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

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. “They’re making a tremendous amount of money — they have to pay taxes,” he says. Because the one thing in which Trump is consistent is his vagueness, it is not 100 percent clear whether what he is talking about is the so-called carried-interest loophole, which is very much on the minds of people with economic-policy views similar to Trump’s — meaning Bernie Sanders and Hillary Rodham Clinton and other cookie-cutter progressives — but in any case, it is worth having a look at the reality and the myths of how hedge funds and other financial firms are taxed, assuming that we want to start with facts and proceed to opinion rather than go like a crab backward.

The myth is this: Hedge-fund managers take home tremendous paychecks that are really plain old payments for services but which are disguised as long-term capital gains, meaning that they get taxed at 15 percent rather than the 39.6 percent I pay on my salary, which is fundamentally unfair.

If you will forgive a brief little dip into finance gobbledygook, some clarification is in order here. The first thing to understand is that “hedge fund” has come to be used the way the Left (and science-fiction writers) use the word “corporation,” meaning: men and institutions with a great deal of money doing things that I do not understand, who must, therefore, be evil. Indeed, the current discussion about the taxation of financial firms is a terrific example of how the good-guys/bad-guys school of policy analysis makes people stupid.

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.

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.

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.

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.

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