Hedge Funder John Paulson Earns More Hourly Than Most Americans Do In A Lifetime And Pays A Lower Tax Rate

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As ThinkProgress has previously noted, necessary services and public investments in Main Street America are being gutted as some of the wealthiest Americans are getting away with paying less in taxes than they have in a generation.

Progressive activist and former Texas agricultural commissioner Jim Hightower notes one particularly egregious exammple of this unfair economic arrangement: the case of hedge fund billionaire John Paulson. Hightower writes that an American who earned $50,000 a year for 47 years would earn $2.4 million, which would be a healthy sum. Yet Paulson earns that much in an hour:

If your job paid $50,000 a year and you stayed at it for 47 years, your tally for a lifetime of work would be $2.4 million. Not bad — but hedge fund hustler John Paulson pulled down that much last year.

Most of us would consider an annual income of $2.4 million to be a windfall, but it didn’t take Paulson a full 12 months of work to pocket his windfall — or one month, a week, or even a day. That’s how much he made an hour. Yes, Paulson could’ve worked one single hour in 2010 and hauled off a paycheck equal to what a typical household gets for a lifetime of work.

Hightower goes on to note that not only does Paulson earn such wild compensation, but that he actually pays a lower effective income tax rate — 15 percent — than the average American, whose effective rate in 2007 was 20.4 percent.

The reason Paulson is able to pay so little in taxes compared to the average American is because of what’s known as the “hedge fund loophole.” People who work for hedge funds are allowed to classify income that they’ve gained from investing other people’s money as capital gains rather than normal income. These capital gains are then taxed at an ultra-low rate of 15 percent, rather than the normal rate that such income would be taxed at — 35 percent. MoveOn demonstrates this tax disparity with the following graph:

Economist Robert Reich estimates that closing the hedge fund loophole could raise as much as $20 billion a year in revenue. The Senate last year made a brief attempt to narrow the loophole, but its efforts were beaten back by the industry. (HT: @matthewstoller)