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Hedge Fund Hypocrisy

Yes, there is something terribly wrong with taxation in the hedge fund industry — but it is not the perceived evil that the defeated Baucus/Grassley bill was attempting to “fix”.  According to them, the problem was that the hedge fund operators get part of their compensation from (relatively low-tax) capital gains income.

However, the proposed changes to “carried interest loopholes” is for political gain only, creating a problem that isn’t there, in order to solve some mythical inequality. However, all it does shift the benefit of the capital gains lost by the operators to the investors. That fixes nothing.

 

Instead, the real problem is that the Internal Revenue Code (IRC), as strictly enforced by the IRS, requires generally that hedge fund investors pay taxes on huge amounts of “income” that does not exist. This is derived from rules that require investors to pay tax on investment income while denying them an offset for the expenses that were incurred to generate that income.

It is simply not uncommon for hedge fund investors to pay tax rates of 70-100% or more on the hedge fund income they earn.

Yes, you read that correctly. 100% or more. In fact, in my practice I see a few clients every year forced to pay more taxes on an investment than that investment earned. True, it is a small percentage of people affected in any given year, but this does not mitigate the blatant unfairness. How does this injustice take place?

It follows from what is the most inequitable provision of the current tax code, namely, the severe limitation on the ability to deduct the necessary expenses incurred by a hedge fund operator in order to earn income: investment fees and expenses, accountant’s fees, legal fees for collecting a settlement, etc.

The tax code requires those expenses — which include virtually all operation expenses of private equity hedge funds, including fees to the operators — to be listed under the category of “miscellaneous deductions”.

However, these deductions may not be claimed until and unless they reach 2% of the taxpayer’s entire income. The upshot of this is that most taxpayers do not get to benefit from these deductions. To add further insult to injury, that even if investors have expenses which exceed the threshold, these expenses become addbacks for the dreaded alternative minimum tax (“AMT”).

This taxpayer abuse then certainly discourages investment and is a major source of inequity in the code. If Congress were ultimately concerned with reforming the hedge fund industry, this problem — the inability to deduct necessary expenses incurred while earning income — would be the right one for Congress to fix. Trying to interfere with and fix who gets the capital gain rate in a “carried interest” transaction was a worthless and meaningless endeavor.

1000 Days Later


What is so special about April 29, 2009?

It’s the last time Congress passed a budget. 1000 days later, we are operating without any plan. Oh, the delicious irony that it is today… I can’t wait to hear about it during the State of the Union tonight, right? Just like last year’s State of the Union; the budget Obama tried to pass shortly thereafter, modeled on the ideas espoused during his speech, failed 97-0. It was so outrageous, not one Senator of either party would put his name to it.

I’ve read some recent articles about the last 1000 days. Human Events had some worthwhile observations:

Senate Majority Leader Harry Reid (D-NV) said it would be “foolish” to have a budget.

“There’s no need to have a Democratic budget in my opinion,” Reid said in a May interview with the Los Angeles Times. “It would be foolish for us to do a budget at this stage.”

The breakdown in the Senate came after Sen. Kent Conrad (D-ND), chairman of the Budget Committee, failed to get a consensus among panel Democrats last year on any plan that was proposed to the caucus.

Meanwhile, U.S. Rep Sandy Adams penned a short piece about Congressional budget activity, (or lack thereof)

The previous Democrat-led Congress had ample time to do so. With President Obama in theWhite House, Senate Majority Leader Harry Reid and former Speaker Nancy Pelosi had the power to implement any budget they chose. Unfortunately, they punted on their responsibilities, choosing to pass legislation creating a national energy tax and an unpopular health-care law instead.

