THE BLOG
05/21/2010 03:13 pm ET | Updated May 25, 2011

Does Orrin Hatch Want to Bail Out the Hamptons?

In today's New York Times, Andrew Sorkin describes the sweetheart taxes for hedge-fund and private-equity partners as follows:

General partners at private equity funds, who take a cut of the investment gains they earn for their investors in the form of "carried interest," have been paying federal taxes worth only 15 percent of that cut.

This means the "gods of Greenwich" receive about a 24.6 percent tax break. That's because the highest bracket on ordinary income--currently 35 percent--is returning to 39.6 percent. And the gods don't pay taxes on their carried interests until they liquidate and pull out the cash.

What's new is that our regulators are finally debating the issue. It's about time. But I find it ironic that Orrin Hatch (R-Utah), who once referred to my academic tribe as "limp-wristed Ivy Leaguers," favors the 24.6 percent tax break.

"A lot of hedge funds have gone belly up," Sen. Orrin Hatch (R-Utah) told The Hill.

"Some others aren't doing as well as they should and others are doing well. And one reason they can survive is if we don't raise taxes," said Hatch. "Frankly, this administration will raise any tax it can."

Hey, Orrin. Hedge funds are full of your "limp-wristed Ivy Leaguers."

It's ridiculous to link private equity or hedge fund survival to tax policy. If the managers underperform, they close their doors. That's all she wrote, because investors pull their funds and head for the exits. Investors won't pay a 20 percent carry to lackluster funds forever. Taxes aren't the issue. It's performance. One strike, and you're out.

What about the public policy considerations?

During 2009, the twenty-five most profitable hedge funds collected $25 billion in income. This means, based on the tax break of 24.6 percent, these twenty-five funds are paying $6.15 billion less than they would on "ordinary income."

Here's what you can do with $6.15 billion:

  1. Clean up the BP oil spill off Louisiana and pocket over $1 billion;
  2. Hire 87,000 high school teachers for one year;
  3. Replace the Golden State Bridge--with enough money left for a healthy down payment on a new George Washington bridge;
  4. Bail out the losers in six Abacus-like deals--those toxic, synthetic CDOs championed by hedge funds; or
  5. Buy 246 ocean front estates in the Hamptons.
Where do I come out on the taxation of carried interests?

It's not about "belly up" as Senator Hatch suggests. It's about "pony up" and our nation's need to make tax laws more even-handed.

Norb Vonnegut