Megan McArdle on "Washington Issues"

I thought this was a pretty good observation:

Why then, do so many people know about the tax treatment of carried interest? Because it is the epitome of a Washington Issue. A Washington Issue is something that sounds terrible, has little meaningful impact on more than a handful of people, and most importantly, allows you to pretend that you are addressing a different, very difficult issue that would impact a large number of people if you actually tried to make meaningful change -- people who might get angry and do something rash, such as voting for your opponent.

The carried interest issue is thus a convenient way for Democrats making stump speeches to claim that they’re really going to do something about inequality and cronyism, and maybe fund some important new spending on hard-working American families. With the entrance of Jeb Bush and Donald Trump into the arena, it is also a way for Republicans to seem tough on rich special interests while simultaneously proposing tax plans that will help affluent Americans hold on to a lot more of their income and wealth.

As with most Washington Issues, my actual level of concern about carried-interest taxation hovers somewhere between “neighbor’s bathroom grout drama” and “Menudo reunion tour.” Nonetheless, I’m beginning to wish that Congress would get rid of it without demanding anything in return, just to force politicians to talk about something that actually matters.

My tax proposal, as a reminder:

1.  Eliminate all deductions in the individual income tax code

2.  Eliminate the corporate income tax.

3.  Tax capital gains and dividends as regular income.

4.  Eliminate the death tax as well as the write-up of asset values at death


  1. Daniel Nylen:

    flat rate or not? Does this include SS and medicare? Big issues. Most of the not super rich really don't want to pay more than 25% of their gross income (14% medicare and SS plus 11% income tax). At the median household income- that quite a bite of $55K or so. Those of us who aren't super rich, but work long hard hours to get more for our families and future don't want to get screwed for the non-working poor when we make more than the median.

  2. Roy_Lofquist:

    Modern politics - Oh look! A squirrel!

  3. Guest:

    I guess we can call the launch a Washington issue too, since it's estimated to have cost less[1] than carried-interest exemption[2] and was a one-time expense?

    Agreed that there's always bigger fish to fry, but I can't recall any other time you've defended a Democrat-backed expense on the grounds that it's too small to matter....


  4. Matthew Slyfield:

    You8r comment is deceptive. I see little to no evidence that politics was ever, even in ancient times anything other than "Oh look! A squirrel!"

  5. Dave Boz:

    How about taxing every penny of income at the same rate? Why stop at capital gains and dividends? I say everything should be taxed, then we don't have to worry about who gets exempted. This includes pensions, municipal interest, social security - everything. Have an income exemption if you want, but after that it doesn't matter how you choose to make your money. Want to make money by selling stocks, houses, cars, your body, your integrity (politicians)? Doesn't matter, we all pay. "We're all in this together!"

  6. vikingvista:

    The least bad tax is the tax that is easiest and safest to avoid. And the fewer overall taxes that are collected, the better off almost everyone is. That's right--you really do tend to be better off if a billionaire spends his own money than if Nancy Pelosi spends his money.

    But since the US tax code is unlikely to shift back into tariffs (which foreigners can avoid by changing trading partners), the simplest change to improve the general welfare would not be to wipe out all deductions (although reducing complexity and cronyism is good, even if politically difficult). A simpler and easier beneficial change would be to extend tax deductions on *all* forms of savings to 100%, effectively creating a consumption-only tax system.

    I used to think an alternative maximum tax would be a simple protection, but then I realized that most voters would have no problem seeing "the rich" pay an effective tax rate equal to their current top marginal rate.

  7. Cardin Drake:

    Taxing capital gains as regular income allows the government to profit from inflation even more than they already do. It's very dangerous without indexing. It would be a huge loophole to allow the government to create inflation for the purpose of confiscating wealth.

  8. vikingvista:

    "How about taxing every penny of income at the same rate?"

    One reason is that too many people take the legal fiction of a corporation as an autonomous taxable entity too literally. If you own a business, you use part of those business revenues to pay yourself wages or dividends, upon which you pay an income tax. Why on top of that income tax should you also have to pay an additional tax--the corporate income tax--which isn't your or anybody else's income (though it surely reduces the incomes of you and your employees)?

    Another reason is that of all the ways in which money flows, why would you single out income (as opposed to consumption or savings) to be taxed? For that matter, why choose to tax a flow at all?

