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carried interest
John Steele Gordon’s recent Op-Ed in the WSJ
opened with following observation: “The question of how to fairly and equitably tax capital gains has been a political problem since the modern personal-income tax was adopted in 1913”. Being a business/financial historian, he gives an adequate overview of the history of capital gains and how it has reached its present state.  But because he is not an economist or CPA, he disingenously presents a one-sided treatment of the issue of capital gains and “carried interest” without actually exploring the merits of the tax. The result is that Gordon sounds like sour grapes on the wealthy and ultimately, he is wholly unable to answer his own question.

Gordon puts forth the notion that “carried interest” is a “cause of much recent controversy”. This much is true, in that the recently defeated Baucus/Grassley bill was attempting to “fix” carried interest because of a seemingly unfair low-tax capital gains income rate.

This is true. But so what? It’s not as though the income isn’t from capital gains. If the law was changed so that the operators were taxed at ordinary income only, it wouldn’t get rid of those gains — it would simply mean that the investors get the benefit of the capital gains lost by the operators. This fixes nothing.

Ultimately such a change, which is again being explored in Obama’s proposed budget,  will merely shift the tax benefit from the operators to the investors. This takes a tax break away from people who are working for a living and gives it to millionaires who are just investing – pure hypocrisy from liberals who wish to inflict additional taxes on the wealthy at every step.  It make compensation deals for hedge fund operators a bit more complicated (i.e. requiring more assistance from accountants), but the amount of compensation stays revenue neutral.

Therefore, it takes a whopping dose of either incompetence or disingenuousness from Gordon and other carried interest critics to look at the hedge fund industry and proclaim that the hedge fund operator “carried interest” is the problem that needs to be addressed.