Hedge Fund Fair Tax Can Cut Deficit By $18 Billion

President Obama suggested that we help finance the American Jobs Act, in small part, by asking hedge funds to pay what I think is a fair tax. The proposed taxes change would require hedge money to pay a typical tax rate (35%) instead of the existing capital increases rate (15%) on their so-called transported interest. Carried interest is the amount of money that hedge account managers get paid as a reward for making profits on their fund’s investments.

Hedge funds typically get paid through a combination of management fees and carried interest. 100 million a 12 months (2% of the resources under management). 100 million is taxed at 15%. To understand why it should be taxed at 35%, it helps to understand the rationale for setting the capital benefits rate below that of normal income. As I discussed on CNBC with the Wall Street Journal’s Alan Murray back 2007, we want to encourage putting capital at risk so we tax the gains from such risk at a lower rate.

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The reason that increasing that rate for hedge fund managers is reasonable, for me, is because the money that hedge money invest is partially that of the hedge finance managers themselves and mainly that of the hedge fund’s investors. The hedge finance manager shouldn’t be rewarded with a lower taxes rate for putting someone else’s money at risk.

Simply put, transported interest is a mixture of at risk rather than at risk income, so it should be taxed in a combined way. Towards the extent that a general partner is putting his / her own capital at risk in an offer, then the carried interest in that offer should be taxed as a capital gain. However, to the degree that the overall partner is placing the limited partners’ capital in danger, the pro-rata talk about of the carried interest should be taxed to the general partner at the ordinary income rate.

Simply put, since general partners put hardly any of their own money at risk, most of the transported interest is actually a fee for handling other people’s money that charge should be taxed at the normal income rate. After all, any income that is part of the regular trade or business normally is taxed at regular tax rates. And for some hedge funds, profiting with other peoples’ money is a normal occurrence. How well will this discussion go over in Washington? If money purchases votes, then your answer by April 2011 is pretty simple – just like a business lead balloon.

That’s because based on the Center for Responsive Politics, hedge money has shifted the lion’s share of their money from the Democratic Party to the Republicans. 13 million for the Republicans. I’d challenge a hedge fund manager to guard the theory that it’s as risky for them to put a client’s money into a trade as it is to bet their own cash. It doesn’t appear defensible to me though. In the end, if your client loses money on the trade, that doesn’t cost the hedge finance supervisor much beyond the client’s stress. It’s only once he manages to lose his own money, that the burn off is experienced by him in his own bank-account. 1 billion personally. If hedge funds paid a good tax, their managers would be the best-paid people in the world still.

Can an organization borrow funds to provide it to its directors to buy or sell its own stocks? A director can borrow funds from his/her company. So theoretically, borrowing money to help a director to buy or sell own shares is possible. Because, by definition we realize that an ongoing company is an artificial being.