How to Take on Wall Street and Win

It’s tax time again, and again America’s richest financiers are breaking out the bubbly. Why? Because they pay less than you do!

The top hedge fund earners -- who personally rake in billions (not millions) of dollars per year -- can toast to the fact that they’re not living under that great radical president, Dwight David Eisenhower, when the top income tax rate was 91 percent, or under that rascal Dick Nixon when it was 70 percent. Nope, today, it’s a 15 percent maximum for the big boys, and we’re letting it happen.

In 2007 Congress took a serious look at closing what’s called the carried interest loophole--along with another loophole that allows hedge funds to defer taxes by shifting profits into offshore structures. But nothing happened due to heavy lobbying by the financial industry.

And for good reason. The top 25 hedge fund managers raked in more than $30 billion just for themselves in 2010 which represents two kinds of income. First, they get 2 percent of all the funds invested with them for “administrative” services involved in managing the funds. Mostly, that pays for their staff, office and trading costs. And then for their exquisite investment prowess, they get 20 percent of the profits. That’s their big bonanza.

The 2 percent is taxed as ordinary income subject to the top Bush-era tax rate of 35 percent. But the 20-percent-of-the-profits are taxed at 15 percent as if that income came from long-term capital gains. But it most certainly is not. Most hedge funds move their money at the speed of light. Long-term is a couple of minutes. So it has been obvious for years that this is just ordinary income for services rendered.

But these are not ordinary people. We’re talking real money. If this loophole were eliminated on the $1.9 trillion hedge fund industry, tax revenues from the richest of the rich would increase by at least $100 billion over the next decade. And the joke is they wouldn’t even notice. How could you if you’re pulling in $2.4 million an HOUR as the leading hedge fund manager did in 2010?

But here’s the thing about being a billionaire hedge fund player. You feel entitled. You’re the new nobility. You’re the smartest, toughest and bravest investor on the globe, performing work that by definition is much more important than what the rest of us do. After all, that’s why you haul in billions. Ergo, you deserve to pay lower taxes.

So you’ll fight like hell to maintain your lower tax rate. You’ll convince yourself as well as anyone who will listen that the economy will crumble if, god forbid, you paid the same tax rate as your secretary.

So when it comes to protecting a loophole that literally puts billions into your private bank account, no justification is too outrageous. Here’s the Chamber of Commerce’s version:

“Increasing carried interest taxes would reduce the amount of long-term capital available to the US economy and undermine investment, innovation, entrepreneurial activity, productivity, growth and the ability of U.S. companies to compete in the global market.

Why hasn’t Congress acted?

Obviously, with a jobs crisis still with us and public sector budgets in disarray, closing a loophole on the uber-rich should be a snap. And so it seemed when the 2008 elections brought a Democratic president and a Democratic Congress into office during the worst economic crisis since the Great Depression. In fact, only a year ago, Peter Orszag, Obama’s budget chief (who has since jumped ship for big bucks at Citigroup), predicted action on the loophole:

“I believe that there will be some legislative changes in carried interest, although the exact parameters are still being negotiated…But I think you’re going to see a change in the taxation of carried interest pass the Senate within the next few weeks.” (NYT)

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