    Another reason is that the fiduciary cost of a tax tends to be paid by all market actors to an extent that is independent of who the direct target of the tax is.

    It is the inseparable nature of any tax, that it cannot possibly be fair (just as a mugging is never fair no matter how many or severe the victims). So, if you are going to impose a tax, you need considerations other than fairness. Efficiency and civil rights might be two such considerations.

  9. vikingvista:

    What amazes me is that there are people who hold TIPS not in tax deferred accounts, thereby paying a tax on the inflation adjustment. I mean, instead of buying the TIPS, why not just mail the Treasury a donation?

  10. Richard Harrington:

    This may just be a "milker bill" ( a proposed political change with the goal of increasing lobbying. I don't know if the original Clinton (Bill) healthcare plan was intended as a milker, but that was the effect. The healthcare industry now spends tons of money on politicians. Same thing happened to Microsoft - before the anti-trust lawsuits very little Microsoft money went into politicians rapacious pockets.

  11. Roy_Lofquist:

    You are, of course, correct.

  12. mx:

    The issue is that straight consumption taxes are horribly unprogressive. Someone living paycheck to paycheck spends, by definition, 100% of their monthly income on goods and services. Meanwhile, the guy sitting on a couple million in assets can grow his nest egg tax free and is only taxed when he wants to buy a boat. Efforts to smooth this out can quickly become overly complicated and still don't generally do enough to make up the difference. Also, the consumption tax rate has to be quite high to make up the revenue difference, which gets retail and small businesses screaming.

  13. vikingvista:

    "straight consumption taxes are horribly unprogressive"

    Consumption taxes are progressive. You see now, and you would see under consumption-only taxes, that wealthier people consume more regardless of the cost of government services that they consume. You must mean that consumption taxes are not as progressive as you or the electorate would like them to be.

    But it doesn't matter anyway, as far as tax burden goes. Even for people who can't comprehend tax incidence, it should be pretty clear that deducting all savings has no effect on how progressive the income tax rates are. I.e., deducting all savings turns a highly progressive income tax into a highly progressive consumption tax.

    Furthermore, in America, savings are not a luxury, but rather something that almost everyone accumulates over their lives. Deducting all savings would only encourage more of this. The result would be not just more intensive capital formation and productivity growth (the reason many economists prefer consumption taxes), but also growing independence from government transfer programs.

    Voters may balk at the increase in income tax rates that would be needed for revenue neutral tax change using fixed revenue projections. But voters at those lofty highest marginal rates who bothered to look at their own circumstances would quickly see that their own tax burdens would be unchanged if they simply transferred more income from consumption to savings.

    Additionally, people who currently have highly variable incomes (i.e. entrepreneurs) wind up paying more taxes than a steady corporate employee with the same lifetime earnings, since entrepreneurs often earn next to nothing until they have a single big payday their whole lives, most of which gets taxed at the highest marginal rate. Deducting savings corrects that terrible disincentive (and gift to big corporations).

  14. mlhouse:

    Carried interest is bullshit though. The fees that a hedge fund charges their clients out of the capital gains are not capital gains. The hedge fund did not risk their own capital to obtain the gain, their clients did. That they can get away with claiming it is capital gains is because they are protected by powerful DEMOCRATIC US Senators.

    Why everyone believes Wall St. is Republican baffles me to this day.

  15. bigmaq1980:

    That all may be true, but it is but one (smallish) example of how government gets captured by special interest groups to bequeath special privileges.

    The whole discussion, as McArdle states, is a pretend issue which serves a diversion from real issues while simultaneously making those who rail against it look to be fighting for the "little guy".

  16. me:

    One more for your list of proposals: restrict taxes to exclusively income, period (no more inheritance/capital gains/exit taxes etc).

  17. bigmaq1980:

    Consumption (sales, goods and services, value added) tax is preferable, in its simplicity and visibility.

    It also has the advantage of some libertarian justification. That is, one could argue that unless this tax is paid upon a transaction/trade, there is no enforceable contract that will be recognized by the courts.

    This will certainly add to revenue between simplicity and recognized contract.

    Want to sue a manufacturer for selling a faulty product that causes harm, but you bought it off of eBay or Amazon from a seller who doesn't collect consumption tax. Our condolences, good luck!

