Alan Blinder on Taxing Private Equity Managers

Very nicely done:

The Under-Taxed Kings of Private Equity: AN arcane debate is raging in Congress over the appropriate taxation of the bountiful incomes of people who manage private-equity and hedge funds.... [O]ne thing is easy to understand, though hard to swallow: Some people who are richer than Croesus are paying 15 cents in federal income taxes on the marginal dollar, while you may be paying 25 or 35 cents.

To be clear, I hold no brief against the kings of private equity. Their clients are consenting adults who sign up with full knowledge of the lush fees that private equity managers receive. Some of these managers may even earn their rich rewards. My question is simply this: Why shouldn’t they pay taxes like the rest of us?... [I]s the low 15 percent tax rate justified? For better or, as I will argue shortly, worse, capital gains are taxed far more lightly than wages. Since carry stems mostly from capital gains, defenders of the status quo argue that it deserves the low tax rate. Critics, however, object that carry looks and feels like payments for managing money, that is, like earnings.

Who’s right? It’s true that carry is mostly derived from gains on capital — but it’s mostly someone else’s capital. Which is presumably why former Treasury Secretary Robert E. Rubin said at a conference last month, “I think what they’re doing is getting paid a fee for running other people’s money.”

Sounds right to me. This judgment does not dispute the fact that fund managers’ compensation is risky. But so are the incomes of movie actors, the royalties of authors and the prize winnings of golfers — none of which is treated as capital gains....

Why do we have a preference for capital gains in the first place? The main argument is that lower taxes on capital gains boost investment. But the evidence on that point is iffy at best, and there are better ways to spur investment, like, say, the investment tax credit. Besides, lower taxes on capital gains reduce the tax bills of the rich relative to the rest of us — after all, they own most of the capital. But in this age of hyper-inequality, shouldn’t we be making the tax code more progressive, not less?

A far more important objection is that the tax preference for capital gains undermines capitalism — a system in which capitalists, not the state, are supposed to make the investment decisions. When I discuss this issue with my Economics 101 students, I show them an example of a proposed investment that loses money before tax (and which, therefore, should be rejected) but which actually turns a profit after tax because of the preferentially low capital gains rate. (Accountants and tax lawyers live this example every day.) The government thus induces people to make bad investments...

I'm much for sympathetic to the capital gains tax preference than Alan Blinder is, but the article is very good.

Comments

[sd]

The problem with this debate is that both sides want to say that the carried interest earned by PE and hedge fund managers is either X or Y. The reality is that carried interest is neither X nor Y. Not a true capital gain, in the sense that if I invest $1 of my after tax money and in a year its worth $1.20, the $.20 is a capital gain. But also not a true ordinary income source, in the sense that if I give you my $1.00 to invest for me on the agreement that you get to keep 2% of it in exchange for your services I pay you $.02 which is ordinary income for services rendered.

Robert Rubin says that carried interest looks a lot like a fee for running money. The problem with this is that PE and hedge fund managers already earn a fee for running money - usually 2% of capital under management - that they pay ordinary income taxes on. They get that 2% rain or shine. But they only get the 20% carry if there are profits - typically profits in excess of some threshold.

This is a thorny issue. But at the very least I think we should not levy ordinary income tax rates on the full value of the carry. You can argue that the carry is fee for service, but if so then the correct value of the fee is not the post-investment value of the carry but the pre-investment value of the carry. The rest is a capital gain in a straightforward manner.

[save_the_rustbelt]

There are two issues running through here

1) what is (or should be) a capital gain?

2) how should a capital gain be taxes?

The privatge is primarily about #1 and then about #2.

And Blinder's classroom example doesn't make a lot of sense to me (accoutant) unless there are tax credits or C/B, C/F involved.

PS: apologies in advance if my insane computer posts this more than once.....

[Bernard Yomtov]

"The problem with this is that PE and hedge fund managers already earn a fee for running money - usually 2% of capital under management - that they pay ordinary income taxes on. They get that 2% rain or shine. But they only get the 20% carry if there are profits - typically profits in excess of some threshold."

But this is also true of salespeople, for example, who may get a relatively small salary but get the bulk of their pay as commissions - performance based pay. No one claims that the salary turns sales commissions into capital gains.

The best solution is to value the carried interest at the time the fund is formed and tax it as ordinary income at that time. Then profits can fairly be regarded as capital gains. This doesn't seem impossible.

[sd]

Bernard,

The problem with that approach is that the carry is a % of profits, not capital. Its impossible to calculate the value at the time of fund formation, and in any event the fund managers don't get the cash they would need to pay the tax until later.

