Taxing the Top 25 Hedge Fund Managers Like Average Citizens Would Cut Deficit by $44 Billion

Thursday, July 07, 2011
When an individual’s income, both pre-tax and after-tax, goes up more than 400%, shouldn’t they pay taxes like those eking out a living?
That’s the argument by tax reformers who want to go after some of the biggest earners on Wall Street. In 2010, the 25 most successful hedge fund managers in the nation collectively earned $22 billion. But they didn’t pay taxes at the same rate as ordinary working Americans. If the special loophole they enjoy was eliminated, hedge fund tycoons would pay enough money into the U.S. Treasury to cut the national deficit by as much as $44 billion over the next 10 years.
Former Clinton Labor Secretary Robert Reich estimates that $20 billion a year would flow into the U.S. Treasury from all hedge-fund managers combined.
The tax break is known as the carried-interest loophole. It allows hedge fund managers to treat profits on money received from investors as capital gains, not income. Instead of being taxed at 35%, the money is taxed at 15%. Typically, these private-equity managers receive 2% of assets as regular fees taxable as income. The big bucks come from the 20% they get from the fund’s proftis, which they pay the lower tax on.
These wealthy individuals are part of the 400 highest-earning households—a group that enjoyed phenomenal growth in their incomes from 1992 to 2007, according to the Economic Policy Institute. During this span, the richest of the rich saw their pre-tax earnings grow by 409% and their post-tax income increase by 476%.
-Noel Brinkerhoff
Where Has All the Income Gone? Look Up. (by Lawrence Mishel, Economic Policy Institute)
Special Interest (by James Surowieki, The New Yorker)


Tim 13 years ago
how come none of these articles that indicate getting rid of the carried interest rule will probably have no effect on the revenue the government will collect for any hedge fund that is taxed as trader? all it will do is increase the tax burden for the manager and decrease the tax burden for the investor in the fund. while it might be the case for most private equity funds, most hedge funds earnings are taxed at the short-term capital gain rates (35%), not the long-term capital gain rates (15%), thus the biggest assumption in all these articles of increasing government revenue by getting rid of the carried interest rule is incorrect.

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