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Tilting at Windmills

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May 23, 2007
By: Kevin Drum

HEDGE FUND FEES....You learn something new every day. Everybody knows that hedge fund managers earn astronomical fees for managing their funds, but today Jared Bernstein informs me that these fees are taxed at capital gains rates (15%), not income rates (about 35%):

The industry argues that since the lion's share of their compensation is keyed off the appreciation of the fund, it should be treated as a capital gain. A growing number of critics disagree. Look at their job title: they're managing other people's money. Sure, they often reinvest their own returns, but their income from managing the fund is just that: income derived from doing their job.

This is absurd. I'm not a fan of low capital gains rates in general, but even among those who are, the rationale is that it encourages investment, which in turn helps the economy grow. But while low rates might encourage people to put their money in hedge funds in the first place, they do nothing to encourage fund managers to invest the money, which they're going to do regardless. Lower tax rates for management fees are pure windfall.

Bernstein is right: hedge fund fees are income for doing your job. Hedge fund managers should pay capital gains rates on any money of their own that they've invested in their own fund, but they shouldn't be able to do so on the fees for managing other people's money. This is just a racket, yet another example of the super-rich ripping off the rest of us with special tax treatment. It's time to get the pitchforks out.

Kevin Drum 12:17 PM Permalink | Trackbacks | Comments (57)

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Comments

I agree -- it should be counted as income. I believe thats how it is for mutual fund managers, so hedge funds shouldn't be different.

I read an argument today that this might encourage hedge funds to incorporate abroad. However, I think that argument is bogus too.

Posted by: Jon on May 23, 2007 at 12:47 PM | PERMALINK

What's John Edwards take on this?

Posted by: Keith G on May 23, 2007 at 12:54 PM | PERMALINK

Hey, I like this! I'll change my occupation to landscaping so my job title can be 'Hedge Manager'.

Oh, that's different... :>(

Posted by: Buford on May 23, 2007 at 12:58 PM | PERMALINK

Can someone explain to me this notion of how some percentage points in tax rate encourages or discourages investment? The tax debate is always abou this.

The argument goes that as an investor, I will refuse to invest if my return-on-investment is taxed at 20%, but I will invest if it is 15%. So for example if I net after tax profit of $50,000, I'll make the investment but if my after tax profit is only $43,000, I'll refuse to invest and instead go for a CD or something that will yield (perhaps lower risk) $10,000.

I never understood this. Anyone?

Posted by: Alan on May 23, 2007 at 12:58 PM | PERMALINK

I happen to agree with you Kevin but it is important to separate out the two parts of a hedge fund managers compensation. The flat fee should be treated as income. The percentage of capital appreciation is "at risk" in theory so is treated like a capital gain.

Even splitting that hair, our system definitely rewards wealth over work. It's a shame that a regular joe pays more in taxes working "regular" jobs, and it should be an outrage.

Posted by: qarll on May 23, 2007 at 12:58 PM | PERMALINK

Alan >"...I never understood this..."

What`s to understand other than it is propaganda, pure and simple.

“You would label it cynicism-as if that proved it wrong.” - Robert A. Heinlein

Posted by: daCascadian on May 23, 2007 at 1:04 PM | PERMALINK

Income is income is income. No type should be taxed differently, including capital gains.

Posted by: Fred on May 23, 2007 at 1:04 PM | PERMALINK

The fees should be treated as income, but that isn't the real point: there is no legitimate reason why capital gains income should be taxed at a lower rate than earned income anyway. (Hey, conservatives, you are supposed to believe that the government doesn't interfere in the market, hence all income should be taxed the same by your perspective, as well as ours: fairness.)

Capital gains should, however, be indexed to inflation, also in the interest of fairness. (And in such a case, a person selling old stock could actually pay even less than under a lower rate, or even be able - quite properly - to declare a loss if for example stock bought in 1970 for $1M sells in 2007 for only $1.2M.)

Posted by: Neil B. on May 23, 2007 at 1:10 PM | PERMALINK

Why would the govt. tax policy want to encourage one form of economic activity (investing) over another (labor)?

The purpose of taxation is to fund government activity.

Engineer and fine-tune that to maximize revenue and minimize economic impact, based on sound scientific data and proven theory: sure.

But as a tool to manipulate favored economic activity or reward or punish certain activities? I'm not sure I agree that that's a legitimate function of government.