And finally, the Heritage Foundation put forth their list of facts about our nation’s budget and America’s money:

  • The last time the Senate passed a budget was on April 29, 2009.
  • Since that date, the federal government has spent $9.4 trillion, adding $4.1 trillion in debt.
  • As of January 20, the outstanding public debt stands at $15,240,174,635,409.
  • Interest payments on the debt are now more than $200 billion per year.
  • President Obama proposed a FY2012 budget last year, and the Senate voted it down 97–0. (And that budget was no prize—according to the Congressional Budget Office, that proposal never had an annual deficit of less than $748 billion, would double the national debt in 10 years and would see annual interest payments approach $1 trillion per year.)
  • The Senate rejected House Budget Committee Chairman Paul Ryan’s (R–WI) budget by 57–40 in May 2011, with no Democrats voting for it.
  • In FY2011, Washington spent $3.6 trillion. Compare that to the last time the budget was balanced in 2001, when Washington spent $1.8 trillion ($2.1 trillion when you adjust for inflation).
  • Entitlement spending will more than double by 2050. That includes spending on Medicare, Medicaid and the Obamacare subsidy program, and Social Security. Total spending on federal health care programs will triple.
  • By 2050, the national debt is set to hit 344 percent of Gross Domestic Product.
  • Taxes paid per household have risen dramatically, hitting $18,400 in 2010 (compared with $11,295 in 1965). If the 2001 and 2003 tax cuts expire and more middle-class Americans are required to pay the alternative minimum tax (AMT), taxes will reach unprecedented levels.
  • Federal spending per household is skyrocketing. Since 1965, spending per household has grown by nearly 162 percent, from $11,431 in 1965 to $29,401 in 2010. From 2010 to 2021, it is projected to rise to $35,773, a 22 percent increase.

So there you have it. We stopped having a budget with a Democrat in the White House, a Democrat-controlled Senate, and with a Democrat-controlled House of Representatives. 1000 days ago. So how come they aren’t talking about it?

Update: The Hill is reporting that some Republicans will be sporting “1000 days” buttons to mark the 1000 days of ineptitude

Land of the Free (Market)?


The Heritage Foundation just released its 2012 Index of Economic Freedom. The United States is ranked….10.

Top 10 Countries

world rank country overall score change from previous
1 Hong Kong 89.9 0.2
2 Singapore 87.5 0.3
3 Australia 83.1 0.6
4 New Zealand 82.1 -0.2
5 Switzerland 81.1 -0.8
6 Canada 79.9 -0.9
7 Chile 78.3 0.9
8 Mauritius 77.0 0.8
9 Ireland 76.9 -1.8
10 United States 76.3 -1.5

SEE ALL RANKINGS

For over a decade, The Wall Street Journal and The Heritage Foundation, Washington’s preeminent think tank, have tracked the march of economic freedom around the world with the influential Index of Economic Freedom. Since 1995, the Index has brought Smith’s theories about liberty, prosperity and economic freedom to life by creating 10 benchmarks that gauge the economic success of 184 countries around the world. With its user-friendly format, readers can see how 18th century theories on prosperity and economic freedom are realities in the 21st century.

The Index covers 10 freedoms – from property rights to entrepreneurship – in 184 countries.

So much for the Land of the Free, eh?

Pandering: Regulating Oil Profits?


It’s another egregious example of the Democrats wanting to overreach boundaries in an effort to appeal to voters:

The Democrats, worried about higher gas prices, want to set up a board that would apply a “windfall profit tax” as high as 100 percent on the sale of oil and gas, according to their legislation. The bill provides no specific guidance for how the board would determine what constitutes a reasonable profit.

The Gas Price Spike Act, H.R. 3784, would apply a windfall tax on the sale of oil and gas that ranges from 50 percent to 100 percent on all surplus earnings exceeding “a reasonable profit.” It would set up a Reasonable Profits Board made up of three presidential nominees that will serve three-year terms. Unlike other bills setting up advisory boards, the Reasonable Profits Board would not be made up of any nominees from Congress.

According to the bill, a windfall tax of 50 percent would be applied when the sale of oil or gas leads to a profit of between 100 percent and 102 percent of a reasonable profit. The windfall tax would jump to 75 percent when the profit is between 102 and 105 percent of a reasonable profit, and above that, the windfall tax would be 100 percent. The bill also specifies that the oil-and-gas companies, as the seller, would have to pay this tax.

