Which Republican will defend Hedge fund tax exemptions

[Toro]

1. dividends need to be taxed as ordinary income. Short-sales and derivatives and commodities, and options need to be taxed at even higher/punitive rates.

2. Hedge fund managers need to be taxed at ordinary income rates. They aren't even investing their own money. PLUS Wall, Street needs to have a transaction tax. The object is to provide long-term capital for companies to use to create jobs.

Hedge fund managers should be taxed no differently than anyone else. However, I disagree with a transaction tax. I think that's a bad idea.

You want a fair tax vertically, but want it to be unfair horizontally. What do you have against people that are smart enough to live on the edge and make a profit off of it?

What, no questions about why I hate freedom too? Or America? Or puppies and kitties?

lol

 

[Quantum Windbag]

Who else would it affect? Private equity fund managers? If so, that's good too.

It would affect everyone who carries interest on any investment, which is why it is called a carried interest exemption. Hedge fund managers taking advantage of the loophole is certainly egregious on its face, but it is not the fault of the exemption, and any reformation of it could affect small investors in the stock market.

Before you get huffy, I know most small investors do not carry their interest over, but they do have that option, and I see no reason to penalize them if they elect to exercise it.

Interesting so explain the exception an how you would address the use by Hedge fund managers.

Why should I? I have repeatedly stated that we should close loopholes across the board. This is just one more loophole that needs to be closed.

 

[Toro]

It would affect everyone who carries interest on any investment, which is why it is called a carried interest exemption. Hedge fund managers taking advantage of the loophole is certainly egregious on its face, but it is not the fault of the exemption, and any reformation of it could affect small investors in the stock market.

Before you get huffy, I know most small investors do not carry their interest over, but they do have that option, and I see no reason to penalize them if they elect to exercise it.

Interesting so explain the exception an how you would address the use by Hedge fund managers.

Why should I? I have repeatedly stated that we should close loopholes across the board. This is just one more loophole that needs to be closed.

Eliminate these types of loophole and lower the corporate tax rate.

 

[Quantum Windbag]

Who else would it affect? Private equity fund managers? If so, that's good too.

It would affect everyone who carries interest on any investment, which is why it is called a carried interest exemption. Hedge fund managers taking advantage of the loophole is certainly egregious on its face, but it is not the fault of the exemption, and any reformation of it could affect small investors in the stock market.

Before you get huffy, I know most small investors do not carry their interest over, but they do have that option, and I see no reason to penalize them if they elect to exercise it.

It doesn't matter if the investor is small or large. The manager is getting paid a performance fee for a service. The exemption distorts economic activity by encouraging speculation at the expense of everything else. It should be ended immediately.

My understanding is that only about 10 funds in the entire world are large enough to actually make these fees seem outrageous. Feel free to provide the data that proves me wrong if you have it. My thought is that anyone that invests with one of the larger funds is free to negotiate lower fees on his portion of the investment.

We could go the route of Australia and demand lower fees for everyone, but that will just move the funds offshore where we cannot tax any of the income. How will that solve anything?

 

[American Horse]

Okay one of the revenue enhancements in the gang of 6 plan rejected by Republicans is related to hedge funds managers.

Currently hedge fund managers get paid two ways. They take a 2% administration fee off the top. This fee is typically taxed as income. The other fee is they charge 20% of profits. This 20% often makes up the bulk of their income. The 20% is taxed at the 15% capital gains rate and not the 33% marginal tax rate for income.

The intent of the reduced capital gains tax is to encourage investors to undertake more risky investments. Hedge fund managers are getting this rate for managing other peoples money not for risking their own.

The House Republicans will preserving the undeserved tax break at any cost. Will any Republican defend this position?