You have to settle the tax burden at the time of fund exit, not start-up. But you should still be able to separate the carry into a portion that is a fee for management that you charge staright income tax on and a portion that is pure capital gain. For example:

LPs invest $100. At the end of 5 years the fund is worth $200. The gain is $100. The carry is 20% of the gain or $20. So the portion remaining to the LPs is $180. The LPs put in $100 and got $180, so ~55% of their ending value is initial capital ($100/$180) and ~45% is capital gain ($80/180). So the $20 in carry should be taxed 55% at the ordinary income rate and 45% at the capital gains rate. The logic being that the LPs implicitly paid the fund managers to manage their money, but once that was done the fund managers had a capital stake in the fund that appreciated in value and should be subject to capital gains rates.

[anne]

The problem, I find, is the carry, and the carry is a special problem because, well, the carry is thorny and I for one would not want to have to carry thornys since I am always afraid of being stuck, though I could try gloves. Gloves might work for carrying thornys.

Beyond that there is every reason to tax millions and billions of dollars of income, as, well, income. Duh.

[jimo]

It's clearly immoral to tax capital (i.e. the wealthy) at a lower rate than labor. Those who support lower capital gains taxes use the argument that higher taxes will discourage investment. Perhaps we should consider a flat tax on capital at least equal to the risk free rate of interest (say 5% today). It would not discourage investment and may actually encourage it. And why should capital earn any income from a riskless investment? Admittedly such a tax would require an international agreement...

[anne]

Interestingly, the income of private equity fund managers which is not taxed as income is also readily not taxed, well, not taxed at all for years as long as the income is re-invested. So, private equity fund managers can easily pay lots less than even a maximum of 15% on millions or billions, yes, billion of dollars on income.

All those carrying thornys. Duh.

[Bernard Yomtov]

sd,

I see your point. But then it seems to me that the carry really is nothing but performance-based pay, just like a sales commission, or a profit-sharing bonus paid to a manager in another type of business. I see no reason for it to be regarded as a capital gain.

Nothing thorny about it.

[PseudoNoise]

I find the higher tax on labor discourages me from working. Yeah, that's it.

So do fund managers take capital losses? If their fund does exceptionally poorly, they pay that money back out and take a loss for the year, maybe sell their house to cover the losses, right? Because if all of my income was from capital, that's what I would have to do.

[anne]

Ah, by the way, just to be clear, the LP this and LP that tax at 55% stuff is comical nonsense.

[sd]

Bernard,

Yes, some portion of the carry is clearly performance based pay. But the pay takes the form of a share in a pool of capital that is growing over time. If fund managers are simply being compensated for their labor, then surely they are earning this compensation over time - over the life of the fund. But if that's the case, then they are, over time, being compensated by being given an asset that is then invested in the fund itself, which appreciates like any other capital investment.

It may be inaccuarte to classify the carry as a capital gain, since its clearly given in exchange for services rendered. But its also inaccurate to classify it all as ordinary income. If a fund has a five year life, then 1/5 of the carry is earned in each year of the fund. But the fund manager can't take this as a cash distribution, since the performance based value of the carry cannot be known until the fund closes. So the carry continues to be invested in the fund itself, alongside the capital of the LPs. To the extent that it grows, the growth should be taxed at the capital gains tax rate, not the income tax rate.

[sd]

anne wrote:

"Interestingly, the income of private equity fund managers which is not taxed as income is also readily not taxed, well, not taxed at all for years as long as the income is re-invested. So, private equity fund managers can easily pay lots less than even a maximum of 15% on millions or billions, yes, billion of dollars on income."

Anne, carried interest isn't taxed every year because it can't be. Its 20% of the profits of the fund and the profits of the fund can't be known until the fund closes - typically years after the fund forms.

[piotr]

ed,

when I have 5 year CD, I pay tax every year even if I get the principal and the interest only after 5 years. Tough.

If the hedge fund managers were getting into liquidity problem by having huge income booked and deferred as capital gains, and having this income reclassified as, well, income, they can alter the management contracts in the future. Say, early disbursement of the part of the gains to cover the taxes. What to do with the existing agreements, it can be debated, either some grandfather clause, or vis maior authorisation to renegotiate the contracts.

I see two problems: one, special rate applied to capital gains, second, deferring the income. With a single rate on all income, there would be no problem.

Personally, I would add inflation to the cost basis of an asset held by a full year, and afterwards view capital gains as any other income. This would give a certain preference for long-term gains, but that preference would merely recognize that some of the long term gains are not income at all.

[piotr]

Again about "carried interest". Can someone succintly explain the scheme used by hedge managers? Is it something like a sell option that worth something only if the fund exceeds some performance threshold? If yes, then its cost basis would be minuscule, and my reform of capital gain tax would not decrease the liability in this case.

