Carried Interest: Obama Takes Aim at Wall Street's Second Favorite Tax Loophole

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President ObamaOn Sunday, President Obama took aim at what many believe to be a long overdue target: the carried interest tax rate. Suggesting that "smart spending cuts" could reduce the deficit and make it possible to increase education funding, he proposed a closing more tax loopholes, cutting more government waste, and reforming some too-costly health programs. The centerpiece of his proposal, however, was an end to certain key tax loopholes, notably carried interest -- a tax break that almost exclusively benefits high-income investors and money managers.

Carried interest has been in and out of the headlines for months, thanks in large measure to GOP presidential nominee Mitt Romney, who had made good use of it for many years.

For all the confusion surrounding carried interest, the lucrative tax loophole is actually fairly simple: Instead of taking a straight salary, many hedge fund managers and other investment advisers receive a percentage of the money that their funds generate. Because their lavish compensation comes from investments, it's not treated the way your salary is: It's taxed at the capital gains rate -- previously 15 percent, now 20 percent -- rather than at the significantly higher income top tax rate: 35 percent until last year, 39.6 percent as of 2013.

This amounts to a huge tax break; For example, it was largely responsible lowering Mitt Romney's real tax rate in 2010 to a fiscally rewarding (but politically devastating) 13.9 percent. Overall, the ability to use the carried interest tax rate saved up to 20 percent of his considerable income from the IRS.

It's important to separate the carried interest tax rate from the capital gains rate. In the latter case, there's a clear case to be made as to why the lower rate exists: By offering investors a tax break on the money they make in the market, the tax code encourages investment. This should, in theory at least, translate into more money being poured into the American financial system and, eventually, into American businesses.

Fans of the capital gains and dividend tax rates also point out that, often, the money being invested in the market has already been taxed once at the higher income tax rate. After all, if someone invests his or her nest egg in the market, the money was probably taxed when he or she earned it. For that matter, investments often fail, so -- they claim -- investors should be offered an additional enticement to put their money at risk.

There are certainly arguments to be made against these ideas, but for the purposes of discussing the carried interest tax break, let's assume for a moment that, with regards to the capital gains and dividend tax rates, they're completely legitimate. Even if one wants to argue that the value of providing liquidity to a risky market justifies a hefty tax break for big-ticket investors, the carried interest tax break still makes little sense.

Unlike investors, the hedge fund managers who get the carried interest break aren't investing their own money. They haven't paid income tax on it, and they don't stand to lose their hard-earned cash if their hedge funds fail. In short, they are being taxed as if they are taking a risk, when they aren't risking anything.

Not surprisingly, for Obama -- and, indeed, for anyone looking to reform the tax code -- carried interest is a very easy target. Congress' Joint Committee on Taxation estimates that abolishing carried interest would generate $16.8 billion over ten years.

And what of investors? In 2011, Warren Buffett railed against the carried interest and capital gains tax rates. "I have worked with investors for 60 years and I have yet to see anyone -- not even when capital gains rates were 39.9 percent in 1976-77 -- shy away from a sensible investment because of the tax rate on the potential gain," he said. He then went on to note that the comparatively high taxes of the 1980s and 1990s produced "40 million jobs," while the post-2000 tax breaks ultimately resulted in "far lower job creation."

Following so quickly on the heels of January's tax increase, it seems unlikely that the carried interest rate will go up without a huge fight. That having been said, it's hard to explain why millionaire hedge fund managers should pay a lower tax rate on their wages than waitresses. And for a Republican party that is trying hard to reach out to moderate voters, carried interest seems like an unwise place to draw a line in the sand.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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rgmac12

What really stood out during the Obama / Romney debates .... Romney clearly had his estate and personal affairs in order .... Obama kept criticizing him for the amount of taxes he didnt pay (I would think 4.2 million is enough for 1 tax payer) .. was it Romney's fault he understood the tax laws to minimize his taxes .. like most of us do? I am sure Obama went back to his estate / tax planners and crucified them that he was paying taxes at such a high level. Of course .. now that he will be out of the public limelight ...... I am sure he will minimize his taxes moving forward ..... or he can jsut write a check to the Treasury .. Like Warren Buffet .... if he wants to pay "a little more"

February 09 2013 at 2:58 PM Report abuse rate up rate down Reply
Tom

yes thats bogus form over substance --- that "carried interest" is in effect their salry and it should be taxed as such---did not know that fact -stunning what Congressand IRS lets the big guys get away with.

February 07 2013 at 3:30 PM Report abuse rate up rate down Reply
trusgold

CUT THE LOOPHOLE NOW~

February 07 2013 at 3:00 PM Report abuse +1 rate up rate down Reply
babyboehner

Fox News Viewers Know Less Than People Who Don't Watch Any News: Study

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Fox News viewers are less informed than people who don't watch any news, according to a new poll from Fairleigh Dickinson University.

The poll surveyed New Jersey residents about the uprisings in Egypt and the Middle East, and where they get their news sources. The study, which controlled for demographic factors like education and partisanship, found that "people who watch Fox News are 18-points less likely to know that Egyptians overthrew their government" and "6-points less likely to know that Syrians have not yet overthrown their government" compared to those who watch no news.

Overall, 53% of all respondents knew that Egyptians successfully overthrew Hosni Mubarak and 48% knew that Syrians have yet to overthrow their government.

Dan Cassino, a political science professor at Fairleigh Dickinson, explained in a statement, "Because of the controls for partisanship, we know these results are not just driven by Republicans or other groups being more likely to watch Fox News. Rather, the results show us that there is something about watching Fox News that leads people to do worse on these questions than those who don’t watch any news at all."

