What Donald Trump Doesn’t Know about Hedge Funds: The reality and myths of taxing financial firms.

National Review ^ | 09/22/2015 | Kevin Williamson

[Eric Pode of Croydon]

in no mood for more of the same old same old lassiez-faire

If we'd actually had any laissez-faire in the last quarter century, I could possibly be consoled by what you are saying.

As it is, I am tremendously saddened to see so many supposed conservatives infected by the "occupy Wall Street" virus.

I expect to vote for whichever third party candidate is most in favor of capitalism......

[Rusty0604]

I have not yet read Trump’s tax plan, and I have been making comments on the article posted about carried interest and hedge fund managers. I am not assuming anything about his entire tax plan because that wasn’t what the article was about. My degree is in finance/accounting and I have worked as CFO for years so I know a little about finance and taxes. I thought this was a discussion forum where conservatives can exchange ideas, you need to chill out a little because not everyone here is going to agree with you.

[Rusty0604]

I wish I was. I do enjoy investing; sometimes the risk pays off and sometimes it doesn’t. I don’t care about HFM one way or the other, I just defend the concept of how risk is considered in the tax code.

[perfect_rovian_storm]

I’m sorry, but all this hand-wringing is just ridiculous. This Williamson jackass is either trying to mislead people or is ignorant of Trump’s tax plan. The plan is a graduated flat tax with no deductions. The top tax rate is 15% on all income, regardless of how it is earned. There is no carried interest deduction, because there are no deductions at all, thus hedge fund guys are ‘punished’.

In actuality, everyone (except maybe people in your line of work, I’m afraid) makes out pretty well. Trump is merely using populist language to sell what is actually a really conservative plan.

Glenn Beck and NRO appear to me to be intentionally misleading people into believing that Trump is some kind of Democrat when it comes to tax policy.

Of course, all of this will be cleared up in like a week, when Trump puts his plan out officially, but in the meantime, these guys getting away with this crap ticks me off.

[Rusty0604]

I actually like Trump and am looking forward to seeing his tax plan and I’m sure it will be better than the hundreds of thousands of pages of tax code we have now. I was merely addressing what this particular article was about. And I do realize that he is using populist language to get votes, he is a smart man and I would do the same thing.

[itsahoot]

Should tax code to be used to punish certain behavior and reward certain others?

Strange that you should ask since this thread is about exactly that. A group of people that enjoy a tax advantage that you can't have.

[David]

OK for those who want to understand the issue instead of bash anyone who questions a policy simply because St. Donald’s name is on it , here’s what Trump proposes: Trump specifically addressed a tax code loophole known as the “carried interest loophole,” a provision in the tax code that lets private equity and hedge fund managers pay taxes at the CAPITAL GAINS rate instead of the ORDINARY INCOME rate. The capital gains tax bracket is only at 20%, significantly lower than the top income bracket that many fund managers would occupy, which is around 39.6%. Bernie Sanders is in favor of that. The difference being, he wants to INCREASE the capital gains AND the top income bracket significantly. For that matter, Hillary is in favor of that too. Trump echoes similar remarks by his Democrat peers. Hillary Clinton commented in May that “something is wrong when CEOs earn more than 300 times than what the typical American worker earns and when hedge fund managers pay a lower tax rate than truck drivers or nurses.”

OK I am reluctent to get too far into this but here is a little more.

A carried interest arrises when a pass through entity is organized under subchapter K of the Internal Revenue Code (a partnership). One partner puts up nothing but he has such a great track record of managing deals like this one that he gets a 20% interest in profits and cash flow earned and received in the future. The other partners put up 100% of the cash; get 100% of the capital accounts; but have only 80% of the profits and cash flow.

Partner one (no contribution; 20% of profits) still has nothing. The venture might crater and he might never get anything--clearly nothing to tax yet.

The venture proceeds; Partner one is a great manager and puts together great deals that look like great future income. No income yet; no profits; no net cash flow. Nothing to tax yet under existing law. But the future looks good interests now have great value.

So this is where the beef arises. Because at this point, the deal having been in place for more than 12 months, Partner One sells his interest to another financial partner at a large gain on which he pays tax at long term capital gain rates.

All that has happened is that Partner one has done work which if you and I did it for salary would be ordinary income; but all he has is an interest in future profits and when he sells it all, it is long term capital gain.