  18. Dallas CPA:

    fyi -
    The typical hedge runs on a 1/10 or 2/20 fee structure. The base fees are the 1%-2%, The carried interest is the 10 & 20 of the 1/10 & 2/20 which is the % of profits in excess of a certain amount.
    A) The fees the Hedge fund charges come through as ordinary income
    B) The profits from the carried interest (10/20% profit) can be both capital gain and ordinary income. The character of the income the carried interest income depends on the character of the hedge funds income. gains only flow through as capital gains if the carried interest generates capital gains. If the underlying income from the carried interest is ordinary income, then that income flows through to the hedge fund managers as ordinary income.

  19. bigmaq1980:

    The issue is not about defending the policy, it is not being side tracked down a rabbit hole on a (relatively) minor issue.

  20. bigmaq1980:

    Oh look, another Trump tweet!

  21. Dallas CPA:

    consumption taxes are both regressive from an income point and very regressive from a generational point. The poor spent a greater portion of their income on necessities than the well to do,
    Likewise young families spent more on necessities as a percent of their income than the middleaged and elderly.

    Two other problems with a consumption tax is the the transition from income to consumption. people who have already purchased homes will get a big break vs new buyers.
    the second problem is what to exempt,. food clothing housing, and if so how much to exempt. There will be significant pressure to start exempting items such that after 10 years, the sale tax/consumption tax code will be just as thick as the current title 26. Then there will still be a income tax filing to provide rebates for those not making enough money. Switching to a consumption tax will only be circle jerking the same thing

  22. vikingvista:

    What is so special about income?

  23. vikingvista:

    "consumption taxes are both regressive from an income point and very regressive from a generational point."

    This is an odd belief. Although it is true that people who die of old age tend to die with some savings, it misses two facts: (1) over their lifetimes almost everyone consumes almost all of their income, and (2) what they don't consume is passed to a younger generation.

    The truth is far different. Low income people currently pay no tax on their incomes. So, if all savings became tax deductible, they STILL would not be paying any taxes. Almost everyone would pay the same in taxes, they just would transfer more consumption into savings.

    The regressive claim just makes no sense.

  24. vikingvista:

    "that unless this tax is paid upon a transaction/trade, there is no enforceable contract that will be recognized by the courts"

    A tax is not offered as an option to buy services. A tax is a unilateral demand to pay, where the payor's choice is not whether to pay, but whether to obey or suffer retribution.

    It is a mistake to look at a tax as having moral justification--aside perhaps from some weak collectivist utilitarian argument.

    In other words, if morality is your concern, then you should never act to enforce any tax. But if there is no action you can take that would have any bearing on the presence of taxation, then perhaps there is an action you can take that will reduce the inherent immorality of it.

  25. morganovich:


    you have this completely wrong.

    it works like every other form of limited partnership in the US. there is absolutely nothing about "carried interest" that is exclusive to hedge funds. they are just a whipping boy. if you form a partnership, your partners put in money and you run it for a share of the equity, you'll be treated EXACTLY the same way.

    this is not a "loophole". it's the basic tax law for all partnerships in the US. you have been sucked in by endless media misrepresentation.

    also note: carried interest only counts as a cap gain if the gains in the fund are long term gains.

    also: the new laws remove all cost basis from the GP's carried interest. as such, they pay a disproportionate share of the tax.

    this makes the effective long term rate more like 30-35%.

    there really is no carried interest tax benefit anymore and i am a hedge fund manager, so trust me, i know.

    my tax rates have effective doubled in the last 4 years. (15 to over 30)

    it's getting to the point where we are either going offshore or we are going to shift the fund structure.

    you cannot "get rid of carried interest". to try would be punitive to hedge funds in a way no other partnership is punished.

    we'd also just route around it.

    instead of taking a 20% carry, we'd structure the fund so that jan 1 each limited gave us an interest free loan of 20% of their assets to be repaid dec 31 with debt forgiveness/auto rollover if the fund loses money.

    this puts us right back to taking the capital gains alongside our limiteds and gives us a cost basis again.

    this makes carried interest legislation useless in addition to being unfair.

    megan nailed this as a "washington issue". it's just noise and the issues underlying at are nothing like you think they are.

    there is no "capture" on carried interest. this is the basic law for all partnerships since before time.

  26. mlhouse:

    Bullshit. If you form a partnership you will have both income and capital gains. I

    But the hedge funds get to count the fees that they capture from their clients gains, usually 20% of the total earnings, as a capital gain. That is what "carried interest" is. While you can blab about how such gains are treated, they are not true capital gains and they should not be treated to any special tax treatment.