Republicans understand that any inroad of tax increases will be minimal in producing revenues and will further enable greater spending because of the projected increased revenues. Since our revenues only comprise about 60% of what we spend, only extreme measures will enforce cuts in spending. Republicans are willing to go on the record, and be misunderstood as to their motives, the really tough stand, to stop this ever accelerating slide into eventual very real default. Sure more revenues would help but we've been down this road long enough to know where we are headed if we do that and it's not a good place.

 

[Quantum Windbag]

Hedge fund managers should be taxed no differently than anyone else. However, I disagree with a transaction tax. I think that's a bad idea.

You want a fair tax vertically, but want it to be unfair horizontally. What do you have against people that are smart enough to live on the edge and make a profit off of it?

What, no questions about why I hate freedom too? Or America? Or puppies and kitties?

lol

I think it was a legitimate question.

How would you feel about taxing venture capitalists who invest all profits in new businesses as if all their investment income was actual income? Do you think they should be charged at the higher rate when they carry profits? Why single out hedge fund managers?

Please note that I have actually read some very good arguments in favor of the position I just described, and I actually think they make sense. I just want to know if you have actually thought about it and have some of your own.

 

[Quantum Windbag]

Interesting so explain the exception an how you would address the use by Hedge fund managers.

Why should I? I have repeatedly stated that we should close loopholes across the board. This is just one more loophole that needs to be closed.

Eliminate these types of loophole and lower the corporate tax rate.

Exactly. We just have to be careful to differentiate between capital gains and income. I honestly believe that capital gains should be treated differently.

 

[Toro]

Why should I? I have repeatedly stated that we should close loopholes across the board. This is just one more loophole that needs to be closed.

Eliminate these types of loophole and lower the corporate tax rate.

Exactly. We just have to be careful to differentiate between capital gains and income. I honestly believe that capital gains should be treated differently.

I agree that capital gains and income should be treated differently. That's why, in our example, the hedge fund manager should be taxed at the capital gains rate for his own money in his fund, and at the income rate for the fees he receives for managing other people's money.

 

[Toro]

You want a fair tax vertically, but want it to be unfair horizontally. What do you have against people that are smart enough to live on the edge and make a profit off of it?

What, no questions about why I hate freedom too? Or America? Or puppies and kitties?

lol

I think it was a legitimate question.

How would you feel about taxing venture capitalists who invest all profits in new businesses as if all their investment income was actual income? Do you think they should be charged at the higher rate when they carry profits? Why single out hedge fund managers?

Please note that I have actually read some very good arguments in favor of the position I just described, and I actually think they make sense. I just want to know if you have actually thought about it and have some of your own.

Profits derived from capital gains should be taxed at the rate of capital gains. Income should be taxed at the rate of income. A venture capitalist is no different than a hedge fund manager or a private equity manager. If a venture capitalists invests capital, then any gains should be treated as capital gains. If the venture capitalist receives a fee for investing capital - which is what carried interest is - then that should be taxed as income. It doesn't matter if the venture capitalist ploughs all the money he earned from fees back into his fund. They are still fees for a business service rendered. If you earn money from another business, say plumbing supplies, and plough it into his fund, the money you earned from your plumbing supplies business that you plough into his fund is taxed at the rate everyone else pays. Yet, the money manager's fees are taxed at a preferential rate. If the venture capitalist pays the regular rate of tax on his income, then ploughs the after-tax amount back into his fund, that is now capital and thereafter should be taxed at the rate of capital gains. That's no different than you or me. But right now, society is deeming that the services the hedge fund manager provides is more important than anything else. Really?

If someone creates a cancer drug that saves millions of people and makes $1 billion, he is taxed at a higher rate than a fund manager who, say, is arbitraging the synthetic CDO market with the underlying securities in the cash market. Is that really more worthy than inventing new drugs? Or new consumer technologies? Or new retail formats? I have no problem with people making a billion dollars. Good for them. I have a big problem with discriminating between different industries. Why should financial professionals pay a lower rate of tax than healthcare professionals?

