Sheila Bair on Carried Interest ::

This claim that managers of hedge funds pay half the tax rate of managers of shoe stores is bogus.

First of all, it’s not a “giveaway” to let a person keep money that they earned. It’s their money, not the government’s.

Second, the tax treatment applies to long-term capital gains, whether they are the gains of someone who starts a shoe store business or someone who starts a hedge fund. If a shoe store manager starts Zappos and has founder’s stock that is sold after more than a year, he pays the long-term capital gains rate. If a hedge fund manager starts a hedge fund and makes investments in stock or real estate or oil and gas ventures that are held for more than a year, he pays the long-term capital gains rate. If it’s a short-term investment, it’s taxed at a higher rate. If the fund loses money, the hedge fund manager may not earn any carried interest to be taxed on at all. And the management-fee part of the investment manager’s fee (the part that depends on assets under management, not the return) is taxed at the higher rate. For some reason, there’s a lot of confusion about this issue. I understand that plenty of bank CEOs whose income is taxed at the higher ordinary income rates don’t like the carried interest capital gains treatment of their competitors and want to end it. But they should be able to make that argument without distorting what the current policy is.

Third, this distinction between “financial assets” and the “real economy” is an artificial one. Ms. Bair may be right that investment funds have created “far too few jobs,” but it’s not clear how raising taxes on them would create more. In fact the venture capital, private equity, hedge fund, real estate, and oil and gas industries have created and preserved an awful lot of jobs.

via Sheila Bair on Carried Interest ::

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