    Here is why: the entire justification for favorable tax treatment for capital gains is that this incentizes capital investment versus the risk. It also adjusts long term investment income to inflation. But the hedge fund and any other similar organization that earns this type of fee is not putting their own capital at risk, but someone else. It is ordinary income and should be taxed accordingly.

    On the other hand, if the hedge fund invests its own capital and makes a gain, that gain should be taxed as a capital gain.

    You can talk about what is but this is a change to what it should be.

  27. morganovich:

    "unprogessive" in the sense you mean it is a terrible misnomer.

    if you and i go to burger barn to get a burger and each pay $5 for the same burger, THAT is a flat system.

    if you pay $5 and i pay $10 because i have twice your income, that is NOT a flat system. no one would call it so in any field but taxation which has been taken over by orwell worthy doublespeak.

    a flat tax is incredibly progressive. if i make $50k and you make $500k, you pay 10 times what i do. by what sane definition is that flat? using %'s to determine that is incredibly disingenuous and masks far more than it revels.

    calling a consumption tax "regressive" is just the same.

    if you earn 50k and spend 45 and i earn 500k and spend 315, sure, i pay less tax as a % of my income. but i still pay 7X what you do. calling me paying 7x the price for the same goods (we get the same government) "regressive" is outrageous. it's a preposterous misstatement.

    you have badly misframed this issue

    also: the home issue is an easy one to fix:

    get rid of ALL capital gains taxes. it's the single most harmful tax we have. call a primary residence a capital investment, never tax such things, and be done with it. cap gains are what drive the economy. to be taxed AGAIN on your own money for trying to put it to constructive use is unfair, borders on double taxation, and is severely economically harmful. if you tax something, you get less of it. do we really want less business investment and formation? it's the backbone from which everything else flows. cuts in cap gains in the 80's and early 90's set off an incredibly vibrant economy. the cap gains hikes of recent years have hamstrung us. business formation in the US has been negative for several years. cap gains is the tax that has to go.

    then run a VAT and a basic income tax if you need to. better, add a national property tax. that's what one is paying to protect, right? let's make taxes as user pays as possible.

    fund defense from property tax. fund roads with gasoline, mileage, or vehicle registration. privatize airports etc.

    make all social security individual accounts. handle medicare the same way as a HSA.

    the idea that an income tax is just or needed is simply baseless. it's a TERRIBLE form of tax, and in 15 years will be damn near impossible to impose anyhow as we shift to cryptocurrency. commerce and money will no longer be controlled by or even visible to governments. you cannot tax what you cannot see. we're going to need a new paradigm.

    also: the idea that there can ever be a tax system with no deductions is naive to the point of not understanding taxes.

    businesses all run this way. you tax profits, not revenue and there is no other sane way to do it. so, expenses get deducted.
    if you allow this for business and not for individuals, then everyone will shift their lives to corporate structures. you won;t work for intel, newcorp will. you will be an employee of newcorp, a marketing consultancy. newcorp will own your house etc.

    there are 1000 ways to structure this. business and individual tax rates need to be harmonized or you'll get arbitrage that wastes time and treasure on tax avoidance. (look to the 70's and 80's for some great examples)

    in the end, taxing income (even if it remains possible) is incredibly problematic and inevitably harmful to growth.

    the whole thing has been a terrible experiment whose costs are surreal. had the US never imposed an income tax, how many multiples larger would our economy now be? no way that number is less than 4. stop and consider that. we are 75% poorer than we could be because we made a terrible taxation choice. worse, this choice that basically makes the top 20% pay all effective federal taxes in the US (yes, really. net out federal transfers and this is plain as day even including FICA etc) not only consistently siphons resources from the most productive to give to the least, but it also gives rise to full blown kleptocracy and monstrous, out of control government bloat and deficit spending.

    if 80% know that all the new debt and all the new spending will be paid for by someone else, of course they vote for it. democracy cannot withstand such a process indefinitely.

  28. Dallas CPA:

    MLhouse - But the hedge funds get to count the fees that they capture from their clients gains, usually 20% of the total earnings, as a capital gain. That is what "carried interest" is.