I support progressive taxation as a pragmatic solution to funding government activity to appropriate levels. I'm not sure giving capital-gains a lower rate accomplishes any pragmatic goal other than keeping k-street clients happy.

Posted by: osama_been_forgotten on May 23, 2007 at 1:13 PM | PERMALINK

Are the hedge funds LLCs? I seem to recall (from my days in an LLC-incorporated startup) that there are tax advantages that sound very much like this associated with being an LLC. (But perhaps my memory is faulty.)

Posted by: dr2chase on May 23, 2007 at 1:13 PM | PERMALINK

I agree with Neil B.

Capital Gains ought to be adjusted for inflation prior to tax calculation.
And they should be taxed like normal income.

Posted by: osama_been_forgotten on May 23, 2007 at 1:17 PM | PERMALINK

The argument is that investors are really interested in after tax profits. Reducing the capital gains tax makes growth stocks look more attractive. Back in the Carter era or there abouts the capital gains tax was reduced and the stock market did in fact go up. Of course encouraging investment is largely a cover story. Rich people have capital gains, poor people have paychecks, so giving capital gains a lower rate is another way of cutting taxes for the rich. I seem to remember that Democrats used to run on the slogan “income earned by money should be taxed the same as income earned by workers”.

The incentive pay is typically 20% of gross appreciation, while the fixed fee is 1.5 to 2 percent. If the fund goes down, do the managers pay 20% of the gross losses back to the investors? If they don’t I don’t see how they are assuming capital risk, or why appreciation driven incentive pay should be treated as a capital gain.

Posted by: fafner1 on May 23, 2007 at 1:17 PM | PERMALINK

Yes, the rationale for lowering capital gains taxes is to encourage investment. It's a lie. The reason is because rich people want to keep all of their money.

It's the same argument that goes on about the "death" tax. Just try to find a family farmer who's going to lose his farm over it. Rudy tried last week, with no luck, in Iowa.

Rich people want to keep all their money, and to them, taxes are like root canal surgery.

I'm so tired of listening to the trickle-down economists.

Posted by: merciless on May 23, 2007 at 1:19 PM | PERMALINK

I fully agree with Kevin. Hedge fund compensation is compensation, not capital gains.

Alan, I have seen many projections for start-up companies or for investing additional capital in companies. There's generally a pro forma spreadsheet showing how much money the investment is expected to yield and what the return rate would be after taxes. The higher the after-tax return, the more likely the investor is to put money into the deal.

There is a lot of competition for capital. Capital can be invested in many different areas, including foreign stocks and bonds. E.g., a big share of the new money invested in insurance has gone into Bermuda, because there's no income tax.

Alan, in your example, a 5% difference in tax rate isn't going to make that big a difference. But, a Bermuda tax rate of zero makes a huge difference as compared with the sum of US federal and state income tax rates.

Posted by: ex-liberal on May 23, 2007 at 1:19 PM | PERMALINK

So if you manage a fund made up of tax-exempt investments and are paid a percentage of the (tax-free) appreciation, you pay no tax at all?

Posted by: CJColucci on May 23, 2007 at 1:20 PM | PERMALINK

Rich people have capital gains, poor people have paychecks, so giving capital gains a lower rate is another way of cutting taxes for the rich.

It's not that straightforward, but basically you're right. The rentier class technically has interest and dividends, not capital gains straight off. Since interest and dividends are taxed as income, however, there's a strong incentive among owners of private capital to maximize capital gains at the expense of interest/dividends.

The problem comes when you make your money on trading, rather than buying and holding, that's income. There really isn't any difference between an importer who buys goods cheaply from China and sells them at a markup in the United States and a securities speculator, yet the former's profits are taxed as income and the latter's as capital gains. That's frankly unfair.

Posted by: Pete on May 23, 2007 at 1:36 PM | PERMALINK

hedge fund managers generally structure their domestic funds as limited partnerships or LLCs where the manager serves as GP or manager, respectively. in addition to their management fee (1-2%), the manager generally takes a profit share (10%-15% OF THE PROFITS). since LPs and LLCs provide flow-through taxation, the profit share taken by the manager retains its character--often capital gains. this is not a "trick" unique to hedge fund managers. It's the magic of tax pass through structures. Provided investors are receiving good net returns on their investments, why do we care how much a hedge fund manager makes?