 

[Quantum Windbag]

What, no questions about why I hate freedom too? Or America? Or puppies and kitties?

lol

I think it was a legitimate question.

How would you feel about taxing venture capitalists who invest all profits in new businesses as if all their investment income was actual income? Do you think they should be charged at the higher rate when they carry profits? Why single out hedge fund managers?

Please note that I have actually read some very good arguments in favor of the position I just described, and I actually think they make sense. I just want to know if you have actually thought about it and have some of your own.

Profits derived from capital gains should be taxed at the rate of capital gains. Income should be taxed at the rate of income. A venture capitalist is no different than a hedge fund manager or a private equity manager. If a venture capitalists invests capital, then any gains should be treated as capital gains. If the venture capitalist receives a fee for investing capital - which is what carried interest is - then that should be taxed as income. It doesn't matter if the venture capitalist ploughs all the money he earned from fees back into his fund. They are still fees for a business service rendered. If you earn money from another business, say plumbing supplies, and plough it into his fund, the money you earned from your plumbing supplies business that you plough into his fund is taxed at the rate everyone else pays. Yet, the money manager's fees are taxed at a preferential rate. If the venture capitalist pays the regular rate of tax on his income, then ploughs the after-tax amount back into his fund, that is now capital and thereafter should be taxed at the rate of capital gains. That's no different than you or me. But right now, society is deeming that the services the hedge fund manager provides is more important than anything else. Really?

If someone creates a cancer drug that saves millions of people and makes $1 billion, he is taxed at a higher rate than a fund manager who, say, is arbitraging the synthetic CDO market with the underlying securities in the cash market. Is that really more worthy than inventing new drugs? Or new consumer technologies? Or new retail formats? I have no problem with people making a billion dollars. Good for them. I have a big problem with discriminating between different industries. Why should financial professionals pay a lower rate of tax than healthcare professionals?

I knew you had it in you.

Just as an FYI, here is the link that made me think the situation with carried interest is a bit less complicated than I thought.

Hedge Fund Taxation – Law School Professor Perspective ? Hedge Fund Law Blog

If you don't learn you don't live. I guess that this proves I am still alive.

 

[Sactowndog]

It would affect everyone who carries interest on any investment, which is why it is called a carried interest exemption. Hedge fund managers taking advantage of the loophole is certainly egregious on its face, but it is not the fault of the exemption, and any reformation of it could affect small investors in the stock market.

Before you get huffy, I know most small investors do not carry their interest over, but they do have that option, and I see no reason to penalize them if they elect to exercise it.

Interesting so explain the exception an how you would address the use by Hedge fund managers.

Why should I? I have repeatedly stated that we should close loopholes across the board. This is just one more loophole that needs to be closed.

Why be an ass? It was the first logical defense of it I have heard, but I am not familiar with the carrying interest over so I don't know to whom else it my apply.

That being said I agree it needs to be closed and I would prefer it be traded for spending cuts so that we might lower the deficit. I would trade higher capital gains rates in return for lowering the coporate income tax rate which I agree needs to be lowered.

 

[Sactowndog]

Eliminate these types of loophole and lower the corporate tax rate.

Exactly. We just have to be careful to differentiate between capital gains and income. I honestly believe that capital gains should be treated differently.

I agree that capital gains and income should be treated differently. That's why, in our example, the hedge fund manager should be taxed at the capital gains rate for his own money in his fund, and at the income rate for the fees he receives for managing other people's money.

So Toro and Quantum- Isn't the lower taxation of capital gains based on the premise that people will invest locally? If you take away that premise then the value of lower capital gains tax would seem to go away. I am not sure it makes sense to have a lower capital gains if portfolios will be increasingly diversified WW.

Instead it is better to reward investment with a significantly reduced or eliminated Corporate Income tax.

Using your Venture capitalist example, if the corporation can grow tax fee and the taxation occurs only at the point of sale the venture capitalist actually comes out ahead with a longer term investment.