    You have had a hedge fund manager/employee and a CPA explain the actual tax treatment of the carried interest and why only a portion of such carried interest income can be capital gain, yet you seem to persistent in repeating talking points. The income from the carried interest is only long term capital gain to the extent the hedge fund generates long term capital gain income. Short term capital gain income has very little incremental value in the overall scheme of taxation. Bear in mind, many of the hedge funds have made the 475 election and therefore will have very little if any capital gains.

    hope that clarifies some of the common and repeated talking points

  29. Craig Loehle:

    The reason everyone wants to tax corporations is because it seems free. But not only does it inhibit job growth and employment, but the effort companies spend for tax compliance is huge. The tax code also leads to companies doing things they normally wouldn't do that are not good business. Eliminating this drag on corporate productivity could restart growth in the economy big time.

  30. mlhouse:

    I don't care if the King of Spain tells me HOW CARRIED INTEREST IS CURRENTLY TAXED. I don't care and you are just obfuscating what I said. I will l repeat again.

    When a hedge fund reaps income from the capital gains of their clients it is NOT a capital gain. And is should not be treated as such. They did not have their own capital at risk only their clients. There is not justification for any favorable tax treatment.

    This is one issue I agree with The Donald on. The favorable tax treatment of "carried interest" must end. Of course, as I also stated, it is protected by powerful US Senators and since it is one of the big cash cows for Democratic politicians (and many GOP ones too) it will continued to be protected.

  31. Dallas CPA:

    MlHouse - I don't care if the King of Spain tells me HOW CARRIED INTEREST IS CURRENTLY TAXED. I don't care and you are just obfuscating what I said. I will l repeat again.

    So you are going to form your opinion based on information provided by someone with no knowledge of the subject matter and ignore the information provided by two individuals with relevant knowledge of the subject matter.

  32. mlhouse:

    Again, I don't know if you are just trying to be obtuse or are just plain stupid. I don not care how carried interest is treated today. I don't care how a hedge fund structures itself. Carried interest is ordinary income in all cases for the hedge fund. It should be taxed as such.

    You can keep blabbing about how you have "relevant" knowledge but you really do not. This is a policy discussion, not a tax seminar.

  33. morganovich:


    um, no. you have no idea what you are talking about. dude, i AM a hedge fund manager. trust me, i know how the taxes work.

    we do not automatically get to count all of our 20% carry as a long term gain. i have no idea where you got that idea, but it's completely wrong. we pay taxes just like our limited partners. if the gains are short term, we pay regualr income tax. if they are long term, we pay capital gains.

    we are treated just like every other member in the partnership with one difference: we have to pay more. the LP's get the cost basis of the investments to use vs sale price. we do not. we are not advantaged, we're penalized.

    they are, indeed, capital gains. you literally have no idea what you are babbling about.

    we get 20% of the profits. those profits are gains, some ST, some LT. this is absolutely no different than a partnership founder having 20% of the firm because he works there and creates the value and the investors having 80% because they put up the money.

    it's the EXACT GODDAM SAME THING. if you are too utterly ignorant of basic tax and partnership law to know that, then i would avoid commenting on this topic in the future. you're making a fool of yourself.

  34. morganovich:


    repeating the same ignorant nonsense over and over will not make it any more true, it will just make you look progressively stupider.

    what you call "carried interest" is exactly the same as "management interest" at every partnership in the US. there is no special treatment. lots and lots of guys get sweat equity for doing the work. someone puts up the money, someone does the work and creates the value, they split the partnership.

    you are asking for punitive treatment for hedge funds (and also clearly have no idea how partnership income or carried interest work as it is NOT all LT gains. see above..)

    becoming louder, ruder, and more emphatic is just making you look like a buffoon.

    it's obvious you have no grasp of how any of this works and just want to tax guys you don't like because they are richer than you.

  35. morganovich:


    that is correct save for one thing" most hedge funds are 1 and 20. some are 2 and 20, but it's less common. that structure is more common for VC's.

