Sheila Bair on Carried Interest
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The Times op-ed page today carries its second article in three days on the tax treatment of "carried interest" earned by managers of investment partnerships. This one is by Sheila Bair, the former chairman of the Federal Deposit Insurance Corporation. She writes:
This claim that managers of hedge funds pay half the tax rate of managers of shoe stores is bogus.
First of all, it's not a "giveaway" to let a person keep money that they earned. It's their money, not the government's.
Second, the tax treatment applies to long-term capital gains, whether they are the gains of someone who starts a shoe store business or someone who starts a hedge fund. If a shoe store manager starts Zappos and has founder's stock that is sold after more than a year, he pays the long-term capital gains rate. If a hedge fund manager starts a hedge fund and makes investments in stock or real estate or oil and gas ventures that are held for more than a year, he pays the long-term capital gains rate. If it's a short-term investment, it's taxed at a higher rate. If the fund loses money, the hedge fund manager may not earn any carried interest to be taxed on at all. And the management-fee part of the investment manager's fee (the part that depends on assets under management, not the return) is taxed at the higher rate. For some reason, there's a lot of confusion about this issue. I understand that plenty of bank CEOs whose income is taxed at the higher ordinary income rates don't like the carried interest capital gains treatment of their competitors and want to end it. But they should be able to make that argument without distorting what the current policy is.
Third, this distinction between "financial assets" and the "real economy" is an artificial one. Ms. Bair may be right that investment funds have created "far too few jobs," but it's not clear how raising taxes on them would create more. In fact the venture capital, private equity, hedge fund, real estate, and oil and gas industries have created and preserved an awful lot of jobs.
Ms. Bair goes on, "Republicans should also put rebuilding the nation's transportation and energy infrastructure high on our political agenda. From Lincoln's transcontinental railroad to Eisenhower's highway system, Republicans have understood that investing in critical infrastructure projects creates jobs and expands commerce."
This is also bogus.
First of all, we had an $800 billion Obama stimulus bill, not to mention a series of pork-filled energy and transportation bills under the George W. Bush administration. It got us Solyndra and various other solar or battery companies that either went bankrupt or were sold to China, along with lots of traffic jams caused by road construction by unionized workers alongside signs proclaiming that some project was paid for by the Recovery Act. No matter how much money the taxpayers pile onto these projects, the bridges always seem to be in terrible shape (or so the construction contractors and unions tell us, in an effort to win more spending).
Second, this contradicts the earlier argument about how there are too many financial assets chasing too few real world projects. Why is venture capital investment in transportation or energy bad, but government investment in it good?
Third, it misreads history. Lincoln's transcontinental railroad empowered a private company — Union Pacific Railroad Company — to transport, in the words of the act, "troops, and munitions of war." It was a wartime measure that had little or nothing to do with jobs or commerce. Likewise, the Eisenhower highway system was a Cold War measure, the National Interstate and Defense Highways Act, an expenditure explained in the words of that act not in terms of jobs but "because of its primary importance to the national defense."
There's plenty of other ridiculous material in the op-ed, but it's not worth going into.
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