Now there are nuances on this picture--which are done to protect the transaction and might protect the transaction even if the law changes. Because people seem to think the guy should pay ordinary income tax on what he receives. But the nuances somehow are pretty effective to preclude tax at ordinary rates.

Matter of fact, Congress has twice passed legislation in one house in the last five years that would purportedly convert the capital gain to ordinary income. Neither one would have reached the income from my deals with ordinary tax rates.

And those bills passed either the House in one case and the Senate in the other; but they never made law because it was obvious neither one was sufficient to accomplish the objective and the non consenting house thought there was risk the legislation would impair other deals.

And frankly, I think taxing carried interest is beyond the intellectual capability of the people writing tax legislation--I think they have trouble doing it at all.

My next post is on Trump.

[LucyT]

Check out # 107 .

Thanks, David.

[David]

And frankly, I think taxing carried interest is beyond the intellectual capability of the people writing tax legislation--I think they have trouble doing it at all.

That's probably excessive.

Gain on sale of the carried interest is presently taxed at Long Term Cap Gains rates and the complaint is Cap Gains rates instead of Ordinary Income rates.

But the bottom line is that it is going to be very difficult to reach carried interests with ordinary tax under the current system. Evidence is that they have had bills to do so every session and they can't seem to construct one that works.

Next Post is Trump.

[David]

So that gets to the Trump element of the original post.

If the election were today, pick your candidate, I would vote for Trump although I oppose many of his historical and some of his current inferred positions and I prefer Cruz.

I would take Trump because I think his real approach to governing the country would be to address the many issues we face and get people who generally agree with us to figure out what to do about solving them.

And as to his first two propositions, immigration & border security and Second Amendment rights, I agree exactly with his position.

Tax policy? Hedge fund managers and others who are engaging in business in the US Markets from residences in the US ought to pay US tax and a tax modification package that provides for that would be a sound objective.

Trump is not a tax policy expert; he doesn't have anyone on his staff (yet) as a tax policy adviser; and fundamentally, current tax policy and the general domestic political environment are not attractive to capital formation for business employment practices much outside the real estate industry.

Fact that Trump has prospered in the domestic real estate industry is to his credit but domestic real estate prosperity is about to end.

Instead of policies to punish investors who take their capital offshore, we need to adopt policies that make the domestic US a more attractive environment in which to invest capital.

Ordinary income rates at the high end are negative incentives for capital formation activities. Trumps proposed higher top end rates are bad policy and should be opposed. I assume when the rubber met the road in either the campaign or a Trump Administration, he will be better informed and make better decisions. (As I assume Cruz would do from the get go.)

The true bottom line in America today is that our country; our Constitutional Republic; the historical Judeo-Christian ethical foundation of our culture; are under terminal threat and will be destroyed by continuation of current national government policies. So we need leadership to turn conditions around and we don't have much time in which to do that.

And as Trump has pointed out several times, one man at the top isn't going to be able to do that. The real requirement is for the one man with sufficient supporting managerial talent--and there is no guarantee of success.

Most of the federal judiciary does not support our constitutional and legal system and they all need to be replaced. Most legally trained managers and policy directors oppose our form of government and historical foundation for success.

Maybe there are enough talented people out there on our side of the table to save the country--that is not a sure thing.

[LucyT]

Check out # 109 and # 110 . ... Worth the read.

Thanks David.

[A CA Guy]

Being Trump himself has benefitted from that kind of tax more than most Amercans, I think he will not have a problem going after it.

[PGalt]

Thanks for the ping. Thanks for your posts, David. BUMP!

[stephenjohnbanker]

Good job.

[Brown Deer]

Donald Trump has promised that he will ease burdens on the middle class by going after “the hedge-fund guys,” who, he believes, do not pay enough in taxes.

"Private equity and hedge fund managers can currently count compensation from the funds they manage as capital gains. Treasury estimates that taxing those payments as ordinary income could boost tax revenues by $18 billion over a decade." ~~ Breaks, Penalties, and Extenders

and federal income tax revenue during the next decade is projected to be well over $18 trillion. So we are talking about a possibility of maybe a 0.1% increase in tax revenues. So how will that ease the burden on the middle class? Especially when you consider that this country continues to spend much more than it receives...