 

[Sactowndog]

I knew you had it in you.

Just as an FYI, here is the link that made me think the situation with carried interest is a bit less complicated than I thought.

Hedge Fund Taxation – Law School Professor Perspective ? Hedge Fund Law Blog

If you don't learn you don't live. I guess that this proves I am still alive.

Thanks for the link. Very interesting overview.....

I would be interested in both your and Toro's opinion on what is a more effective approach to reward investors if your interest is to generate US jobs in a global economy. I would argue that the balance should be exactly opposite of what it is today which is high corporate income taxes and lower capital gains rates...

Such a structure provides capital when it is most needed and rewards the local entrepenuer more highly versus a capital gains rate which draws no distinction on whether the investment was made locally or internationally.

 

[Toro]

Exactly. We just have to be careful to differentiate between capital gains and income. I honestly believe that capital gains should be treated differently.

I agree that capital gains and income should be treated differently. That's why, in our example, the hedge fund manager should be taxed at the capital gains rate for his own money in his fund, and at the income rate for the fees he receives for managing other people's money.

So Toro and Quantum- Isn't the lower taxation of capital gains based on the premise that people will invest locally? If you take away that premise then the value of lower capital gains tax would seem to go away. I am not sure it makes sense to have a lower capital gains if portfolios will be increasingly diversified WW.

Instead it is better to reward investment with a significantly reduced or eliminated Corporate Income tax.

Using your Venture capitalist example, if the corporation can grow tax fee and the taxation occurs only at the point of sale the venture capitalist actually comes out ahead with a longer term investment.

There are two general arguments for a lower rate of tax on capital gains. First, capital gains are usually a function of the profitability of some asset, which has already been taxed. So, for example, if you own a stock that is worth $10 a share and the company earns $1 a share in profits, if profits rise to $2, then the share price will rise to $20, all else being equal. That incremental $1 in profit has already been taxed, so taxing the market price which reflects that after-tax profits is effectively double taxation by taxing the $10 increase in the stock price. The other argument is that tax on capital gains is essentially a tax on savings. Savings are the capital stock which funds the productive capacity of the nation. Taxing savings decreases the capital stock of the nation. I have no problem with a lower rate of tax on capital gains. However, there is an argument that all income should be taxed at the same rate, regardless of the source.

We should lower the corporate tax rate but we should not fund it by raising capital gains taxes. Instead, we should do it by closing loopholes and flattening the tax structure. Loopholes - like the tax on carried interest - distort economic behavior by diverting resources from one economic behavior to another. This distortion should be kept to a minimum.

 

[Toro]

I knew you had it in you.

Just as an FYI, here is the link that made me think the situation with carried interest is a bit less complicated than I thought.

Hedge Fund Taxation – Law School Professor Perspective ? Hedge Fund Law Blog

If you don't learn you don't live. I guess that this proves I am still alive.

Thanks for the link. Very interesting overview.....

I would be interested in both your and Toro's opinion on what is a more effective approach to reward investors if your interest is to generate US jobs in a global economy. I would argue that the balance should be exactly opposite of what it is today which is high corporate income taxes and lower capital gains rates...

Such a structure provides capital when it is most needed and rewards the local entrepenuer more highly versus a capital gains rate which draws no distinction on whether the investment was made locally or internationally.

The best way to generate jobs is to have a competitive tax and regulatory structure. IOW, lower corporate taxes and decrease regulation. But you also have to invest in infrastructure. You can have no corporate taxes and no regulation, but if your population is dumb, you'll be poor as dirt.

 

[Quantum Windbag]

Interesting so explain the exception an how you would address the use by Hedge fund managers.

Why should I? I have repeatedly stated that we should close loopholes across the board. This is just one more loophole that needs to be closed.

Why be an ass? It was the first logical defense of it I have heard, but I am not familiar with the carrying interest over so I don't know to whom else it my apply.

