Obama’s budget calls for a change in the tax code that would increase taxes on hedge-fund and other money managers who make most of their income from “carried interest” — a percent of the funds under management, plus a much larger percent of yearly gains. Carried interest is currently taxed as capital gains instead of income, meaning it’s taxed at a lower rate.
The irony here is that hedge-fund managers helped put Obama in office. Democrats received 65 percent of the industry’s donations in 2008. In a superb piece in the new NRODT, “Losing Gordon Gekko,” Kevin Williamson examined the reasons why guys who appear to have so much to lose would vote for a party that wants to raise their taxes. One reason could be that they think they have enough allies in Congress to block any change in the way carried interest is taxed:
[Sen. Chuck] Schumer’s tactics for extracting campaign money from Wall Street when he was head of the Democratic Senate Campaign Committee were so aggressive that Sen. Arlen Specter accused him of using congressional inquiries in part as a fundraising tool. But it’s hard to weep for Wall Street when it is getting such a rich return on its political investments: Schumer drove a stake through the heart of tax-code changes that would have treated “carried interest” — the source of many private-equity fortunes — as regular income for tax purposes, instead of taxing it as a capital gain. As it stands, a private-equity manager who makes a billion dollars pays 15 percent in taxes on carried interest, while a guy earning a salary of $34,000 is in the 25 percent income-tax bracket.
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