| | John Edwards (and others) on the campaign trail has said he would raise taxes on hedge fund and private equity fund managers. Typical management fees for such funds are 2 percent of the fund's assets plus 20 percent of profits (positive fund returns). The funds are typically partnerships, and the fees are passed on to the managers, who pay personal income taxes on them. The latter is often called "carried interest." The first amount is treated as ordinary income and taxed at a maximum 35% rate. However, the second amount is treated as capital gains (for assets held more than one year) and taxed at a maximum 15% rate.
It seems the rates differ by 20%, which Edwards' demagogic rhetoric exploits to the hilt. However, the rhetoric overlooks the effect of the Alternative Minimum Tax (AMT). Assume a manager makes many millions of dollars in a year, and the top rates apply to most of the income. According to my calculation, when the AMT is taken into account, the alleged 15% rate jumps to 28%. So the real difference is only 7%.
If the tax rate on such capital gains were raised to 30%, the demagogues can say they doubled the rate. The truth is it would be much less.
|
|