That being said I agree it needs to be closed and I would prefer it be traded for spending cuts so that we might lower the deficit. I would trade higher capital gains rates in return for lowering the coporate income tax rate which I agree needs to be lowered.

Sorry, I sometimes get cranky, don't take it personal unless I call you an idiot.

Here is some info on others who will be affected.

The carried interest tax increase would excessively harm commercial and multi-family real estate, since real estate accounts for 45% of the estimated 2.5 million partnerships subject to this tax hike. These ventures carry risks, and investing partners join together to insure against such risks (i.e. construction overruns) by granting the general partner the carried interest. If the government takes a greater portion of this investment, partnerships will have less capital with which to undertake these endeavors. Projects most in need of capital, such as those in disadvantaged neighborhoods, will lose funding. Property values will decline, along with property tax revenues to underserved localities. Private investors who lend to small businesses will lose capital – as a result, the businesses lose financing needed to pay taxes and employ their workforces. Private equity partnerships and venture capitalists regularly make long-term investments that lead to job creation. Doubling the tax rate on carried interest does nothing to create jobs or restore confidence in the economy.
Lastly, far from enforcing “fairness,” such a measure provides no grandfather rules for recent investments made in good faith by investors and partnerships, and overturns five decades of tax law classifying carried interest as a capital gain.
A carried interest tax increase negatively impacts millions more than its proponents suggest. This is another clear example of policymakers relying on rhetoric and not thinking through the consequences of their plans.

Carried Interest Tax Increase: Bad for Main Street |

 

[Quantum Windbag]

I agree that capital gains and income should be treated differently. That's why, in our example, the hedge fund manager should be taxed at the capital gains rate for his own money in his fund, and at the income rate for the fees he receives for managing other people's money.

So Toro and Quantum- Isn't the lower taxation of capital gains based on the premise that people will invest locally? If you take away that premise then the value of lower capital gains tax would seem to go away. I am not sure it makes sense to have a lower capital gains if portfolios will be increasingly diversified WW.

Instead it is better to reward investment with a significantly reduced or eliminated Corporate Income tax.

Using your Venture capitalist example, if the corporation can grow tax fee and the taxation occurs only at the point of sale the venture capitalist actually comes out ahead with a longer term investment.

There are two general arguments for a lower rate of tax on capital gains. First, capital gains are usually a function of the profitability of some asset, which has already been taxed. So, for example, if you own a stock that is worth $10 a share and the company earns $1 a share in profits, if profits rise to $2, then the share price will rise to $20, all else being equal. That incremental $1 in profit has already been taxed, so taxing the market price which reflects that after-tax profits is effectively double taxation by taxing the $10 increase in the stock price. The other argument is that tax on capital gains is essentially a tax on savings. Savings are the capital stock which funds the productive capacity of the nation. Taxing savings decreases the capital stock of the nation. I have no problem with a lower rate of tax on capital gains. However, there is an argument that all income should be taxed at the same rate, regardless of the source.

We should lower the corporate tax rate but we should not fund it by raising capital gains taxes. Instead, we should do it by closing loopholes and flattening the tax structure. Loopholes - like the tax on carried interest - distort economic behavior by diverting resources from one economic behavior to another. This distortion should be kept to a minimum.

Like I said before, carried interest affects other people, which is why I am a bit ambivalent simply eliminating it.

Carried Interest Tax Increase: Bad for Main Street |

 

[Toro]

Like I said before, carried interest affects other people, which is why I am a bit ambivalent simply eliminating it.

Carried Interest Tax Increase: Bad for Main Street |

Real estate is no different than any other general partnership. You are a rich guy who wants to invest in real estate. I am a real estate professional. I invest your money for you. You pay me a performance fee. That fee should be taxed at the same rate as all other economic activity which is fee based.