Posted by: bjurk on May 23, 2007 at 1:37 PM | PERMALINK

Alan-

The argument is about whether to consume or invest your money. The return is the premium that you will accept to defer consumption. If that premium is high, you'll be much more likely to defer consumption; low, and you'll be much less likely to defer consumption. (You have a personal preference for deferred or realized consumption.)

This line of reasoning works really well if you accept a rational consumption function over time. In classical economics this assumption is something of a given. Back in the real world, the assumption is imperfect. A lot of people invest at a certain level regardless, a lot of people consume everything regardless, not that many people can do math at all - and those that do don't crunch their own numbers to figure out what their likely lifetime average annual consumption will look like under competing scenarios.

Posted by: Saam Barrager on May 23, 2007 at 1:40 PM | PERMALINK

It's nonsense anyway. Growth is bottom up, not top down.

The reason the government borrows so much money is because there is too much surplus wealth. Where would it be going, if the government didn't borrow it and recycle it through the public sector? Stocks? Real estate? Art? The world is awash in too much investor cash and they want us to think they are doing us a favor?

Money is a public utility, not private property. The taxpayer is responsible for government obligations and it isn't made out of gold anymore.

http://www.exterminatingangel.com/index.php?option=com_content&task=view&id=203&Itemid=118

Posted by: brodix on May 23, 2007 at 1:40 PM | PERMALINK

The best argument for a preferred capital gains rate is that it fights the "lock-in" effect. We need to balance our need to generate revenue from capital gains (which we do appropriately, obviously) against the fact that the tax imposes a real cost in terms of distorting efficient allocation of capital in the market, which reduces everyone's overall wealth.

I might want to get out of a particular investment because I think it's a dog, but I also may have a lot of built-in appreciation in the investment and a very high tax rate on my exit gains might cause me to think twice. To the extent the tax inteferes in this sense, there's an economic cost.

So where is the appropriate line? I remember reading some research from the 80's that suggested that anything lower than 18% is a true give-away. So if we don't need a rate as low as 15% to mitigate lock-up, then the government is really leaving money on the table.

Posted by: DJ Ninja on May 23, 2007 at 1:41 PM | PERMALINK

The filthy liars and propagandists in the GOP get a lot of mileage out of criticizing the Internal Revenue Code (IRC), but it is because of crap like this “capital gains vs. income” scam by extremely wealthy hedge fund managers that the IRC is unnecessarily long and complex. The truth is that over 60% of Americans could use Form 1040-EZ to file their taxes, which is one page long and designed to be understandable to an 8th grader.

Next time you need a laugh, ask a conservative, "How long is the Internal Revenue Code?"

All of the following quotes about the IRC were extracted from the representatives' official press releases and statements as found on www.house.gov

U.S. Representative John Hostettler (R-IN)
"the Internal Revenue Code and regulations add up to one million words and is nearly seven times the length of the Bible"

U.S. Representative Rob Portman (R-OH)
"The income tax code and its associated regulations contain almost 5.6 million words -- seven times as many words as the Bible. Taxpayers now spend about 5.4 billion hours a year trying to comply with 2,500 pages of tax laws...."

U.S. Representative J.C. Watts, Jr. (R-OK)
"The heart of IRS abuse lies in the existing tax code. Most of the folks who work for the IRS are good people just trying to do their job, but they are caught in a bad, overextended tax system. At 3,458 pages, twice the length of the Bible, it's impossible for the average taxpayer to know, understand, and accurately apply its provisions. The length is twice that of the Bible! Even tax experts cannot do so reliably."

U.S. Representative Spencer Bachus (R-AL)
"With its 6,000 pages and 500 million words, the complexity of our tax code is the prime source of frustration and anger felt by millions of Americans toward their government."
U.S. Representative Bill Archer (R-TX)
"The Internal Revenue Code and regulations now come in at one million words and 9000 pages."

U.S. Representative Jo Ann Emerson (R-MO)
"The Bible, the guide of our lives, is 1,291 pages and contains 774,746 words. But the Tax Code and its regulations which are referred to by some as, 'a person's worst nightmare come true' is 9,471 pages and over 7 million words."

U.S. Representative Vito Fossella (R-NY)
"the tax code runs 17,000 pages and contains a mind-boggling 5.5 million words. By way of comparison, War and Peace is only 1,444 pages and the Bible checks in at 1,291 pages."

