Hedge Fund Managers Pay Only A 15% Income Tax
June 17, 2010
If you're a lawyer, doctor, or small businessperson who had a really good year, you'll pay a 35% income tax on your income. If you manage a hedge fun, you'll pay 15% on your income. That's not a typo. How can this be?
Hedge fund managers are paid on the 2-and-20 principle: They get 2% of the value of the hedge fund as compensation, no matter what. They also get 20% of any profits the hedge fund makes. For example:
- Hedge Fund A is valued at $10 billion in Dec. 2009.
- Hedge Fund Manager receives $200 million just for showing up to work.
- Hedge Fund A is valued at $12 billion in Dec. 2010.
- Hedge Fund Manager receives $400 million as a management fee.
The hedge fund manager will pay a 15% tax on his fees because a tax loophole holds that hedge fund compensation is treated as long-term capital gains. This makes no sense, since hedge fund managers are being paid a fee for their work. They are not investing their own money into the hedge fund. Instead, they are being paid a fee to manage the fund.
This tax loophole is so outrageous and illogical that I've stopped bringing it up at dinner parties. People don't believe me. Yet power is not concerned with what is logical. Power is concerned with what can be done. "Do what thou wilt," is the first principle of Satanism. And so hedge fund managers pay a 15% income tax rate.
There is no logical reason to treat hedge fund management fees different from other professional services fees. Yet the loophole persists, and anyone who argues that Wall Street doesn't Congress should spend a few minutes explaining why hedge fund managers pay a lower income tax rate than other professionals.
Democrats want to reform the tax code, but Republicans are opposing it. Senator Orrin Hatch claimed “Some others aren’t doing as well as they should and others are doing well. And one reason they can survive is if we don’t raise taxes."
Hedge funds made record profits last year. There is a reason - taxpayers. Had Wall Street not been bailed out, nearly every hedge fund would have gone out of business.
Unless you have a net worth of $1.5 million, you can't even invest in a hedge fund. If you have a 401(k), you invest in mutual funds. A mutual fund is not a hedge fund.
Hedge funds profit by exploiting mutual funds. The rich get richer by sniping your less-connected and less-sophisticated fund managers. If the guys managing your money at Vanguard could get a job in a Connecticut hedge fund, they wouldn't be at Vanguard. To get a job in Connecticut, though, you need to have connections and a lack of morals. You must be able to obtain insider information - and have no moral scruples against violating the law by trading on it. Do as thou wilt.
Thus, most Americans would be better off if hedge funds failed. Hedge funds manipulate the stock markets, trade on insider information, and rob 99% Americans. They should should be prosecuted out of business.
Whatever the merits of hedge funds (there are none), hedge fund managers are earning money only because of the bailouts. How can those who have taken so much give back so little.
People complain about taxes, but paying 35% in income taxes is a nice problem to have. I'd rather pay 35% of 100,000 than 10% of 50,000. Wouldn't you?
When 100% of your income resulted from government hand-outs, keeping giving back just over one-third seems like the right thing to do.
Nevertheless, it's unlikely that the tax loophole will be closed. Republicans, the party of Jesus Christ, have rewritten the Gospels: Little will be required from everyone to whom much has been given.