Obama Tax Plan Would Raise Taxes On Private Equity And Hedge Fund Chiefs

Part of the tax proposal announced by the Obama administration on Wednesday would shut down a controversial loophole that allows hedge fund managers and private equity executives to pay taxes at a lower rate than many working people.

The administration's plan seeks to close tax loopholes for corporations and individuals. At the same time the proposal would lower the corporate tax rate to 28 percent from 35 percent.

Hedge funds managers and private equity executives pay a different tax on their profits--which often comprise the bulk of their income --than most wage earners pay on their regular income. Hedge fund and private equity gains are taxed as “carried interest" at 15 percent. The Obama administration proposal would tax these profits at regular income rates of up to 35 percent.

“Currently, many hedge fund managers, private equity partners, and other managers in partnerships are able to pay a 15 percent capital gains rate on their labor income,” a relevant section of the proposal reads. “This tax loophole is inappropriate and allows these financial managers to pay a lower tax rate on their income than other workers.”

The administration’s move to raise the tax on hedge fund and private equity profits comes on the heels of similar proposals by U.S. legislators and international leaders. Last Tuesday, Congressman Sander Levin (D- Mich.) proposed a bill that would similarly raise the carried interest tax rate to regular income levels. And in recent weeks, some European leaders have reportedly been looking at ways to raise taxes on private equity profits as well.

The tax hike proposal also comes just one week after the Securities and Exchange Commission reportedly sent letters to a number of U.S. private equity firms announcing that it had launched an “informal inquiry” into how these firms value the companies they invest in.

The newfound regulatory interest in the way in which these firms do business, coupled with legislative pressure to raise their taxes, has sparked fears in the private investment industry that the sector could find itself the subject of a slew of new regulations.

As the head of one private equity firm, Stewart Kohl of Riverside Co. told The Huffington Post last week. "One day, we're going to wake up and there's going to be a set of laws regulations and restrictions that are going to make it difficult or impossible for us do what we do."

Also on HuffPost:

Comments

[Christina Bussmann]

06:26 PM on 03/01/2012

This is the real reason behind Wall Street's effort to limit President Obama to one term. Whoever you vote for, make sure you are voting in your OWN interests and not those you mistakenly believe serve you. Same-sex marriage and birth control? Really? How about whether more of the tax burden falls on the dwindling middle class.

[lendtolease]

09:20 AM on 02/27/2012

As someone who receives carried interest, let me explain it for you. I charge a small asset management fee for a group of assets that I and my investors have invested in. This annula fee is taxed as ordinary income. The asstes we invest in are typically broken assets. At the end of the day, if the assets do well, I receive part of the gains my investors receive-they allocate part of their profits to me. If the character of the profits to the investors is capital gains, that's what my income is classified as. If they are ordinary income, that is how my income is classified. These assets typically take 3-5 years to "fix" and become profitable. Any income I might receive is totally at risk, and relies on my investors making money.

Can someone explain to me why this should not be classified as capital gains? Did you people even understand what this was, other than some "rich person loophole"?

[BBackSoon]

01:50 PM on 02/23/2012

Stewart Kohl of Riverside Co. told The Huffington Post last week. 'One day, we're going to wake up and there's going to be a set of laws regulations and restrictions that are going to make it difficult or impossible for us do what we do.'

You would not make a Billion dollars if instead of paying $150 million in taxes you had to pay $350 million in taxes? That extra $200 million is what makes it worthwhile? So if you can't keep $850 million you won't even try to keep $650 million?

My heart bleeds. No really it does, and you probably collect the drops.

[ChetHolly]

10:55 AM on 02/23/2012

You hear a lot of noise around regarding the lowering of corporate tax rates and how it will spur employment growth. You also hear a bit about closing loop holes. The bottom line of any proposal will dictate the response. If the rate cut are less of a benefit to the corporate bottom line than the existing loop holes this rate cut package never see the light of day in either house. Money controls as long a transparency does not. Large money talks but does fear the social networks who operate largely outside their control. These social networks can mobilize millions of people to focus collectively on a person or issue must be a very scary and disruptive undermining of the value of the cash they have to throw around in order to gain advantage.

[pbr56]

02:17 PM on 02/23/2012

The people who get the loopholes will all be against it, because they already pay less than 28%.

[ronp121]

09:35 AM on 02/23/2012

Ah man he is going to make the big wigs mad then they will just take their hatred for this President on us the little people. Going to have to get a case of Puffs for poor John Boehner I don't think he will be able to handle this one without a lot of tears flowing. LMAO

[lowrodiay65]

08:37 AM on 02/23/2012

So many tears shed for multi-millionairs. I can't stand it.