U.S. Representative Jim DeMint (R-SC)
"The federal tax code with its 44,000 pages, 5.5 million words, and 721 different forms is a patchwork maze of complexity and a testament to confusion over common sense."

U.S. Representative Walter Jones (R-NC)
"The IRS tax code is 44,000 pages and growing"

U.S. Representative Bobby Jindal (R-LA)
"The current tax code is almost 60,000 pages, longer than the Bible"
U.S. Representative Dave Hobson (R-OH)

"the current tax code, which at 1.3 million pages is twice the length of Tolstoy's War and Peace"
U.S. Representative Nick Smith (R-MI)

"the federal tax code has about four times as many words as the bible. Accompanying the law are a staggering two-and-a-half million pages of regulations"
...and President George W. Bush (courtesy of Professor Paul Caron of the TaxProf Blog)

"The tax code is a complicated mess. You realize, it's a million pages long."


So Bush thinks the IRC is a “million pages long”. Actually, according to the Governement Printing Office it is 13,458 pages long or about 15 times the length of Tolstoy's War and Peace (Penguin edition).

From this website.

Posted by: The Conservative Deflator on May 23, 2007 at 1:41 PM | PERMALINK

Whilst it pains me to defend the super-rich, especially when it comes to taxes and paying (or not paying) their fair share, the fact of the matter is the fund managers are right. It may be a bit of shell game logic here, but if the HF manager's salary is directly the result of the return on investment the fund made, then the capital gain tax rules should apply. The argument is that the the pay the HF manager receives, what is really called his fee, is directly correlated to this ROI, not on any actualy labor asscoiated with managing the fund.
It's the equivalent to professional day-traders who pay only capital gains taxes on the income derived from trading, not as a salary.

Posted by: ny patriot on May 23, 2007 at 1:42 PM | PERMALINK

If the fund goes down, do the managers pay 20% of the gross losses back to the investors?

Often, yes. The investors are often guaranteed a certain base return on their investment (like, say 8%). If the investors get less, the Managers often have to pony up for it.

Posted by: DJ Ninja on May 23, 2007 at 1:45 PM | PERMALINK
Can someone explain to me this notion of how some percentage points in tax rate encourages or discourages investment?

It doesn't. It just rewards people who have the assets to engage in investment in the first place.

Which is, really, exactly what it is designed to do. The whole "encourages investment" line is just a sales pitch.

There is really no just cause for distinguishing between capital gains and any other source of income. There is a justification, in a progressive tax system, for some special handling of long-term gains as opposed to short-term gains, but the best way, IMO, of handling that is ggiving people the freedom to voluntarily recognize income they expect from long-term investments in advance, paying tax early, which allows people who temporarily sacrifice labor income to increase their ability to make future income through labor the same treatment that people who hold capital for a long term and then sell it get.

Posted by: cmdicely on May 23, 2007 at 1:46 PM | PERMALINK

Money is a public utility, not private property.

Does that apply to your money, too, or just other people's money?

Posted by: DJ Ninja on May 23, 2007 at 1:49 PM | PERMALINK

Even the Economist thinks all income should be taxed at the same rate.

Posted by: Brojo on May 23, 2007 at 1:57 PM | PERMALINK

cmdicely, you make some interesting points. Maybe there is no moral justification for distinguishing between capital gains and other sources of income. A practical justification is the worldwide competition for capital. It's a lot easier for American capital to be invested abroad than for American workers to take jobs abroad.

I'm unclear on why people would want to pay tax early. In fact, a big advantage to investors is that they can defer their taxes as long as they hold the asset.

Posted by: ex-liberal on May 23, 2007 at 1:58 PM | PERMALINK

"The argument is that the the pay the HF manager receives, what is really called his fee, is directly correlated to this ROI, not on any actualy labor asscoiated with managing the fund."

But why isn't this a bonus? The hedge fund manager isn't risking his own capital, he is getting paid for "investing" other people's money (OPM) well. There is no capital at risk to gain upon. If the manager ponies up capital and co-invests it with OPM, then he can take capital gains his portion of the capital.

Separate rant: I wish there was a separate word for most of what happens under the label of "investing". Putting money in the markets isn't quite the same thing as investing in a new plant, or a new business, or research and development, etc.

