Class Warfare and the Hedge Fund Manager

Below is a guest post by Josh Bill.  Josh is a passionate conservative from Sikeston, MO that I met at a Cape County Tea Party event in September 2011.

He gets into a class warfare issue highlighted, but ignored, by Warren Buffett and Barack Obama in relation to Hedge Fund managers.  I assumed such managers were part of a corporation, any profits were taxed at corporate rates, and any dividends or capital gains were taxed.  This is apparently not the case with the 2&20 taxation laws.


I have not investigated my assumptions above or Josh’s discussion below, but assuming it’s true, here is another issue on which Tea Partiers and members of the Occupy Wall Street Poopstock crowd can agree — certainly, we don’t agree on tactics:

If our country is to work our way out of the deficit/debt crisis, the ideologues on both sides have to be pushed out of the way.  More concerned about remaining “pure” than the consequences, they cling to political philosophies long past when they make matters worse.

One major player on the right, we’re told, is Grover Norquist the author of the “No Tax Pledge.”  Senators and Congressmen are said to fear him, or at least be intimidated by his threats if they break his pledge.

Having worked together in the Reagan Administration, it’s not comforting for me to hear he’s acquired the influence he’s reported to have.  He’s very bright, but he’s the personification of an ideologue.

Recently Grover said, “Anyone who says we have a deficit problem is either a Democrat who wants to raise taxes or a Republican who’s dimwitted and doesn’t understand what he’s talking about.”

Those are the shrill, rigid words of an ideologue.  Anyone who fails his litmus test is dimwitted.  Anyone who thinks there’s a deficit problem doesn’t understand what they’re talking about.  Oh really Grover ?

On tax issues conservatives follow the credo of “starve the beast.”  Translated, it means that if you raise taxes, Congress will simply increase spending to match and the deficit will remain.  It’s easy to prove.

So, it’s smart to draw the line at “No new taxes”….and stick with it.   In the debt limit fight, the Tea Party House Freshmen did just that.   Good for them.

But, they won on that.  Early on, the Democrats agreed to holding tax rates steady.

The problem came when Grover then signaled to raise the bar.  He said “No new taxes” means keeping all tax loopholes.  That’s just stupid.

In 1986, Ronald Reagan passed a tax reform bill that closed loop holes.  There were so many, and they were so large; he also lowered tax rates for everyone else.  The economy soared, and America became the “Great Jobs Machine.”  Revenues rose.

Politically for Reagan, it was a drop kick.  The loop holes he closed were written by the Democrats in the 40 years they held the majority.

What’s trickier today is that many of the loop holes on the chopping block were inserted into the tax code by Republicans after they took over in 1994.

There are too many to list, but for pure outrage the Grand-Daddy of them all may be one you’ve never heard of.  It’s called “carry basis.”   It’s a little goody for Hedge Fund Managers, only it’s not little.

In his first budget, President Obama proposed closing this loophole.  OMB pegged the lost revenues at $17 billion a year, or $170 billion over ten years.  That’s a lot of money from only 4,000 Hedge Funds.

Hedge Fund Managers are paid by a formula called “2 & 20.”   The “2” is a 2% annual fee, just like Mutual Fund managers.  The “20” is 20% of the profits they make their clients on investments.  On the “2” they pay income tax rates of 35%.

But, under “carry basis” they only pay the long term Capital Gains rate of 15% on the “20”, even though it’s not long term and their money’s not at risk.

A Forbes magazine article on Hedge Funds in 2001 said: “Why is this outrageous?  Because the managers share none of the downside.”

The average Hedge Fund in this country made $286 million last year.  These managers aren’t “rich” – as in the guy down the street with a bigger house or nicer car.  And they’re not in the top 1% of all Americans.   They’re in the top one- one hundredth of a percent.  Sebastian Mallaby wrote a book about them titled: “More Money Than God.”   If you can get past the sacrilege, you get the idea.

These people are smarter than me.  I have no problem at all with them making a great deal of money…..none whatsoever.  I have a very big problem knowing they don’t pay income tax on 90% of it.

But, make no mistake; the blame is bi-partisan.  Obama proposed closing it, but Democrat majorities in both houses killed it.

So, who’s worse?  Republicans who grovel before Wall Street with tin cups, or liberal Democrats. They want to raise taxes on anyone making over $250,000.00 a year, but leave those making a thousand times that much immune from the income tax altogether.  Can you spell “hypocrite”?  They’ve all got tin cups.

These people contribute so much money that in our public discourse “carry basis” has become the tax code equivalent of “He who must not be named.”  Both sides want the other to object first, so they can make a beeline to Wall Street.  Can you spell “corrupt”?

Warren Buffet made a veiled reference to this in a piece he wrote in the August 14th New York Times titled “Stop Coddling the Super-Rich”.  He said his tax rate is only 17%, but added, “If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine.”

This is what he’s referring to: Hedge Fund managers and their “carry basis.”  Warren Buffett was writing to insiders though.  Not even he would call it by its name.

Grover Norquist may think it’s his place to tell “the Republican base” what it is to be a true conservative.  But, he does not speak for me.  When I first got “into” politics, the top marginal tax rate was 90%.  That’s not taxation; it’s confiscation.

I am still a conservative, but my conservatism stops at Americanism.  Only an aristocracy protects a privileged class through law.  Doing it through the tax code works as well as any other.  It’s just less obvious.

Mine is a small voice in the “Republican base,” but exempting Hedge Fund Managers from the income tax is an abomination, pure and simple.

The Tea Party summons us all to the American “Spirit of 1776.”  The Grover Norquits of the world may call what I’m saying “class warfare” but I believe it’s what our forefathers fought to free us from.  (And if they’re not careful, they’ll rekindle the French “Spirit of 1789”.)

What really spikes my blood pressure, though, is when he invokes the name of Ronald Reagan.  The President we both worked for was a decent man.  On his first day in office, he would have put “carry basis” on the tax code junk heap ….no matter who wrote it.

Josh Bill

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