[gwboysen]

11:49 AM on 05/24/2012

No one is stopping you complainers for being successful so get over the rich hating sob stories. Go get a job

[lowrodiay65]

08:33 AM on 02/23/2012

O NO! Have hedge fund mangers pay the same tax rate as working people, COMMUNISM, SOCIALISM, KILLING THE ECONOMY , ON NO THE WORLD WILL COME TO AN END!!!!

[LaughingTwo]

07:38 AM on 02/23/2012

Mr Kohl won't be able to do his job because he will actually be paying the appropriate tax? Do they really believe this stuff when they say it out loud? C'mon Stewie, you know you'll justjack up your rates to make me pay for it.

[Royce09]

06:28 AM on 02/23/2012

SO, who cares it isn't me.

[madrediterra]

04:57 AM on 02/23/2012

Mr. President, raise them and raise them high - 1960 levels - and the voters will stand in lines all day to support you on election day

[K August]

04:54 AM on 02/23/2012

It's about time! Thank you Mr. President!

One guy ..one hedge fund manager made 5 Billion in 2009.......
And he's not alone. In 2009 25 hedge fund managers averaged a billion dollars in earnings. Hedge fund manager James Dinan, who made 'only' $350 million in 2009, advised other hedgers to "stay in the middle of the field" to avoid angering the public.

The hedge fund managers are not alone, either. Based on Tax Foundation figures, the richest 1% has TRIPLED its share of America's income over the past 30 years.

Much of the gain came from tax cuts and minimally taxed financial instruments. If their income had increased only at the pace of American productivity (80%), they would be taking about a TRILLION DOLLARS A YEAR LESS out of our economy.

[gwboysen]

11:50 AM on 05/24/2012

like I just said, the only one stopping you from being successful is yourself so dont get mad when someone else is. Liberal thinking, very sad.

[crazyindc1984]

04:48 AM on 02/23/2012

I make over the median household income for the country and with the standard deduction paid a 4% tax rate last year. I have one dependant. How is that higher than 15%?

[K August]

05:16 AM on 02/23/2012

Median income was just over $26K last year.....according to articles here on H.P.

Are you talking about just Federal income tax ? Have you added up state and local taxes, FICA taxes, sales taxes, taxes on your utilities?
You probably pay more as a percentage of income than many wealthier people do.

[crazyindc1984]

05:37 AM on 02/23/2012

Median income is 26k. Median household income is in the forties. Yes I am speaking of federal income taxes. Isn't that what we are discussing is federal income taxes?

If you count every tax that is on a paystub, mine is around 17%. Who would count sales tax, utility tax, etc, when the article is discussing a single tax? The wealthy pay these taxes as well on their paycheck. But once again, we are talking about the federal tax rate on income and on capital gains.

[crazyindc1984]

05:38 AM on 02/23/2012

And as far as the amount of income I am speaking of is 55k /year.
I am a single income family, as I choose to have my wife stay home and take care of the house and my daughter.

[no body]

05:38 AM on 02/23/2012

A minimum wage earner pays 15.4% in federal payroll taxes including their employer contributions. So you paid 19.4% in federal taxes last year more than the 400 richest families in America.

And remember Romney will get the max SS benefit and Medicare at 65, even though he stopped paying payroll taxes years ago.

[crazyindc1984]

05:48 AM on 02/23/2012

Federal payroll taxes is not the same thing as the federal income tax. Quit trying to muddy the water by trying to bundle all taxes, as well as SS and medicare benefits together to make it sound like the average American has some huge tax burdon that others do not have.
And who cares about Romney? That is how the SS and medicare plans were created. If people don't like it, tell their congressman to change it. Romney paid in more than a lot of people sucking ss benefits right now, so I couldn't care less.

[KCY]

10:33 AM on 02/23/2012

How can you add in the matched taxes of Social Security & Medicaid paid by the company? Taxes deducted from your paycheck is Federal Income tax, Social Security tax, Medicaid tax, and a State tax if you live in a State that taxes you. At the end of the year each person files his/her Federal Income tax returns. The only figures that matter is your gross income minus your deduction (standard & exemptions), equals your adjusted gross. that is what determines the % of federal income tax you pay. And the figures that crazyindc used are right in the ballpark. 55K income, 3 personal exemptions, standard deduction for married filing joint OR deduction for his itemized deductions if they were more than his standard deduction. He would definetely be somewhere around the 5% tax bracket.

[Josh Crawford]

03:18 AM on 02/23/2012

Let the crying and histrionics of the GOP begin again......

[gwboysen]

11:53 AM on 05/24/2012

excuse me but the only ones crying on this site are those that seem to have it out for others who are successful. aka lazy liberals

[frankieshoes1]

02:31 AM on 02/23/2012

"One day, we're going to wake up and there's going to be a set of laws regulations and restrictions that are going to make it difficult or impossible for us do what we do."