  36. morganovich:

    actually daniel, about 70-75% of americans would, net after transfers, get screwed by paying any taxes at all.

    this is straight from the CBO:

    after transfers, it's really only the top 20% who pay any meaningful taxes. the 4th quintile pay $700 a year per household. you can bet that's all paid by the top quarter of that quintile. (note: this includes ALL taxes including fica)

    full disclosure, i helped mark put that piece together.

    this is both why americans love taxes (most don't pay them) and why the top payers feel so put upon by the majority who keep voting themselves more and more of their money.

    the US already has the most progressive tax system in the entire oecd yet "the rich are not paying their share" is the endless mantra.

    the oecd average for the ratio of % oftaxes paid to % of income earned by the top 10% is 1.11.

    the us is 1.35.

    i'm sorry you feel like paying taxes is a real bite, but the fact is that the middle class has not been paying any net taxes in the US for a long time and the entire burden has been placed on the top 20%.

    this is a significant part of why the us economy grows so poorly these days.

    the answer is always "make the rich pay more". this is what hamstrings investment and that is what hamstrings growth.

  37. morganovich:

    oh, come now. that's a bit unfair. sometimes they yell "look, a monster! quick, give us a budget to kill it/get it affordable housing and health coverage/study the effects of affirmative action on tentacled horrors"

  38. mlhouse:

    Again, you are just being a prick arguing some issue that isn't even fn relevant.

    I DONT FUCKING CARE WHAT THE STRUCTURE OF THE HEDGE FUND IS. IF you charge your client 20% of their gain it SHOULD BE considered ordinary income. 100% of it. I am not claiming the in today's policy world it is. But it should be. IT IS REALLY ORDINARY INCOME TO THE HEDGE FUND. The 80% gain that your client gets to keep is a capital gain, ST or LT, to them. And that is a reasonable way to tax their gains when their capital was at risk.

    But the hedge fund or any other partnership that earns revenues from a stream like this, that is a "percentage of gain" from someone else's capital, is not facing the risk of capital that justifies the preferential treatment of a capital gain.

    You keep telling me how it works. I DONT FN CARE. I am telling you how it should be changed. You can have your own opinion, I really don't care. The tax code should be changed to treat "carried interest" or "performance fees" as ordinary income while any investment gains made from the firm's own capital would be subject to ST or LT capital gains taxes on those, disaggregated income streams.

    For example. the clients of Mitt Romney at Bain Capital invest $100 million in some buyout with the principal partners at Bain investing $10 million of their own capital. If the investment returned $110 million, Bain would charge their investors a perfromance fee of $20 million which would be treated as ordinary income and the would pay cap gains on the $10 million gain from their own capital.

    While I understand this is not HOW IT WORKS, this is one policy that I support The Donald on. There is no justification whatsoever to treat carried interest as a capital gain.

  39. mlhouse:

    It isn't ignorant one iota dumbass. It is a legitimate policy issue. The estimates of the value of the tax benefits for carried interest are about $15 billion per year. You can talk about "sweat equity" but the secretary of the firm calls that "work" and her income is treated as ordinary w-2 income.

    While I do not wish for any tax rate to be "punitive" at the same time the fact that hedge fund managers and similar types of partnerships like private equity get favorable tax benefits, disguising their income as capital gains, cannot be justified.

  40. morganovich:

    uh, it is mlhouse.

    you're just an ignorant blowhard.

    every partnership in the US is treated this way.

    the secretary gets paid a salary. that salary is defined and paid based on doing a job, not for performance.

    you are comparing apples to oranges and mistaking an employment contract with a set payout to a share in a partnership that has variable payout and risk of no payout at all.

    if a partnership is set up to create income, the partners get income according to their % ownership.

    the nature of that income determines how it is taxed. if a partnership creates long term gains (say from investing in or renovating homes), that is what the partners pay. when any partnership disposes of assets, the same is true. if your partnership builds a factory then one day sells it (or sells an interest in it) the partners pay a long term capital gain.

    literally EVERY partnership is treated this way. the partners face this regardless of how much they paid in, they face it based on what % they own.

    you very literally have no idea what you are talking about. the entire freaking country works this way. the same is true of corporations. if intel sells a fab and makes a profit, that's along term gain. if they were an S corp and it all got passed to the shareholders, then the shareholders would pay the capital gains and, again, they would pay them based on share ownership, not capital contribution. the CEO who got sweat equity would be treated just like a guy who bought the same number of shares.

    seriously, do you have even the rudiments of any business experience?

    you have no idea how any of this works.

    HF manager are treated just like any other form of sweat equity, be it corporate or partnership.

    you are trying to establish them as a special class because you do not like them. you are just too ignorant to know it.

    go find someone who has actually every done any sort of business and run a corporation or a partnership (or done their taxes) and get them to explain this to you.

    then stop embarrassing yourself. ignorant is bad enough, but ignorant and vehemently loud? it's a bad combo. one day, you'll get this and realize how stupid you look right now.

