Tax Hikes Considered for Hedge Fund Managers

Congress is considering a bill that would see a "loophole" for hedge fund managers closed, and would result in those same managers having their income taxed at higher rates than they currently are.

"The U.S. Senate, seeking funds for jobs bills and other initiatives, will consider adopting a House proposal to more than double tax rates on executives at private- equity firms, said Senator Charles Schumer, a New York Democrat.

The proposal, projected to raise $24.6 billion over a decade, would affect venture capitalists, managers of real- estate partnerships, and hedge-fund managers who make long-term investments. Passed by the House three times, most recently in December as part of a jobs bill, it hasn’t come to a vote in the Senate, where some Democrats have signaled they would oppose it.

Managers of investment partnerships typically are paid 2 percent of fund assets as an annual management fee and 20 percent of the profit earned for investors above certain levels. While the management fee is taxed as income, the share of profit, known as carried interest, is treated at the capital- gains rate, currently 15 percent and slated to rise to 20 percent in 2011."

To be clear, the Tax Reckoning Blog much prefers that Congress spend its time looking for ways to slash taxes (and spending) at the federal level. In this case, however, a bill that would raise taxes actually might make some sense from an equity standpoint. The share of profits earned by fund managers looks a lot less like risk capital (which is deserving of reduced capital gain rates) and more like a return for services that should be taxed as ordinary income.

In effect, we can't and shouldn't expect salaried workers to pay a certain percentage of their wages as tax, and allow other workers' compensation to be taxed at a much lower rate.

In any event, since the management of capital is a truly a portable business that can be largely done from any country on earth, as a response to an enactment of this bill it would not be surprising at all to see hedge fund expatriate from the United States in order to avoid its effects.

If that were the case, once again a bill designed to raise taxes actually would have the opposite effect, demonstrating that human beings (for the most part) are not stupid and will actively organize their affairs in such a way that allows them to surrender as little of their wealth to the government as possible.