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Do hedge fund managers deserve a lower tax rate?

nersesianroy032111_optBY ROY NERSESIAN
STRAIGHT TALK

In my last article on General Electric, I pointed out that large corporations with their legions of tax accountants, tax lawyers and lobbyists are very adept at inserting a rider in a Bill to Honor Disabled Mothers to change Title CCXI, Subtitle XVIV, Paragraph CCCIV, Subparagraph XXXVIII, Dangling Thought MCXCIV in a 80,000 page Tax Code from one form of unintelligible gibberish to another. This allows an unnamed corporation to reap rich benefits either in not paying taxes for very specific conditions or receiving undeserved credits not to pay taxes. We pointed out that Congressmen are eager participants in this wanton act of fiscal irresponsibility as a means to garner campaign contributions (remember it costs a hundred-fold what a Congressman makes to get elected). President Obama has mentioned that he plans to spend a billion dollars on his reelection campaign. If I did my math correctly, the ratio between campaign expenditures and remuneration over the next four years for getting elected to the office of Presidency is not 100 to 1, but 500 to 1. Besides begging the question that can’t a billion dollars be better spent, the point is how politicians raise such fabulous sums of money to get elected considering how small their remuneration. If you think about it, high tax rates and unfair regulation is a guaranteed way for Congressmen to replenish their campaign coffers from the fat cats while the rest of us suffer.

Corporations are not the only organizations guilty of trailblazing through complicated tax codes and regulations with a healthy campaign check. Donald Trump gave money to Senator Reid of Nevada election campaign. To some, this means that he’s a closet liberal, not the staunch conservative that he portrays himself. The real reason why he gave money to Senator Reid’ campaign fund is simply a payment to induce his cooperation or quiet his opposition to Trump’s real estate dealings in Nevada. Right or wrong, left or right have no meaning in campaign contributions – their purpose is to gain an advantage that the rest of us do not have.

Hedge fund managers can make billions (yes, I did say billions) playing/gambling/speculating with other people’s money (OPM). Unlike General Electric that employs tens of thousands and makes products that you and I buy, hedge fund managers employ tens of individuals and make nothing tangible. Their job is to get on the right side of a trend in commodity prices or interest or currency exchange rates and go for the brass ring. Credit default swaps – bets against corporations and nations – are a richly rewarding activity for hedge fund managers. Others search for a sophisticated mathematical algorithm linking the fecundity of whales to stock market movements and ride that baby for as long as it lasts. Still others compete for the best trading algorithm against others to reap minuscule profits on hundreds or thousands of computer driven transactions per second – something like two-thirds of trading activity is computer driven algorithms battling one another.

Hedge fund managers are a product of the modern world. Back when the greedy old oil companies controlled world oil (pre-1973), the price remained essentially unchanged for a century at around $2 per barrel (read 25 cents or less for a gallon of gasoline) in current dollars. Back when the dollar was pegged to the value of gold and the British pound and other currencies were pegged to the dollar, there was no money to be made going long in one currency and short in another. Today things are much different with oil bouncing between $50 and $150 per barrel and currencies gyrating in all directions with respect to others. There’s plenty of opportunity to profit as long as you’re astute enough to be on the right side of a trend. Getting on the wrong side can be very costly to those supplying OPM for a hedge fund manager’s betting parlor.

So it is plainly obvious why hedge fund managers, making more money than anybody else, deserve to pay less than half of what other rich folk do. A bank president earning $20 million pays 35% tax rate, or roughly $7 million. By Special Decree to the 80,000 page Tax Code, hedge fund managers must pay all of 15%. For a hedge fund manager to pay $7million in taxes, he must earn $47 million as compared to $20 million for everyone else. And what makes up the Special Decree? It is a fallacious argument that even though hedge fund participants must pay taxes on normally short term gains, hedge fund managers should pay taxes on long term gains even if none exist. I’m sure you can see the logic of this argument.

How has this really sick situation come about? Do you think that hedge fund managers have made contributions to both individuals going up for election? Then they approach the winner (so it does not matter which party won) to induce him or her to vote on a rider to the Bill to Honor Disabled and Mentally-Challenged Mothers that “35% for all” should read “35% for all but hedge fund managers” in some obscure location in the Tax Code.

President Obama proposed on several occasions to raise taxes for all the rich who make more than $250,000 per year. But this exempts hedge fund managers, of course. Who gets hurt the most? Not wage earners making more than $250,000, but small businessmen who’ll see taxes go up just as the economy is showing the faintest signs of a recovery. More taxes for them mean fewer job opportunities for the jobless. But that does not matter because small businessmen do not have an organization to provide slush funds to President Obama or any other politician. President Obama, to his credit, did propose abolishing the special tax position of hedge fund managers – but he had second thoughts when he was told that hedge fund managers will be active participants in funding his reelection (along with whoever is running against Obama). Would I be too cynical to suggest that maybe his words for abolishing the tax exemption for those partially responsible for the global financial meltdown were only to stir the waters of campaign donations? For a hedge fund manager, it’s a good deal – pay $1 million in contributions and pay $10 million less in taxes. Or maybe it’s more like pay $10 million in contributions and pay $100 million less in taxes – and make the political contribution a tax deductable expense if at all possible. The tax treatment favoritism shown to hedge fund managers will keep many a campaign fund solvent.



 

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