  41. mlhouse:

    Yes, I do know what I am talking about. It isn't that complicated. You can have your own opinion on how such earnings should be taxed. I have mine. It bothers me that I share that opinion with Donald Trump.

    Regardless lets look at your example. If YOU create a partnership that invests in real estate and you contribute x% of the capital of that partnership you would have two potential revenue streams. The first revenue stream would be any income derived from the investment: rents, fees. The second would be any realized gains you made from liquidating any capital assets. You would pay capital gains taxes on any of those gains. And that is justified because the capital gains were made with your own capital at risk.

    With hedge fund management fees it is different. The fee is based upon taking a percentage of the gains made from other people's capital. There is no justification to treat these earnings as anything other than ordinary income.

    So, you can continue to talk about "go find someone to explain this to you" all you want. I don't care how such income is treated TODAY. I think that the current rules should BE FN CHANGED. Further, you can claim that carried interest isn't that big of a deal, but it has significant revenue impacts.

    Again, you can bloviate all you want on how it is currently taxed. I don't care. I understand how the system gives this preferential treatment. But that should change and many other people agree.

  42. morganovich:

    i keep trying to explain this to you because your opinion is based on nonsense. it's clear you do not understand nor want to. you just hate a group because they are richer and smarter than you are. you are trying to treat hedge funds differently that every other partnership entity. that is prejudice.

    if the general partner owns 20% of a partnership and the partnership generates long term gains, what, they magically become short term because you dislike hedge fund managers? we're going to create a whole new way to punitively treat partnership interests because you and some other populists dislike rich people?

    if you are going to start making anyone who has a partnership interest or % ownership (including equity) based on working as though and capital gains by the underlying entity are ordinary income for them, then you'll have to re write the entire tax code.

    what's more, you'll be acting in an utterly unjust and bigoted fashion. (hardly surprising given what an unstable moron you clearly are)

    you are singling out a group for predatory treatment. you are trying to make them pay taxes in a way no one else does. equal treatment before the law is a fundamental bedrock notion in a rights based republic.

    if you own 20% of a house because i bought it and hired you to provide the labor to renovate it then we sell it, you paid nothing in but work. but guess what? you get a long term gain.

    that is reasonable and just, it was a long term project and you took risk and added effort.

    you own a part of thing. thus, you are treated just like the other owners.

    only an utter financial illiterate or someone with absolutely no sense of fairness would claim otherwise.

    alas, it appears you are both.

    good luck with your laughable political crusade.

    1. it'll never happen, because it can't without hitting the whole tax code.
    2. if it does, i'll change the structure of the fund and have worked around it in a matter of weeks. (it would be trivially easy) it'll actually wind up better for me that way as i'll get my cost basis back for tax purposes by substituting a loan from LP's for GP % ownership. then it IS my capital.
    3. or, i'll just move. this is likely going to happen anyhow. elections have consequences. we're likely moving to peurto rico next year. this means we will pay NO us feder4al income taxes at all. there's quite a hedge fund community getting set up down there. you should see what paulson is putting into condado real estate.

    so, squall and wail all you want. your foolish, impractical, and unjust proposals cannot be put into force in any fashion that would work for more than about 3 weeks.

    you are what is referred to as a "useful idiot". you get all riled up about a non issue that you do not really understand and wind up supporting someone politically over it.

    good luck with that. i have strong doubts it'll work out well for you.

  43. morganovich:

    " I understand how the system gives this preferential treatment."

    no, you don't. fund managers get treated less well than those who run most partnerships, not better. it's already punitive, not preferential.

    basically, your whole argument is just you standing on a chair yelling "they need to be taxed more!" over and over without every actually justifying it either by an appeal to consistency or any real appeal to justice.

    a just system treats people equally, yet you push for unequal treatment.

    the great irony here is the basis of your argument is that you are basically arguing that money is the only form of investment that should be treated well and that labor is not. that's an odd argument for such a populist notion.

    i'll chalk that up you having not the slightest idea what you are talking about.

    the fact that you even thing it would be possible to pass this law and have it work alone proves you are not well enough versed in taxes and partnership structure to speak on these issues.

    the whole industry would change structure and get around a "carried interest tax" in a couple weeks.

    why would you bother passing a law that would never have any effect?

    that is the action of an idiot or a zealot.

    shall i put you down as both?

