The Hedge Fund CEO and the Secretary

“How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries?” President Obama has often said this, probably to the bewilderment of most listeners.

But the point he makes is true. Here’s why.

In addition to a sizable annual fee, paid to them whether their fund makes or loses money, hedge fund managers typically pocket a whopping 20% of any gains earned by their funds. That percentage can come to many millions of dollars — billions even. In 2010, John Paulson took in $1.7 billion as the 20% cut from gains on his outside investors’ holdings.

The George W. Bush administration in 2003 reduced the capital gains tax rate from 28% to 15%, delivering a huge wealth redistribution to the upper income echelons, people with enough disposable income to own securities. Still earlier, the rates had been the same as for ordinary income.

Hedge fund managers on their tax returns treat their yearly 20% take as a capital gain and pay only %15 in tax to the federal government. That’s where the secretary comparison comes in. A single person with a mere $38,000 of taxable income pays the same 15% rate as that hedge fund CEO who claims his tens of millions of income is entirely capital gains. And any secretary making more than that $38,000 would pay a higher rate than the CEO as the president says. By refusing any tax adjustments in the debt ceiling bill, Republicans have continued to hand hedge fund owners this astonishing inequity.

In fact, it is worse. That income isn’t even a capital gain. The hedge fund CEO never owned the securities. His money was never at risk. He had no skin in the game. His pay was wholly for work and services rendered to his investors — just like your paycheck. That they are given this special deal is outright corruption.

For that you can thank New York Senator Chuck Schumer. He’s a Democrat who will always turn a trick for money, unperturbed at running entirely opposite to his own party’s position on such taxes, not to mention disregard for logic, fairness, and so on. He cravenly went to bat for those New York hedge fund managers to get them their most favored contributor deal.

Later, he would do the same for the New York banks, arguing that they should be allowed to continue charging an average of 43 cents on every debit card purchase you make, a charge which you get to pay for because the merchant must pass it on by inflating prices. The banks have been raking in a hugely profitable $16 billion a year of yours. The Dodd-Frank financial reform bill sought a limit of 12 cents per transaction. To keep those campaign contributions coming, Schumer went against his own party, which had championed the bill. Now there’s a senator who puts the people first.

There is no clearer example than Chuck Schumer of the extent to which Congress members will prostitute themselves to get campaign funding from big business; no clearer example of why the campaign finance laws are on track to destroy this democracy.

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