RE: But if it’s not a myth, why are the earnings of a hedge-fund manager treated different from the earnings of any other self-employed or service business?
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Here’s Williamson’s explanation:
Hedge Funds ( AKA Private Equity firms ) don’t just bring money to the table: They bring (at least theoretically) expertise and labor, in exchange for which they are given a percentage of ownership or profits beyond that associated with the money they put up.
If they hold those investments for a year or more and there are profits realized, then they are taxed the same way you would be, i.e., at the 15 percent rate.
This is true even when they haven’t put up investment capital for that portion of the deal, but have instead put up what is sometimes called “sweat equity,” i.e., their work. If the deal goes south, then the private-equity investors will not necessarily have lost money on the management-fee portion of the deal, but they will have lost opportunity, time, effort, etc. And in most cases they will have lost money, too, especially in the case of venture capitalists, who much of the time will have put up practically all the investment capital in a startup.
The case against the carried-interest rule is, in short, that private-equity firms shouldn’t be allowed to treat investment income as a long-term capital gain in situations where they didn’t have money at risk.
*THAT* is the loophole that Trump is trying to close.
The counter argument made by Hedge fund managers is this — For private investors, investments are generally made out of income that already has been taxed: You pay 39 percent on your salary and, if you have the prudence to save some of that salary and invest it, you get taxed again on any money you make, and it strikes many people as sensible that the second bite be smaller than the first.
So, this in effect is DOUBLE TAXATION.
Kevin Williamson argues that this will only serve to discourage investments in innovation.
Hedge funds and other more exotic financial specimens do valuable work, too, although the benefits they provide (mainly risk mitigation) are less obvious to the general population. But it is the case that where certain kinds of income receive preferential tax treatment, firms and individuals will seek to organize their incomes in such a way as to benefit from those rules. Similarly, unless Washington should take the (unthinkably destructive) step of banning U.S. firms from having overseas subsidiaries and partnerships, the offshoring of profits for the purposes of shielding them from high U.S. corporate tax rates is inevitable.
The counter argument made by Hedge fund managers is this — For private investors, investments are generally made out of income that already has been taxed: You pay 39 percent on your salary and, if you have the prudence to save some of that salary and invest it, you get taxed again on any money you make, and it strikes many people as sensible that the second bite be smaller than the first.How is that different from buying stocks with after tax income?
Hedge funds and other more exotic financial specimens do valuable work, too...I'm self-employed, I do valuable work too, I want the same treatment.
Either I get the same treatment they get or they get the same treatment I get...
It's no more complicated than that.