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1.4 billion a year isn't enough for some people
Commentary: Fund managers work for a living and should be taxed that way
By Rex Nutting, MarketWatch
Last Update: 5:32 PM ET Jul 11, 2007
WASHINGTON (MarketWatch) - There's a move in Congress to force the people who run private-equity firms, some of the highest paid people in this country, to pay their fair share of taxes.
You might think that's unremarkable if you haven't noticed how little honesty, consistency and logic are respected in the public discourse these days.
Some of the usual suspects, such as Steve Forbes and Larry Kudlow, say the attempt to close a tax loophole for private-equity funds is a "war on wealth." If there is such a war on the wealthy, it's the most ineptly run war since Baghdad fell. The rich are doing fabulously well in this nation, thank you very much.
In this instance those well-known Marxists, Sens. Max Baucus of Montana and Charles Grassley of Iowa, don't begrudge the fund managers the billions they earn for taking care of other people's money. It's honest work, and it should be rewarded. But it should also be taxed as money earned from hard work. See full story.
Working used to be honored in America, but that was before we remembered that only chumps work.
In America, there are two income tax rates: The higher one (35% maximum marginal rate) applies to income that's earned by working. People who empty bed pans, for instance, or those who host loud and foolish television programs, or those who take care of other people's money by figuring out where to invest it.
The lower marginal tax rate of 15% maximum applies to income that's earned the smart way: These people let their the money do the work by investing capital in productive uses and letting it grow and grow and grow.
The managers of the private-equity funds have the best compensation deal you've ever heard of. As a management fee, they take 2% of the assets they control right off the top, plus 20% of the profits made from other people's capital that they put to work. It's known as 2-and-20. And it added up to an estimated $14 billion last year for just the top 25 managers.
And because, of a tax loophole that lets them pay taxes as if it were their money that was at risk instead of someone else's, their incomes get an extra 20% bump. They pay a marginal tax rate of just 15% instead of 35%. Call it 2-and-20-and-20.
Nice work if you can get it.
You'd think the 2-and-20 would be enough for anyone. One of these guys earned $1.4 billion last year. But you'd be wrong. They got greedy and decided they wanted all the advantages of being a publicly traded company without any of the disadvantages, such as paying taxes at a corporate rate.
They wanted to have their cake and they wanted eat it too and they wanted to take it as a tax deduction.
They told the Securities and Exchange Commission that their funds aren't investment companies, which would trigger greater government scrutiny and increased regulation. Instead, they said the funds are "asset management companies" that provide "financial services" to investors.
But with the other side of their mouths, these same folk are telling the Internal Revenue Service that the income they get isn't earned from providing financial services to investors, but is actually a capital gain. They don't explain why they should be rewarded for watching other people put their money at risk, but why should they explain that when they have an army of lobbyists and paid pundits and cable business news channels to cry "War on Wealth!!"
Those who oppose closing the loophole claim that raising taxes on the managers would somehow hurt investors in those funds, and would reduce the amount of capital being invested in America. But changing the law wouldn't reduce the return for investors in those funds by a penny.
One lobbyist opposing the change even told the Washington Post that regular consumers would be hurt by closing the loophole, because "they shop in stores every day and eat in restaurants every day that might not otherwise be around except for private equity."
So remember, if we don't give a tax break to people who make more than $1 billion a year, you'll starve!
Rex Nutting is Washington bureau chief of MarketWatch.
Commentary: Fund managers work for a living and should be taxed that way
By Rex Nutting, MarketWatch
Last Update: 5:32 PM ET Jul 11, 2007
WASHINGTON (MarketWatch) - There's a move in Congress to force the people who run private-equity firms, some of the highest paid people in this country, to pay their fair share of taxes.
You might think that's unremarkable if you haven't noticed how little honesty, consistency and logic are respected in the public discourse these days.
Some of the usual suspects, such as Steve Forbes and Larry Kudlow, say the attempt to close a tax loophole for private-equity funds is a "war on wealth." If there is such a war on the wealthy, it's the most ineptly run war since Baghdad fell. The rich are doing fabulously well in this nation, thank you very much.
In this instance those well-known Marxists, Sens. Max Baucus of Montana and Charles Grassley of Iowa, don't begrudge the fund managers the billions they earn for taking care of other people's money. It's honest work, and it should be rewarded. But it should also be taxed as money earned from hard work. See full story.
Working used to be honored in America, but that was before we remembered that only chumps work.
In America, there are two income tax rates: The higher one (35% maximum marginal rate) applies to income that's earned by working. People who empty bed pans, for instance, or those who host loud and foolish television programs, or those who take care of other people's money by figuring out where to invest it.
The lower marginal tax rate of 15% maximum applies to income that's earned the smart way: These people let their the money do the work by investing capital in productive uses and letting it grow and grow and grow.
The managers of the private-equity funds have the best compensation deal you've ever heard of. As a management fee, they take 2% of the assets they control right off the top, plus 20% of the profits made from other people's capital that they put to work. It's known as 2-and-20. And it added up to an estimated $14 billion last year for just the top 25 managers.
And because, of a tax loophole that lets them pay taxes as if it were their money that was at risk instead of someone else's, their incomes get an extra 20% bump. They pay a marginal tax rate of just 15% instead of 35%. Call it 2-and-20-and-20.
Nice work if you can get it.
You'd think the 2-and-20 would be enough for anyone. One of these guys earned $1.4 billion last year. But you'd be wrong. They got greedy and decided they wanted all the advantages of being a publicly traded company without any of the disadvantages, such as paying taxes at a corporate rate.
They wanted to have their cake and they wanted eat it too and they wanted to take it as a tax deduction.
They told the Securities and Exchange Commission that their funds aren't investment companies, which would trigger greater government scrutiny and increased regulation. Instead, they said the funds are "asset management companies" that provide "financial services" to investors.
But with the other side of their mouths, these same folk are telling the Internal Revenue Service that the income they get isn't earned from providing financial services to investors, but is actually a capital gain. They don't explain why they should be rewarded for watching other people put their money at risk, but why should they explain that when they have an army of lobbyists and paid pundits and cable business news channels to cry "War on Wealth!!"
Those who oppose closing the loophole claim that raising taxes on the managers would somehow hurt investors in those funds, and would reduce the amount of capital being invested in America. But changing the law wouldn't reduce the return for investors in those funds by a penny.
One lobbyist opposing the change even told the Washington Post that regular consumers would be hurt by closing the loophole, because "they shop in stores every day and eat in restaurants every day that might not otherwise be around except for private equity."
So remember, if we don't give a tax break to people who make more than $1 billion a year, you'll starve!
Rex Nutting is Washington bureau chief of MarketWatch.
