US Senator Levin on taxing hedge funds

Senator Levin, one of the greats of the U.S. political system, explains the problem very clearly:

"Just one example of the kind of tax breaks and tax loopholes we Democrats seek to change is the unconscionable tax break given to hedge-fund managers. Hedge fund managers generally make their money by charging their clients two fees. First, the manager receives a management fee, typically equal to two percent of the assets invested. Second, the manager typically receives 20 percent of the income from those investments above a certain level. This 20 percent share of the investment returns from hedge funds is known as carried interest. Under current law, most hedge fund managers claim that this carried interest qualifies as a long-term capital gain, currently subject to a maximum tax rate of 15 percent, rather than being taxed as ordinary income, currently subject to a maximum tax rate of 35 percent.

But a moment’s analysis shows that this money is ordinary income by any fair definition and should be treated that way. The 20 percent fee is not capital gains, because it applies not to capital that the hedge-fund manager has invested, but to the payment he receives for investing capital that other people provide. Pretending that the 20 percent fee is capital gains when in fact it is payment for a service is an Alice-in-Wonderland argument that elevates fiction over fact."

Some of the rest of it is rather party political - TJN generally tries to avoid that particular battlefield wherever possible - though we can't deny that we do feel sympathy with what Levin is saying in this instance. But the whole thing's well worth reading. Including the bit that starts:

"Republicans are protecting another tax loophole – one that many of these hedge fund managers, by the way, use to avoid taxes entirely."

Read on.