There is no reason to believe that there would be any appreciable decline in investment, at least as how I understand it. In the real estate general partnerships (GP) that I have been exposed to, the limited partners (LPs) supply most of the capital. The manager of the GP may supply a little bit of the capital. The GP has an investment period, usually 3 to 5 years, the capital is called from LPs and is invested by the manager during the investment period. Each GP has a shelf life, usually up to 10 years with extensions of a few extra years if need be. The GP is expected to wind down during that time as investments are sold off. Returns are distributed to the manager of the GP and the LPs. Carry is paid off the profits generated in the GP after the profits are generated. So there is no reason to think that this inhibits capital formation since most of the capital is supplied by the LPs, not the manager of the GP, and it is paid after the activity has occurred. It is a performance-fee based business, no different than any other fee-based business. If the manager of the GP supplies a significant amount of his own capital to the GP, then that capital should be taxed at the rate of capital gains. But the carry the manager generates on the capital should be taxed as any other income.

In fairness, a few years ago, the Democrats tried to tax the capital supplied by the manager into the GP as ordinary income. Well, that's bullshit too. We shouldn't be segregating capital by profession. Capital should be taxed at the rate for capital gains. Services, including money management services, should be taxed at the ordinary rate of income.

 

[Sactowndog]

There are two general arguments for a lower rate of tax on capital gains. First, capital gains are usually a function of the profitability of some asset, which has already been taxed. So, for example, if you own a stock that is worth $10 a share and the company earns $1 a share in profits, if profits rise to $2, then the share price will rise to $20, all else being equal. That incremental $1 in profit has already been taxed, so taxing the market price which reflects that after-tax profits is effectively double taxation by taxing the $10 increase in the stock price.

Yep I understand the argument but if you significantly reduce/eliminate the corporate income tax doesn't this argument go away. Money doesn't get taxed until it is returned either as a return to labor or as a return to capital.

The other argument is that tax on capital gains is essentially a tax on savings. Savings are the capital stock which funds the productive capacity of the nation. Taxing savings decreases the capital stock of the nation.

And this is the fundamental point I am saying is no longer true. National boundries no longer hold for savings as investors chose to invest globally. So having a lower capital gains tax does not impact the country. In fact, countries with a low capital gains tax and high income taxes will lose in attracting capital investment when compared with countries who have a low corporate income tax and high capital gains rate.

The ideal for the investor is to live in a country with a low capital gains rate and to invest in a country with a low corporate income tax.

 

[Sactowndog]

Sorry, I sometimes get cranky, don't take it personal unless I call you an idiot.

Here is some info on others who will be affected.

The carried interest tax increase would excessively harm commercial and multi-family real estate, since real estate accounts for 45% of the estimated 2.5 million partnerships subject to this tax hike. These ventures carry risks, and investing partners join together to insure against such risks (i.e. construction overruns) by granting the general partner the carried interest. If the government takes a greater portion of this investment, partnerships will have less capital with which to undertake these endeavors. Projects most in need of capital, such as those in disadvantaged neighborhoods, will lose funding. Property values will decline, along with property tax revenues to underserved localities. Private investors who lend to small businesses will lose capital – as a result, the businesses lose financing needed to pay taxes and employ their workforces. Private equity partnerships and venture capitalists regularly make long-term investments that lead to job creation. Doubling the tax rate on carried interest does nothing to create jobs or restore confidence in the economy.
Lastly, far from enforcing “fairness,” such a measure provides no grandfather rules for recent investments made in good faith by investors and partnerships, and overturns five decades of tax law classifying carried interest as a capital gain.
A carried interest tax increase negatively impacts millions more than its proponents suggest. This is another clear example of policymakers relying on rhetoric and not thinking through the consequences of their plans.

Carried Interest Tax Increase: Bad for Main Street |[/QUOTE]

Interesting. Thanks for posting it helps further understand the issue though I admit I don't think I am still clear on how the carry works in construction and if the general partner is assuming risks not assumed by the Hedge fund manager. I will have to keep reading but thanks again.