  However, his calling for hedge fund managers to pay taxes on their compensation ... as though it were ordinary income ... strikes me as quite rational (see: Huffington Post Story).  The reason that these barons of Wall Street ... such as Warren Buffet ... currently get away with paying 20% (just upped from 15%) on their hedge-fund compensation (which often can runs into the tens, if not hundreds of million dollars) is that it is treated as "carried interest" ... in other words, it is viewed for tax purposes by the IRS as though it were real interest on invested capital.  It most often isn't.  The definition of "carried interest" is:

"A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund's performance."

Rush Limbaugh has also  zeroed in on "carried interest" as possibly being a problem. This could be because the recent raising of the taxes on capital gains from 15% to 20% may have been inspired by this tax loophole  That is, the rest of the country is now paying a penalty for this one taxing inconsistency.  Rush had in the past implied that this compensation represents a fair (interest) return on what these managers initially invested.  It most often isn't.  Or, if it is, is is not allocated according to what percentage their initial investment represents relative to the total hedge fund assets.  This, to me, is wrong ... and needs to be remedied.  The closing of this tax loophole is not going to balance the federal budget (bringing in just a few extra billion dollars), but this unfairness seems to be gnawing at Obama’s (and my) psyche … and should be fixed.   Then maybe we can drop the real capital gains tax rate back to 15%?  That would be fair.

So even though Obama seems to be biting the hand (Wall Street) that has fed him royally, I will support him on this one issue.  But I won't make it a habit.