Posted by: Fred on May 23, 2007 at 2:05 PM | PERMALINK
cmdicely, you make some interesting points. Maybe there is no moral justification for distinguishing between capital gains and other sources of income. A practical justification is the worldwide competition for capital. It's a lot easier for American capital to be invested abroad than for American workers to take jobs abroad.

Actually, its quite easy for American capitalists to take American jobs abroad. Favorable taxation of capital income and correspondingly unfavorable taxation of labor income shifts makes it more expensive (compared to the total size of the public sector and the services it provides) to hire labor, and therefore encourages such offshoring. How does that keep jobs in the US?

Also, if I'm an American and I invest in a fund that invests exclusively in foreign markets, I pay the favorable capital gains tax rates. How does that keep capital in the US?

I'm unclear on why people would want to pay tax early.

In a progressive tax system, it would be an advantage to recognize intermittent income from long-term assets in advance (if you didn't have a flat, low tax on capital gains income, but taxed it as part of regular income) because you could avoid paying higher marginal rates.

Consider a simplifed system where income up to $100,000 per year is taxed at 10%, and income above $100,000 per year is taxed at 30%. If you sell an asset that produces a $300,000 capital gain once every three years, you would pay $0 in taxes two years out of three, and $70,000 in the third year, if you didn't recognize the income in advance.

If you recognized the income at $100,000 a year, you'd pay $10,000 a year in taxes, every year.

Posted by: cmdicely on May 23, 2007 at 2:16 PM | PERMALINK

Pitchforks, hell! Bring on the flaming torches!

Posted by: William Slattery on May 23, 2007 at 2:30 PM | PERMALINK

This is just a racket, yet another example of the super-rich ripping off the rest of us with special tax treatment.

I believe that Kevin is exactly right on this one. Capital gains taxes are paid by hihg-earners who get low tax rates by special pleading.

Posted by: MatthewRmarler on May 23, 2007 at 2:31 PM | PERMALINK

I meant to add, we'd be better off with lower rates and more uniform rates, fewer deductions. Congress prefers the higher rates with lots of special categories so it can look like they are helping their constituents.

Investments depend on labor for their success, and labor depends on investments for new jobs. It isn't the case that either deserves special treatment.

Posted by: MatthewRmarler on May 23, 2007 at 2:35 PM | PERMALINK

It's time to get the pitchforks out.

But Kevin, yesterday you told us not to be annoying, much less perforating. The tumbrils will roll in this country in the next few decades. The big question is who is going to be in them.

Posted by: Michael7843853 G-O in 08! on May 23, 2007 at 2:51 PM | PERMALINK

ny patriot: It seems to me the difference here should be whose money it is, not whether it's tied to investments. The commission could probably be changed by his boss/investors at will -- even if it's governed by an unbreakable contract, it's an agreement to give him the money, not giving him ownership of the money. Therefore, it's essentially just a clever formula to determine salary.

Posted by: Minivet on May 23, 2007 at 3:05 PM | PERMALINK

pitchforks, Kevin? you're getting soft.....it'd be wonderful to see a wave of populist rage at the financier class; but it won't happen--so easy to distract the people with horror tales of dirty Meskins....

Posted by: nick on May 23, 2007 at 3:13 PM | PERMALINK

But Kevin, yesterday you told us not to be annoying, much less perforating.

*sigh* Don't you find lefter-than-thou liberals like Drum who are under the impression that it's somehow either immoral or impolite to make money to be a bit, well, annoying....

Posted by: Stefan on May 23, 2007 at 3:22 PM | PERMALINK

All the more true since Hedge funds are not for the common guy, but rather restricted to "accredited investors" which makes the argument that the lower capital gains rate would have any effect on hedge fund investment completely frivolous.

Posted by: Joshua Harden on May 23, 2007 at 3:29 PM | PERMALINK

The notion that the economic uberclass of rentiers should pay a lower rate of tax on unearned income than that paid by workers on sweat wages is just what one would expect to hear from the corporatist regime now occupying the executive branch. Its undoing must be one of the first agenda items of the next administration.

Posted by: Django on May 23, 2007 at 3:43 PM | PERMALINK
The notion that the economic uberclass of rentiers should pay a lower rate of tax on unearned income than that paid by workers on sweat wages is just what one would expect to hear from the corporatist regime now occupying the executive branch.

While true, the preferential treatment of capital hardly originates with this administration, and support for it is hardly restricted to the Republican Party.