This isn't the first study that has found that Fox News viewers more misinformed in comparison to others. Last year, a study from the University of Maryland found that Fox News viewers were more likely to believe false information about politics.

February 07 2013 at 1:06 AM Report abuse -1 rate up rate down Reply
1 reply to babyboehner's comment
rgmac12

And the Democrats who watch "no news" generally thought Obama would get them a free car .. free cell phone .. free house .. free .. free free...
Clearly the informed are not represented by the democratic party .... I would assume most have at most a high school education .... or they wouldnt be out there with their hands out for govt assistance


I would assume you generlaly fly Southwest too .....

February 09 2013 at 3:02 PM Report abuse rate up rate down Reply
babyboehner

Fox News To Issue Correction For Misleading 'Fox & Friends' Graphic On Unemployment

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Fox News will air a correction for a misleading graphic that appeared on Tuesday's "Fox & Friends," Mediaite reported.

The program ran into some mathematical difficulty when it threw up a graphic about changes in the unemployment rate during President Obama's tenure.

Liberal watchdog Media Matters noticed a discrepancy in the figures:



The show's mistake was to compare the official unemployment figure in 2009 with the so-called "real" unemployment figure in 2012. That figure takes into account data which is not included in the official number, such as people who have stopped looking for work. Thus, it is always higher than the official figure. (Official unemployment is actually .3 percentage points higher than in 2009, while "real" unemployment is .7 percentage points lower.

Fox News told Mediaite that a correction will air on tomorrow's "Fox & Friends."

The morning show has courted controversy before, especially when it ran a four-minute anti-Obama attack video that Fox News was forced to repudiate.

February 07 2013 at 1:01 AM Report abuse -1 rate up rate down Reply
babyboehner

Fox News' Credibility At 'Record Low': PPP Poll

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Fox News' credibility has fallen 9 percent since three years ago, according to new Public Policy Polling (PPP) results released on Wednesday.

The annual poll asks participants to rate their trust in multiple networks including Fox News, MSNBC, CNN, PBS, Comedy Central, ABC News, CBS News and NBC News. According to PPP's press release:

Just like its actual ratings, Fox News has hit a record low in the four years that we've been doing this poll. 41% of voters trust it to 46% who do not. To put those numbers into some perspective the first time we did this poll, in 2010, 49% of voters trusted it to 37% who did not.
Just like last year, researchers also found that Fox News is both the least trusted and most trusted network when compared to the other networks in the survey. Thirty-four percent said they trust Fox News the most, while 39 percent said they trust it the least.

Other news outlets are not entirely better off. Thirty-five percent of respondents said they trust MSNBC, while 44 percent said they do not. When it comes to CNN, 38 percent of voters said they trust the network, but 43 percent said they trust the cable network the least.

PBS is the only outlet that respondents trust more than distrust, with 52 percent of voters saying they trust the network, and 29 percent saying they do not.

February 07 2013 at 12:17 AM Report abuse +3 rate up rate down Reply
1 reply to babyboehner's comment
babyboehner

Fox News' Credibility At 'Record Low, so is the republican party!!!!!!!!!!!.........LMAO!!!!!!!!!

February 07 2013 at 12:19 AM Report abuse +3 rate up rate down Reply
pdbliz

AOL....You will never be as good as,,,,FOX NEWS.!!!!!! AND,,,,,,PEOPLE,,,YOU GOT WHAT YOU VOTED FOR.!!!!!!! AMERICA NOW IS FIGHTING FROM WITHIN....!!!!!!!!!!! Destroying what it took 100,s of years to make....
DESTROYED IN ONLY 4 YEARS.!!!!! WHAT DOES THE NEXT 4 HOLD.?????

February 06 2013 at 10:09 PM Report abuse -6 rate up rate down Reply
1 reply to pdbliz's comment
babyboehner

DID YOU KNOW FOX NEWS IS CHANGING THEIR LOGO FROM,,,,,FOX AND FRIENDS,,,,,TO,,,,,,FOX AND SNOBS ????????

February 07 2013 at 12:44 AM Report abuse +2 rate up rate down Reply
apartyof.omg.nojobs

hey did you hear

February 06 2013 at 9:25 PM Report abuse -5 rate up rate down Reply
dugerman85

How about prosecuting the Wall Street executives who stole hundreds of billions and put us in this hole...

February 06 2013 at 8:57 PM Report abuse +2 rate up rate down Reply
1 reply to dugerman85's comment
rgmac12

from US? Dude doubtful that you had any skin in the game .....

February 09 2013 at 3:03 PM Report abuse rate up rate down Reply
Don E

I'm waiting to see him put the wall street thieves in jail! That's what I'm waiting for!

February 06 2013 at 8:30 PM Report abuse +2 rate up rate down Reply
2 replies to Don E's comment
apartyof.omg.nojobs

then who

February 06 2013 at 8:34 PM Report abuse -3 rate up rate down Reply
pdbliz

WALLS STREET IS CONTROLLED FROM THE WHITE HOUSE........DEMOCRATE THUGS....

February 06 2013 at 10:10 PM Report abuse -3 rate up rate down Reply
1 reply to pdbliz's comment
babyboehner

AND THE WORLD IS FLAT ................RIGHT?
AND HERE I THOUGHT THE CEO THUGS ON WALL STREET CONTROLLED WALL STREET.

February 07 2013 at 12:26 AM Report abuse +2 rate up rate down