  44. mlhouse:

    1. My guess is that I earn as much or more than you do so I am a rich person myself, and I am not a liberal. I agree with you that income tax rates are too high but if I pay 39.6% plus then so should the "hedge fund' manager on their performance fee. Further, I am certain I am much better educated than you are.

    2. And, your house building example readily identifies the problem. The 20% ownership (picked for the appropriate reason) is just a construct that helps the hedge fund avoid paying taxes on the revenues that they generate in fees. Maybe in your house building analogy the person who does "the sweat equity" doesn't understand how that is being used to avoid taxation. In other words, if you hire someone to do labor but do not pay them they are avoiding taxes on their labor. The construction guy who works on the crew pays taxes on his work earnings and it is the same labor. The other aspect of why I do not believe that such an individual should be able to take their earnings as cap gains is that they have nothing at risk. If the building depreciates in value they are not out any of their capital. Whether some or all of these types of earnings are treated as capital gains or not, there isn't any justification for such preferences.

    3. But the hedge funds are much more sophisticated and they know exactly what and why they are setting up the structure they do. I would eliminate the tax preferences of such practices.

    4. Work arounds are the American way. That is the problem with high tax rates. People with money, like myself, can change the time and place of their earnings, or the structure of such. That is a factor that liberals cannot ever understand and why lower rates generally create more tax revenues.

    5. You are really off when you claim I support Donald Trump. I agree with him on this issue and his tax plan in general. I also support his reparation plan as well as prohibiting US companies from employing offshore tax havens. But the obvious way of doing this is to lower or eliminate US corporate taxes.

  45. Dallas CPA:

    I concur - just trying to educate mlhouse with some basic concepts.

    As you have observed, providing basic concepts to for the purpose of dispelling some misconceptions with mlhouse has become a waste of time.

  46. mlhouse:

    One last thing, as far as the income of a hedge fund manager, I think it is one of the most honest compensation schemes around. Your clients choose you. You invest their money. You take an agreed upon percentage of what benefit you provide them.

    I just do not think it is taxed properly.

  47. Ron H.:

    " And, your house building example readily identifies the problem."

    In other words I can't work for partial ownership in something? I can't agree to build a boat for my neighbor using materials he supplies and be 1/2 owner when it's finished?

    Avoiding paying taxes in any way they can is probably one of the most patriotic things a person can do.

    Your view on taxation seems to be "If I gotta pay, everybody's gotta pay".

    If you and another person were approached by an armed robber demanding money but only took money from you, would you insist that in fairness, the thief should take the same amount from the other person also?

  48. Daniel Nylen:

    Sounds like you agree. Ignoring the insults, your point is that most of the burden is on the top 20%, once the forced savings/progressive time shifting of FICA/Medicare is taken into account. My point is for acceptance, politicians must understand that although SS and medicare are forced savings that are very progressive, they are still a bite from many paychecks and the % from the paychecks are sensitive to those in the bottom 80% (to use your number).

    This point is two-fold. First is my implied supposition that there is a max amount that those who work will allow out of paychecks without significant blowback. Any changes that increase the % out of paychecks, even if it is paid back years later needs buy in that currently doesn't exist. I believe there was a few dem-repub debates on this a couple of decades ago (TK saying if 35% bite from blue collar paycheck is too much?) So yes how much would working man allow out of his paycheck is a big point, especially if his main bite now is really a forced savings account with huge interests rates in his favor. Second point, this sensitivity goes even more for those who are well above median and work the long hours and can adjust their work/risk according to taxes.

    So, somehow we have convinced the to 20% of incomes (your number), that it is their burden to pay most of the taxes in return for their providence. I think that this % is really somewhere a bit higher, 10 to 5%, but haven't seen a good cohort-based analysis of the numbers. This has become very sensitive because the those that earn in the top likely understand the time shift/forced savings of FICA/Medicare on the bottom 80%. Trying to adjust this scheme has great risks because there is not buy in from that 80% who ride on the rest, and neither is their buy-in from the top wants some relief, or at least no large increases. So where the plans changes is important in the details

  49. CapitalHawk:

    Explain how your list of exclusions are NOT income.

  50. Matthew Slyfield:

    In this context, "monster" is just a specialized type of squirrel.