But then, in a country where the major choices are usually between center-right and far right, that's not all that surprising.

Posted by: cmdicely on May 23, 2007 at 3:47 PM | PERMALINK

brodix is right, it's not "your money."

Capital gains taxes should be *higher* then regular taxes.

Investment will happen if it's worthwhile, it doesn't need to "be encouraged" with give-away tax rates.

Americans are suckers for these brain-dead economic arguments, and there are so many such arguments to choose from.

Capitalism is like fire: tightly regulated it can be quite useful. Uncontrolled it will destroy everything.

Posted by: Archie on May 23, 2007 at 3:55 PM | PERMALINK

But then, in a country where the major choices are usually between center-right and far right, that's not all that surprising.

Yep. Clinton signed a reduction from 28% to 20% in 1997.

Posted by: Fred on May 23, 2007 at 3:58 PM | PERMALINK

“The investors are often guaranteed a certain base return on their investment (like, say 8%). If the investors get less, the Managers often have to pony up for it.”

My spouse does some limited investing in hedge funds for her institution, and a guaranteed return is not something I have ever heard of. Hedge funds are highly leveraged which means there are no capital reserves, but rather a lot of overhanging debt. The fact they are LLC’s means the personal assets of the principals can’t be touched. So where would the money come from to pay a guaranteed return? The highly leveraged character of hedge funds is what makes them crash so spectacularly when things go south.

Posted by: fafner1 on May 23, 2007 at 3:59 PM | PERMALINK

Capital gains taxes should be *higher* then regular taxes.

No. Having differing tax rates is just a full-employment program for accountants and lawyers. Plus, if all types of income are treated the same then decision on how to invest becomes simpler.

Posted by: Fred on May 23, 2007 at 4:06 PM | PERMALINK

I rarely agree with you, Kevin, but this time I think you are correct. A capital gain is the result of an increase in value of an investment. Hedge fund managers receive the 20% carried interest not as a return on an investment but as compensation for managing the fund, i.e., ordinary income.

My prediction is that Congress will do nothing about this, although it readily could. The Democrats depend heavily on hedge fund support (who do you think bankrolled Ned Lamont?) and they will not screw their paymasters on this.

Posted by: DBL on May 23, 2007 at 4:31 PM | PERMALINK

cmdicely: But then, in a country where the major choices are usually between center-right and far right, that's not all that surprising.

Center-right, far right? I know not of what you speak. Ballots in my neck of the woods offer a choice between blatant cronies and mere useful idiots.

Posted by: alex on May 23, 2007 at 4:39 PM | PERMALINK

A legitimate issue about capital gains, if long-term, is that part of the gain is inflation and that selling results in a huge and often inconvenient tax wallop in the year of sale. These problems are best solved not by a lower rate but by indexing the gain and allowing income averaging on the sale of a long-term capital asset.

Posted by: CJColucci on May 23, 2007 at 4:40 PM | PERMALINK

cmdicely: Actually, its quite easy for American capitalists to take American jobs abroad. Favorable taxation of capital income and correspondingly unfavorable taxation of labor income shifts makes it more expensive (compared to the total size of the public sector and the services it provides) to hire labor, and therefore encourages such offshoring. How does that keep jobs in the US?

You are correct, cm. Actually it's the corporate imcome tax which affects the desirability of investing in American companies vs. investing in foreign companies.

Posted by: ex-liberal on May 23, 2007 at 5:10 PM | PERMALINK
A legitimate issue about capital gains, if long-term, is that part of the gain is inflation and that selling results in a huge and often inconvenient tax wallop in the year of sale.

I'm not convinced that the former is a legitimate concern from a tax perspective. The latter is important, which is why I prefer to allow income to be recognized in advance (and there are situations where there are parallels in non-capital income that that addresses as well.)

But I could probably tolerate indexing capital gains for inflation, though I'd rather not.

Posted by: cmdicely on May 23, 2007 at 5:13 PM | PERMALINK

All my money's in pitchfork futures.

Posted by: Jim 7 on May 23, 2007 at 6:07 PM | PERMALINK

We need to balance our need to generate revenue from capital gains (which we do appropriately, obviously) against the fact that the tax imposes a real cost in terms of distorting efficient allocation of capital in the market, which reduces everyone's overall wealth.

*yawn*

The same argument can be made about *every* economic activity.