Let’s go after the greedy oil companies as a cash cow to fund our politically motivated government projects:

Kucinich said these tax revenues would be used to fund alternative transportation programs when oil-and-gas prices spike

Of course, when the Left hyperventilates over the (seemingly) huge profit numbers of the oil/gas industry, they always choose not to mention the enormous amounts of monies this industry needs to invest just to produce a profit. I’ve written about this concept before when I discussed free will and capitalism.

How delicious is it that our government — unable to even produce a working budget or spend within its limits — is deemed fit to determine what a reasonable profit is.

What happened to free markets in America?

Update: Mr. Ed Morrissey adds to the discussion by explaining to folks, like I stated above, how the oil/gas industry really doesn’t make that much in profits compared to other industry giants

 

Where Is the Outrage on the Left?


The White House recently named Jack Lew his new Chief of Staff after the departure of Bill Daley. While Obama championed Mr. Lew’s work in the State Department as the chief budget officer and deputy secretary of state, he omitted the fact that prior to the State Department, Lew was the chief operating officer at Citibank during the height of the housing boom. His job was directly tied into the mortgage industry. In fact, he received nearly a million dollar bonus shortly after the government bailed out Citigroup as well as more than a million in compensation in 2008.

The Washington Times covered Lew’s Citi job and compensation in 2010. It is unconscionable that Obama chose not to disclose the relationship in 2012. Considering all the hate from the Left regarding greed and overcompensation, where is the outrage toward Mr. Lew?

 

 

Why the Republicans Must Win the White House

The “unconstitutional power grab”, which rightly describes Obama’s (non) recess appointments on Wednesday is another alarming move in a string of examples as to why we need to make sure we do not re-elect him the the presidency

Quite frankly, as a lifetime CPA, I welcome a split government: a president from one party and Congress from another. Laws don’t get passed except in the occasion that they have true bipartisan support. This type of inaction is actually quite good for the economy – something we desperately need right now – because businesses can plan long-term and individuals can have a sense of security.

The Clinton period was a perfect example of how this worked because spending bills were stifled and tax laws were not changed significantly. The economy became strong and budget surpluses resulted, precisely because the Republicans deadlocked him in Congress. But in this current political climate, we can’t benefit from split government because of two critical things that are different from the Clinton Era.

The first is the tax sunset. Bush tax cuts implemented in ’01 and ’03 are all scheduled to end in 2012 and revert to the prior tax rates. Inaction by Congress will result in the largest tax increase in memory, across the board and at all levels. Although the Democrats are fond of saying the tax cut benefits fell disproportionately to the higher income earners, this is clear demagoguery – because the financial pain to be felt in the middle and lower classes once the tax cuts expire will be monumental. Subsequently, the economy will also tank.

The second difference – and more important as evidenced on Wednesday – is that the president has been able to effectively pass laws which Congress has not passed through the use of the Executive Order and his government agencies. For example, in October, Obama announced new programs to aid college students to repay their federal loans, veterans to find employment, and homeowners make their mortgage obligations. All three initiatives were done by Executive Order rather than by legislation. He remarked, “We can’t wait for Congress to do its job. So where they won’t act, I will. We’re going to look every single day to figure out what we can do without Congress.” Such an attitude is reinforced by the White House campaign called “We Can’t Wait”; this puts forth directives from the Executive Branch, claiming that inaction by Congress requires action from Obama.

Regarding Obama’s use of government agencies, two striking examples of many come to mind. First, limitations on emissions were passed as a set of rules by the Environmental Protection Agency (EPA), which implemented almost in its entirety the cap and trade bill which failed in the Congress. Similarly, the National Relations Labor Board (NLRB) has been passing rules that are virtually as onerous as the card check, which have failed to get through Congress.

It should also be noted that due to the aggressive use of governmental agencies to execute actions meant to be carried out by the legislature, the term “QUANGO” will become much more common and vernacular. QUANGOs, which stands for “QUasi-Autonomous Non-Governmental Organizations” will continue to undermine our government’s checks and balances, and we will see in America the parallel mistakes being made in Great Britain today. Among the most offending QUANGOs are the Federal Reserve, the NRLB, the EPA, and the the Federal Trade Commission.

