A tax increase on private equity and hedge fund executives

From the Financial Times:

A tax increase on private equity and hedge fund executives was passed by the House of Representatives on Friday as part of a package to fund middle class tax relief, but faces a likely veto by President George W. Bush.

The $50bn (€34bn, £23.89bn) tax increase was approved by a vote of 216-193 with all Republicans voting against the package and threatening to block the legislation in the Senate.

The passage of the bill is a setback for the private equity and hedge fund industries and makes it more likely that executives will in time see their tax rate doubled, depending on how Democrats fare in election campaigns next year.

The revenue raised has been earmarked to pay for relief for more than 23m middle-class families who would otherwise be caught by the alternative minimum tax.

The AMT is an archaic levy that was originally designed to catch 200 wealthy families that paid little or no tax, but has expanded stealthily because it was not indexed for inflation.

For a start, I don’t see that a tax increase on executives of specific industries should fairly face a tax increase – why not, say, oil or weapons industries? Their products are actively harming people. Of course this is not the case: the Financial Times is just doing a bad job. The tax is on carried interest, that thing executives of these industries use as income, call capital gains, and scam a lower tax rate on. Rather than fix the problem, the government has decided just to tax the problem (it’s an Austrian kind of day, all told). The tax also does apply to any other industry – whose executives are pulling this scam on the American people.

Second, how archaic must the Alternative Minimum Tax be, if it was designed to catch 200 households but is going to catch 23 million households, now? Call me an idealist, but those numbers tell me of a government that hasn’t been doing its job.

Third, of course – why in God’s name does a government with a budget the size of this one need any new taxes to pay for things? I think carried interest is a scam, as I said, but it should be fixed for that reason – not because the government is too chicken to, say, stop handing over money in tens of billions to the Pentagon.

Finally, the story’s punchline was Secretary Paulson demonstrating, as is his wont, the difference between an elected official, an appointed official and – particularly these days – a competent official:

Treasury secretary Henry Paulson called on the Senate simply to extend tax relief but “not raise other taxes”.

Priceless. They say he’s in charge of the economy, you know.

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1 comment so far

  1. This will get vetoed, it will get more interesting after the next election.

    R


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