The House of Representatives is currently working its way through a bill that extends several popular business tax credits as well as important social safety net provisions like unemployment insurance. But of course, these things cost money, and the bill’s authors — led by Sens. Max Baucus (D-MT) and Rep. Sander Levin (D-MI) — have come up with a series of offsets to partially cover the bill’s cost.
One of these is a change in the taxation of carried interest, or the payment that hedge fund and private equity managers receive for successfully managing other people’s money. Currently, these managers are inexplicably allowed to pay the capital gains rate (which is meant to encourage investment) on money that they receive in exchange for providing a service. It’s as if we taxed the proceeds of a movie that go to its lead actor as capital gains instead of income. Levin and Baucus have suggested that their pay be subject to normal income tax rates.
Of course, CNBC’s talking heads — who never miss an opportunity to defend the right of the wealthy to use tax havens or the sanctity of bonuses for bailed out bankers — are going nuts about the tax increase, led by devout supply-side devotee Larry Kudlow. They’re calling it “one of the five dumbest things in the history of the Earth,” a “job killer,” “mind boggling,” “patently unfair,” and the result of “left-wing social policy.” Watch a compilation:
What’s actually mind boggling is that CNBC’s cast of pundits and anchors thinks it’s entirely appropriate for both a janitor and a hedge fund manager to receive a paycheck, yet have the former be subject to income tax rates and the latter subject to the lower capital gains rate. As Citizens for Tax Justice explained:
The preferential income tax rate for capital gains was created to benefit those who invest their own money. The partnership income that investment managers earn is clearly compensation for services and not a return on investment (except to the extent that they actually have put up their own money — and the treatment of that won’t change). They should pay income taxes at ordinary rates on their compensation, just like everyone else, from the folks who sweep their floors or answer their phones to CEO’s exercising stock options and professional athletes getting playoff bonuses.
CNBC’s gang deploys a lot of rhetoric about innovation and job creation being smothered by the tax, but let’s be clear — investors will not see their taxes go up because of this change. It applies to managers, who are paid to take money from investors and make more money with it. These managers typically receive hundreds of millions — if not billions — annually for their services.
Baucus has said that there’s a “growing sense of inevitability” that the tax change will be adopted and Levin today added that it won’t be taken out of the legislation. “We’ve already worked hard to balance all of the needs, here,” Levin said. “The basic principle is, if it’s your money [at risk] you pay capital gains; if you’re managing other people’s money, essentially you pay ordinary income tax like everybody else.”