Senate Democrats, in order to raise revenues “for a variety of must-do tax break extensions,” are reportedly looking, once again, at ending a senseless tax break for hedge fund managers. Both the Obama administration and the House of Representatives have embraced the change, but it has yet to make its way through the Senate, in part due to the intense lobbying of the hedge funds’ lobbyists.
Today, Sen. Chuck Grassley (R-IA), the ranking member of the Senate Finance Committee, dared Senate Democrats to follow through and actually adopt the change, essentially asserting that they don’t have the stomach:
Senate Finance ranking member Chuck Grassley said he didn’t think Democrats would let things get that far. “The House first voted to change the taxation of carried interest almost two-and-a-half years ago, and has passed legislation three times,” Grassley said. “Senate Democrats must have concerns, since the Senate hasn’t adopted the change in that timeframe. So the policy appears to be controversial with Senate Democrats.”
Senate Democrats should do their best to prove Grassley wrong, as this tax break is nothing more than a gift to the super-rich.
At stake is a provision of the tax code pertaining to “carried interest.” Hedge fund managers are typically paid in a couple of ways: a set fee and then a percentage of the fund’s profits. Currently, the second part — the carried interest — is subject to the capital gains tax rate of 15 percent, which is far below the top income tax rate of 35 percent.
We have a lower tax rate on capital gains because people earn capital gains from investing their own money. To encourage some risk taking, and thus more investing, we’ve decided that profits from such investments are subject to a lower tax rate. But hedge fund managers are not investing their own money. They’re managing other people’s money. Yet, for tax purposes, we treat their income as if it was their own money at risk.
Of course, making the change means overcoming a heavy dose of spending and lobbying. As Politico noted today, “the nation’s 10 richest hedge fund managers have dumped nearly $1 million into campaign accounts over the past several years — with much of it going to senators who’ve given them a friendly reception on Capitol Hill.” This is a drop in the bucket for this industry, as the top 25 hedge fund managers last year made a combined $25.3 billion (yes, billion with a b). The smallest payout amongst those was $350 million.