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Originally Posted by mlmpetert
1) You make up your mind! When did i ever say anything about pinching pennies?? Although i do believe that when in a deficit (either personal or national) cutting spending is generally more responsible and realistic then increasing revenues. And always start with the big things (for both cuts and revenue increases) then get nitpicky and pinch pennies, otherwise youre just wasting time.
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In light of your support for Contract with America I was under the impression that you hated wasteful spending even if it's a measly 2 billion a year. Given this one would think you are an advocate for penny pinching. Further more it isn't wise to assume cutting spending is necessarily the most prudent and realistic course of action to take and when it comes to solving complex budgetary issues you don't go after the big things first whether your are managing a personal or national budget. From a personal budgetary standpoint you first look to increase revenue first and if that isn't immediately feasible you don't cut the electricity before you cut the cable TV or Netflix subscription. Always start with small things because the big things are mortgage payments.
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Originally Posted by mlmpetert
2) You have no idea what youre talking about! The "hedge funds" we are talking about are limited partnerships not 40 act mutual funds.
Investors are limited liability partners that make investments in a investment partnership, much like other investors make investments in more traditional type businesses. The industry standard compensation structure is 2 and 20. For the first part of this compensation the manager/general partner of the LP charges investors 2% of all the money they invest in his company, and this is taxed as income. For the second part he takes an ownership position in his LP thats equal to 20% of the increase in value (if any). So if investors give him 900k to manage and he turns it into 1 mil then he earns 20k of assets (20% of a 100k) by taking ownership of the underlying assets of the company, equal to 20% of the appreciation amount. In this example he increased the value of the business by 100k so he takes ownership equal to 20k, or more correctly, 2% (20k/1mil) of the business's total assets. At this point IF he sells his share of ownership hes taxed just like an investor would be because...... he is one!
And a 4 billion dollar yearly payday is just a ridiculous statement thats simply not true. The 4.9 billion referenced in the article was a one time thing by the year's most successful manager and was an all-time record for hedge funds. More importantly its estimated that 4 billion of the 4.9 billion was earned by his own personal investment already in the fund and had nothing to do with his compensation structure. So in reality the 1 billion he earned was from charging a 2% management fee on the businesses underlying assets with the rest related to the 20% carried interest rule. Furthermore there are normally stipulations that say the manager must meet certain hurdle requirements and that investors in the LP cannot have losses before a manager is compenstated by taking position of the amount he has ownership interest in. A lot of these big paydays are one time deals after years of hard work, kind of like an IPO of a business someone started. We also forget that the 2% management fee is used to cover most of the funds expenses and that the 20% incentive fee isn’t pocketed by one guy its split up amongst the general partners of the LP.
And although John Paulson apparently made 4.9 billion last year it isn’t worth anything until its actually sold, and word is that Paulson didn’t sell anything. His flagship fund was down 47% YTD ending sept 30. Apparently these hedge fund things and their managers can lose money too? Should investors that have losses that are recongized but not realized be able to deduct those losses in the same way you want to tax someone that has recongized but unrealized gains? Do we deduct loses against income or capital gains, if you want to tax carried interest at income levels?
Look im with you in that our tax system doesnt make sense. But just because someone makes a lot of money doesnt mean they should be penalized and taxed more so then you or me.
The problem is we have a tax code so complex that “loopholes” are inherent in it. Adding more complexity and rules to the tax code will only open up new and unforeseen avenues for more loopholes. That’s part of the reason I think a transparent, super easy, and fair tax code is so desperately needed. The current tax code has become a monstrosity because it was set up to eventually become one. Instead of continuing to add to the monster lets just scrap it and start over.
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I understand perfectly how it works, I just believe it is the most vile tax loopholes out there. It is completely irrelevant how the profits are shared by the fund's managing partners or when they sell their 20% cut from the profit because ultimately when they do sell they will pay 15% on whatever they made.
Truth is no one would have a problem with them getting 20% or 50% or 80% cut from the profits if their clients choose to do so, what people such as myself have a problem is that this loophole allows these guys to double dip by first collecting a base 2% fee on managing the fund (puts these fund managers in 1 percentile of income earners) and then get 20% of the profit at a 15% tax rate without taking any risk with their own money. No one wants to deny these guys wealth and prosperity but they shouldn't have a tax advantage over the average Joe. It is not unreasonable to want them to pay a 35% marginal rate minus the deductions they are entitled to.