The Hedge Fund Managers tax break: Because Wall Streeters want your money

A quick hits on tax day. This is from noted economist and writer Dean Baker.

Did you know that Wall Street hedge fund managers have their own tax break, just for them?

Here’s Baker on what it is and how it works (my emphasis):

The Hedge Fund Managers Tax Break: Because Wall Streeters Want Your Money

This rules your world

This rules your world. Want some? Too bad.

The coming of tax day provides a great opportunity for everyone to focus on their favorite tax break, and there are many from which to choose. However for all the sneaky and squirrelly ways that the rich use to escape their tax liability, none can beat the hedge fund managers’ tax break. This is the way the rich tell the rest of us, because they are rich and powerful, the law doesn’t apply to them.

The hedge fund managers’ tax break, which is also known as the carried interest tax deduction, is different from other tax breaks in that it has no economic rationale. With most other tax breaks there is at least an argument as to how it serves some socially useful purpose. That is not the case with the hedge fund managers’ tax break. This is simply a case where the rich don’t feel like paying taxes and are saying to the rest of us, “what are you going to do about it?”

You’ll hear the phrase “carried interest tax deduction (yawn)” to make you (yawn). But think of it as the rich looting the treasury (than asking for your Social Security benefits to be cut). Here’s Baker again on how it works:

The hedge fund managers’ tax break applies to the portion of their earnings that are contingent on the performance of their fund. It’s standard for hedge fund managers to be paid a flat fee of 1-2 percent of the money they manage. In addition, they will typically get performance pay that is equal to 10-20 percent of what the fund earns above some threshold. Managers of private equity funds and real estate investment trusts have similar arrangements with the same tax break.

Baker tells us that this “carried interest,” which is really just a fee for managing the fund, such as any salesperson receives, runs to tens or hundreds of millions of dollars.

If their earnings were taxed as normal income they would pay a 39.6 percent tax rate, compared to just a 20 percent capital gains tax rate. For a successful manager earning $10 million, the savings come to $1,960,000. If they earned $100 million, the savings would be equal to $19,600,000.

Baker is being modest. Here’s what the top end of hedge fund managers make. (Out-of-date alert — this information is old, from 2009. The kites are flying even higher these days.)

Per Barry Ritholtz, here are the estimated 2009 incomes of the top five hedge fund managers:

  1. David Tepper, Appaloosa Management — $4 billion
  2. George Soros, Soros Fund Management — $3.3 billion
  3. James Simons, Renaissance Technologies — 2.5 billion
  4. John Paulson, Paulson & Company — $2.3 billion
  5. Steve Cohen, SAC Capital Advisors — $1.4 billion

Remember, this is income, not net worth. These numbers were added to existing net worths in 2009 — a single year. 

Four billion in income per year? That’s the big money behind this “tax relief” billionaire-financed exemption. Make no mistake. Money doesn’t talk, it swears:

A taste of this sweet performance (the first is free):

Darkness at the break of noon
Shadows even the silver spoon
The handmade blade, the child’s balloon
Eclipses both the sun and moon
To understand you know too soon
There is no sense in trying …

Old lady judges watch people in pairs
Limited in sex, they dare
To push fake morals, insult and stare
While money doesn’t talk, it swears
Obscenity, who really cares
Propaganda, all is phony …

And if my thought-dreams could be seen
They’d probably put my head in a guillotine
But it’s alright, Ma, it’s life, and life only

And so you know.


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Gaius Publius is a professional writer living on the West Coast of the United States.

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