Wake me up when you express as much worry about how taxes on regular income distorts the efficient allocation of labor.

Posted by: Disputo on May 23, 2007 at 6:40 PM | PERMALINK

Get the pitch forks out... Kevin, I just love reading you. You are so down to catearth.

Posted by: elr on May 23, 2007 at 8:26 PM | PERMALINK

I am late again! How can the argumetn complete during the day when all us USians are at work?

I have some pretty strong feelings here that start with the language.

It is getting very quickly forgotten that hedging was lockiing in a profit.

Using two compatible media it meant that today you could make two countervailing transactions both now, or in the future, against two future transactions so that at that point in the future there was a near zero risk of loss, only the profit you'd "locked" in.

These guys have taken that word and feel for security to induce people, all rich. to accept high risk, possible high reward, but to pay these idiots far above their worth.

It tells me so much that most US citizens have no idea about this scam. The rich are no differtent from those taking the high %age mortgages.

Greed and unreality is not limited to the poor.

The USA continues it's unregulation of scams.

Posted by: notthere on May 23, 2007 at 9:21 PM | PERMALINK

This is one of the biggest problems with the flat tax since under those proposals capital gains are taxed at a lower rate (if they are in fact taxed at all). If that plan were to ever take effect (and right now, I imagine it will be passed right after the Iraq victory parade finishes), suddenly every wealthy person in America's income will suddenly all come from capital gains.

Posted by: Guscat on May 24, 2007 at 2:53 AM | PERMALINK

I'm late to the party, so this probably won't get answered.
Can I make this same argument for my 401k? I allocate the dollars in my retirement plan the way I see fit. The only beneficiary is me. I'm basically a fund manager just for me. Yet, for some reason, the money is taxed at income rates when I start drawing on it. Sure, I contribute to the fund with pre-tax dollars, but so what? The fund manager didn't contribute anything to the fund other than his management (which as I understand it is LABOR) but he's paying capital gains on these profits? Huh?
By the same argument, couldn't we all just convince our employers to pay us directly out of "value growth" in the company? Skip income tax altogether, because we're just collecting some capital gains. I mean, if dollars come in the door, and I had a hand in making that happen, didn't I just increase the asset/dollar value of the company? Why should I have to take an income tax hit on that?
They key distinction of a CAPITALIST as opposed to a LABORER is that the capitalist uses his capital to make him money and the laborer uses his labor to make him money. Bottom line - these fund managers are not stakeholders from the get-go, so the value they derive from their LABOR should be counted as income.

Posted by: Govt Skeptic on May 24, 2007 at 8:43 AM | PERMALINK

This is one of the biggest problems with the flat tax since under those proposals capital gains are taxed at a lower rate (if they are in fact taxed at all). If that plan were to ever take effect (and right now, I imagine it will be passed right after the Iraq victory parade finishes), suddenly every wealthy person in America's income will suddenly all come from capital gains.

Heh - then by definition, those plans aren't really "flat tax" plans after all, are they? (Don't fall for "tax only once" crap either, money moves 'round and 'round and is taxed "again" anyway.)

Posted by: Neil B. on May 24, 2007 at 11:08 AM | PERMALINK

"I'm not a fan of low capital gains rates in general, but even among those who are, the rationale is that it encourages investment, which in turn helps the economy grow."

The idea the a low rate on capital gains "encourages investment" is *pure hogwash*. Billions of shares trade hands on any given day on Wall Street; of those billions of shares, only a tiny fraction have anything to do with "investment". All the rest is aftermarket noiose: shares moving from a seller to a buyer, having nothing whatever to do with "investment". It's aftermarket noise, nothing else.

The only true investments are in IPOs and secondary offerings. What fraction of total trading do these represent? A tiny, tiny fraction.

There's no justification *whatever* for low capital gains rates on stock market transactions (with the possible exception of shares purchased in IPOs and secondary offerings). Period, end of story.

Posted by: Gerald Scorse on May 24, 2007 at 11:44 AM | PERMALINK
By the same argument, couldn't we all just convince our employers to pay us directly out of "value growth" in the company?

You could try to convince your company to reorganize as a labor coop, and pay everyone federal minimum wage + some capital disbursement.

Good luck trying to convince the people that currently own the company that that is better for them, though.

Posted by: cmdicely on May 24, 2007 at 12:36 PM | PERMALINK




 

 

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