Wednesday, November 07, 2007

Taxation of Carried Interest Again

I posted awhile back on this subject. Hedge Fund managers earn a commission as part of their compensation, astronomical compensation. This income is treated as a capital gain instead of income, thus, their considerable earnings are taxed at 15% instead of 35%. There was talk about closing this loophole but Sen. Charles Schumer (D-NY and chair of the Finance committee and Democratic Senate Campaign Committee) has nixed such legislation. Professor Bainbridge has a very astute observation about the politics of this situation:

"I continue to predict that the Democrats will not pass hedge fund tax increases this term. It’s not just that the hedge fund industry has bought off key players. Instead, as I explained the other day: We normally think of interest group politics in terms of the interest group using campaign contributions to purchase some result. Where the interest group is fixed on avoiding a change in the status quo, however, the balance of power shifts to the politicos who can use threats to the status quo as a way of extracting funds from the threatened group on an ongoing basis. You don’t let the goose that gives golden eggs go after just it gives you just one egg, after all. Instead you turn it into, so to speak, the gift that keeps on giving."

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