Typically a Democrat second term would be fine in tandem with a Republican Congress because a government that does nothing is the key to economic success. But with this current administration, it’s a perfect storm for catastrophe; Obama would have four more years to implement all his absurd policies in whichever way he sees fit. With his campaign now in full swing, this strategy was boldly confirmed with his appointments.

Obama’s declared,“I refuse to take ‘No’ for an answer. I’ve said before that I will continue to look for every opportunity to work with Congress to move this country forward. But when Congress refuses to act in a way that hurts our economy and puts people at risk, I have an obligation as president to do what I can without them”. 

Ah, Obama claims necessity. And as William Pitt the Younger aptly observed: ”Necessity [is] the plea for every infringement of human freedom. It was the argument of tyrants; it was the creed of slaves.”

In fact, it was confirmed on Friday by the White House press secretary, Jay Carney, that Obama acted preemptively. “So the President acted because Congress wouldn’t, and it was clear that Congress wouldn’t — and numerous senators have made clear they won’t,” Carney said. “And we have to have that: these independent agencies exist for a reason, and the president believed that it was essential to make sure that that agency could function.” Banking on an uninformed electorate and a Congress with a conveniently short memory, to hell with the Constitution and precedent in law!

With this abuse of public trust, and with the urgent issues, upcoming laws, and higher taxes we face, we must find the Republican candidate – imperfect though he may be – who can win the Presidential election and restore integrity, fiscal sensibility, and respect for our Constitution to the highest office and our country.

 

 


Social Security — A Tax or Retirement Plan? (But Not Both)


One of the most common means by which politicians deceive their constitutents is by referring to Social Security as a either a tax or as a retirement system — but usually only as the politics or issues of the day suit them.

We have politicians who stand strongly behind the concept that Social Security must be maintained because it’s a retirement system that people pay for. I certainly believe, as FDR did when he started Social Security, that this is a forced retirement system. As such, it is critical that the entity managing it (the federal government) include Social Security’s actuarially calculated expenses in the current year. By not doing that with their accounting, they are able to simultaneously mischaracterize Social Security as a tax.

If Social Security is truly a retirement and disability plan, it is patently unfair to also consider Social Security collections as a tax that is paid. This is hypocrisy to the citizens contributing toward their retirement. Therefore, when you hear a politician calling Social Security a tax, understand that such a description qualifies it as an entitlement supported the general revenue fund. It can’t be both. The true Social Security Fund, as it is currently being collected and paid out, has been stolen from the taxpayers.

Social Security as a retirement plan has lost its meaning along the way. Yes, benefits promised to recipients have been much more than the amounts taken from pay. For that reason, and for the way by which Social Security is accounted by the government, the system is broken. Nevertheless, we must fundamentally maintain the view that Social Security is the way by which people pay for their own retirement — if we are to fix the imbalances.

The way to lead Social Security back to health is to convince people that the amounts taken from their pay is protected and truly going to their retirement by reclaiming the Social Security Fund so it reflects that reality. Often when it’s realized how little income tax many people pay, the focus typically goes on to how much people do pay toward Social Security. This is not altogether a bad thing. With citizens trying to retire at the age of 65 but often having life expectancies until 90, people need to contribute more money to their retirement.

We need to restore Social Security to a level of sustainability by moving it back to being a path to retirement, view it as a forced retirement system, and hold it accountable in that regard. By modifying the system to be more like present-day 401ks, people can better realize the amount that they are actually putting in. In doing that, more people will ultimately be happy with their Social Security accounts and will also make a mockery of such recent legislation as the payroll tax holiday.

If though, the powers that be continue to insist Social Security is a tax, then the fact becomes that people are really not paying for their own retirement. Therefore beneficiaries are not entitled to anything other that what Congress on a whim decides, because it is subject to the general revenue fund via tax revenue. This would be an outrageous outcome. It turns Social Security into a means by which the people are dependent on government to provide a modest stipend by extracting money from us.