Both the Obama administration’s budget and a bill passed last month by the House alter a nonsensical portion of the tax code that allows hedge fund and private-equity managers to pay taxes a far lower rate than other workers. The change will be taken up by the Senate when it reconvenes on Jan. 20th, and in the meantime, lobbying groups are “girding for a fight”:

Lobbyists have issued statements aimed at heading off a tax increase, arguing that it would stifle risk-taking by shrinking potential rewards for fund managers. “Private equity will endure, but the draconian tax hike, if enacted, will unquestionably slow the flow of capital to companies struggling to get back on their feet during this very fragile economic recovery,” said Doug Lowenstein, president of the Private Equity Council, a trade group.

At stake here is a provision of the tax code pertaining to “carried interest.” Hedge fund and private equity managers are typically paid in two ways: a set fee and then a percentage of the proceeds should the fund make a profit. Under current law, the latter portion — the carried interest — is subject to the capital gains rate of 15 percent, far below the top income tax rate of 35 percent. (Considering that top hedge fund managers make $657 million per year, I’m going to go ahead and put them all in the top income tax bracket.)

This makes absolutely zero sense. We have a lower capital gains rate because people earn capital gains from investing their own money. To encourage some risk taking, we’ve decided that profits from such investments, should they materialize, are subject to a lower tax rate.

But hedge fund and private equity managers are not investing their own money. They’re merely managing other people’s money. Why is the income they collect, when they are paid by the actual risk-takers, taxed at a lower rate? Yes, they make a percentage based on their success as a manager, but plenty of people earn money based on performance and still pay the normal income tax rate. Office of Management and Budget Director Peter Orszag made this point:

A wide range of performance based compensation, including arrangements in which service providers accept the entirety of the risk of the success or failure of the enterprise, is effectively labor income and taxed as ordinary income for services. Contingent fees based on movie revenue for actors, for example, are taxed as ordinary income, as are performance bonuses, most stock options, and restricted stock grants.

A proposal that movie stars pay a lower tax on their portion of a film’s revenue would rightly be regarded as nuts. But that’s exactly how we treat the income that hedge fund managers make, even though they just show up to work every day like any other worker. As the Boston Globe wrote in a recent editorial, “hedge fund managers and private equity partners are merely beating the system when they pay lower tax rates than their own secretaries and janitors.”

“It’s amazing to me that at the same time the U.K. is imposing a 50% excise tax on bankers’ bonuses, the private-equity guys aren’t even willing to pay the usual ordinary income rate,” University of Colorado tax law professor Victor Fleischer said. “You would think they would recognize a fair deal when it’s offered.” The Senate should ensure that this fair deal ultimately becomes law.

As Federal Reserve Chairman Ben Bernanke has been winding his way toward a confirmation vote on his reappointment, he has come under fire for his apparent willingness to “ignore, more or less, the fact that the unemployment rate in America is at 10% and is unlikely to return to normal levels for at least a half decade.”

Bernanke has said that lingering unemployment is “the most difficult problem that we face right now,” and he has also acknowledged that the Fed could undertake more quantitative easing, which former Federal Reserve staffer Joe Gagnon has estimated could bring the unemployment rate down by one to three points. But still, Bernanke is sitting on his hands.

According to the minutes of its latest meeting — which were released yesterday — the rest of the Federal Reserve board has similar expectations regarding the labor market:

The weakness in labor markets continued to be an important concern to meeting participants, who generally expected unemployment to remain elevated for quite some time…Moreover, the unusually large fraction of those individuals with jobs who were working part time for economic reasons, as well as the uncommonly low level of the average workweek, pointed to only a gradual decline in unemployment as the economic recovery proceeded.

But not all members are content to dither, as “a few” said that the Fed might need to “to provide more policy stimulus.” (Fed minutes do not reveal which member made a particular comment.) “On one side are FOMC members who are more worried about the high unemployment rate and less worried about inflation,” wrote Augustine Faucher, an analyst at Moody’s Economy.com. “They look at all of the excess capacity in the economy and state that this will keep inflation under control.”

Via Yglesias, Scott Sumner pointed out that Bernanke used to believe that the central bank can take action to boost growth, and even recommended that Japan take such action during the 1990′s. Now though, he isn’t advocating a similar course — even though there are members of his own board that feel it’s appropriate.

Bernanke has yet to explain his particular reasoning on this, and the one congressman who pressed him on it received a less than satisfactory response. But Bernanke has the tools available to mitigate the effects of extended high unemployment, and he needs to say why he’s hesitant to use them.