In light of what you have done to our economy, I don't think that is necessarily a bad thing.

[K August]

05:10 AM on 02/23/2012

Yep, they should have thought about the mess they KNEW they were creating.

Inside Job is a great documentary that is filled with interviews from some of these guys.
They knew it was out of control and would collapse but the money was so good they didn't stop their bad behavior.....

The worst offenders knew that things would collapse and they got their bets in and they made millions and even billions on the misery they actually caused to our economy, to our people and to economies all over the world.

Europe is in bad shape for the same reason we are..... they sold those worthless mortgage bundles to investors worldwide (while having them rated AAA) and when things started to fall apart the meltdown spread all over the world.

[frankieshoes1]

11:28 AM on 02/23/2012

Like so many children that have to be supervised so they don't burn down the house. (again).

[Kai-HK]

12:15 AM on 02/23/2012

Obama and his tax polices are ruinous.

[turtom]

12:47 AM on 02/23/2012

Really Kal? Really? Asking hedge fund managers whose income is in the multi-millions and on occasion in the billions, to pay the same tax rate as your average businessman who works for 75K a year, that's ruinous? That will destroy the investment incentive?

I can hear the conversation now between the hedge fund guy and his wife:

Hedge Fund Guy: You know, honey, the Obama administration and Congress just raised my tax rate from 15% to 35%. I don't know if I want to stay in the hedge fund game anymore.

Hedge Fund Guy's Wife: Really? What is that gonna mean to us?

Hedge Fund Guy: Well, last year I made $500 million and paid 75 million in taxes. That left us $425 million. This year I'm gonna make $500 million again but now I'm gonna have to pay $175 million in taxes. That means we will only have $325 million left. I mean that's a lot of money to pay in taxes.

Hedge Fund Guy's Wife: Your right, dear. That 35% is the same rate the plumber pays. That seems wrong. What will you do instead of running the hedge fund?

Hedge Fund Guy: Well, maybe I'll be a plumber. I'll make less money but I sure will pay a lot less in taxes.

[Kai-HK]

02:15 AM on 02/23/2012

Turtom:

You make some common, yet highly mistaken, points:

a) Yes. Asking a risk-taking, economic-activity-creating, already-taxed-at-the-corporate-level investment manager to pay the same tax rate as the non risk taking, economic cost, not taxed at the corporate level business man is unfair. In fact the integrated dividend tax rates for owners of businesses, which hedge fund are, is currently 50.8% and will increase to 68.6% upon several tax breaks unwinding. To make it fair and to have the hedge-fund manager pay the same tax as the business man, you would have to further reduce his dividend tax or corporate tax are by another 15% give or take (meaning simply drop dividend taxes to 0% or reduce corporate tax from an effective tax rate of 28% (35% nominal) to about 13%. So which do you recommend?
http://www.theasi.org/assets/EY_ASI_Dividend_and_Capital_Gains_International_Comparison_Report_2012-02-03.pdf

b) You got the conversation with the hedge fund manager and his wife wrong:

Hedge Fund Guy: Obama wants to increase my dividend and capital gains taxes to 35%. This is unacceptable but I love being a hedge fund manager.

Hedge Fund Wife: What does this mean to us?

Hedge Fund Guy: It means that we will most likely have to move to Canada where corporate taxes have just been reduced to 15% or better yet to the Hong Kong where...

[Kai-HK]

02:15 AM on 02/23/2012

… in addition to corporate taxes being 17.5% there are NO dividend or CGT or Switzerland, the Caymans, Monaco, etc…I guess we will have to take the $75 million I paid in taxes with me, as well as all the economic activity and jobs I created and move elsewhere to the recipient country’s benefit.

Hedge Fund Wife: You are right dear, we should not pay more than what the competing hedge funds pay overseas since it puts us at a disadvantage and kills jobs and economic activity….In addition, we are currently being subjected to double taxation which makes are rate near 51%, all in. I will go pack no since I hear that Switzerland is wonderful this time of year.

Hedge Fund Guy: Thanks, you go do that. In the meantime I will head back to my office and fire all my highly-paid staff, especially the 50 people I paid millions to in bonuses, as well as my poor secretary who made $200K last year but had to pay a 35% tax rate. I am sure that she will be happier getting $0 dollars and being on unemployment instead.

Hedge Fund Wife: OK meet you at the jet…let’s blow this economic wasteland of perverse tax laws.

Hedge Fund Secretary (weeks later at McDonalds): Would you like to fries with that big mac, sir?

Kai

[wwelbes]

02:15 AM on 02/23/2012

For who?

[Kai-HK]

03:07 AM on 02/23/2012

people wanting jobs.