I've argued here that it is entirely inappropriate to permit hedge and private equity fund managers to be taxed on their compensation for services at the capital gains rate when ordinary wage earners pay the higher ordinary income rate. It's particularly unfair, since these managers are merely using other people's money to get rich, and then using Uncle Sam's welfare for the elite to get even richer. They are not really entrepreneurs, as they argue, but more likely either risky speculators or highly paid destruction crews. It is these private equity funds, for example, that are able to buy businesses, rip them into pieces, and then resell at a gain. Often workers are lost along the way, or the jobs are exported overseas. In this "greed is good" climate engendered by the "free marketarian" fallacy coupled with the MBA in charge who knows very little about fostering a healthy work environment, nobody seems to care about that anymore. All in all, a situation crying out for change, if only the Senate can be strong enough to take action that will impact a very few people who are very, very wealthy.
Karl Okamoto and Thomas Brennan have put together some empirical research on these hedge fund managers: Measuring the Tax Subsidy in Private Equity and Hedge Fund Compensation. Here's an excerpt from their abstract.
[O]ur model suggests that differences in tax account for a substantial portion of the disjuncture that exists at the moment. It also quantifies the significant excess returns to private fund managers that must be taken into account by arguments in support of their current tax treatment by analogy to entrepreneurs and corporate executives. This analysis is important for two reasons. It provides a perspective on the current issue that has so far been ignored by answering the question of how taxation may affect behavior in the market for allocating human capital. It also provides quantitative precision to the current debate which relies significantly on loosely drawn analogies between fund managers on the one hand and entrepreneurs and corporate executives on the other. This paper provides the mathematics that these comparisons imply.
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