Perhapes EVERY bonus payment can be structured as an option contract?

[sd]

piotr:

1) The reason you pay tax yearly on income from a CD is that the income can be known with a high degree of certainty. The carried interest paid to a PE fund manager is based on the total profits of the fund at the time it closes, which cannot be known until then.

2) Some hedge funds may be able to structure their agreements with their LPs to pay out the carry on an annual basis but PE funds cannot. A PE fund buys companies and hold them for 3-5 years (typically). During this time they are no longer publicly traded so their value cannot be known. Their value can only be known when they are sold off or IPOd.

[Emma Anne]

(1) Capital gains should not be taxed at a lower rate than earned income. The "incentive to invest" argument is just silly. what are people with money to invest going to do? Put it in a mattress so they make sure they don't have any gains to be taxed? If there is another argument for taxing the investment class at a lower rate than the working class I'd like to hear it.

(2) If capital gains *are* taxed at a lower rate this performance based payment scheme clearly shouldn't qualify. The bonuses I give my employee are taxed as income. This should be too.

(3) LOL at Anne's carrying thornys.

[Bernard Yomtov]

" Some hedge funds may be able to structure their agreements with their LPs to pay out the carry on an annual basis but PE funds cannot. A PE fund buys companies and hold them for 3-5 years (typically). During this time they are no longer publicly traded so their value cannot be known. Their value can only be known when they are sold off or IPOd."

A hedge fund that is simply engaged in short-term trading ought to have no trouble making annual payments. Mutual fund companies seem to have no difficulty taking their fees on a regular basis.

Private equity investments may indeed be illiquid, but that is no justification for treating profits on carried interest as capital gains. Isn't the carried interest very similar to non-qualified options?

[Lewis Carroll]

"The reason you pay tax yearly on income from a CD is that the income can be known with a high degree of certainty."

Actually, the reason you pay tax yearly on CD income is because it's not subject to a *substantial risk of forfeiture*, that is, legal ownership of the interest has vested in the recipient, as per the Internal Revenue Code. Exceptions include qualified plans like pensions and profit-sharing or non-qualified deferred compensaton plans. These types of plans require prior contractual adoption, and include various restrictions on receipt of the funds, restrictions which to my knowledge are absent from most principals' compensation agreements in hedge funds.

In a hedge fund, even though by convention and custom the principals keep their incentive comp in the kitty, they are free to take it out and say, use it as a down payment on a home or anything else. That is, the funds have transferred ownership from the investors to the principal. Therefore, they should be subject to taxation.

And since, as mentioned above, such payments are "incentive comp", they really do not differ from tips, bonuses, commissions etc., and should likewise be taxed the same way.

[sd]

Emma Anne,

Suppose you gave your employees a bonus at the end of the year in the form of company stock, but then required them to hold on to it for 5 years before they could sell it. You give each employee 1 share of stock with a value of $10. Five years later, each share of stock is worth $25. Clearly you've given them compensation of $10, and this should be taxed as ordinary income. But the $15 increase in the value of the share is not ordinary income at all. It accrues regardless of whether they stay with the company or not, and cannot be known with any certainty at the time the original $10 share was given out as compensation. The $15 clearly represents appreciation of an asset that belongs to the employee. To the extent that we have a lower capital gains tax rate than ordinary income tax rate (which we do and will continue to do for as far as the eye can see - it is simply not politically feasible to equalize the rates), then the $15 should certainly be taxed at the lower capital gains tax rate.

The situation is analogous for carried interest. A portion of it is clearly compensation, but a portion represents capital appreciation of assets that belong to the fund manager. Treating all carried interest as capital gains is as economically distorted as the current status quo - just in the opposite direction.

[Bernard Yomtov]

"But the fund manager can't take this as a cash distribution, since the performance based value of the carry cannot be known until the fund closes."

Of course he can take it. Suppose you have fund of $100. Year 1 it earns 10%. The manager takes his $2 (20% of the gain), pays taxes, and, if he likes, reinvests the $2 (or some lesser amount) in the fund. Year 2 the fund again earns 10%, so it has a closing value of $121. The manager takes 20% of year 2's profit, or $2.20, plus another $2.20 reflecting the $2.00 he invested after year 1 plus the 10% gain on it. He ends up wth a total of $4.40, of which $.20 is capital gain, the rest ordinary income.

As an alternative you could treat the carried interest as an at-the-money call option on 20% of the fund and treat the value as ordinary income when granted - at fund formation. A five year option on a highly volatile asset is pretty valuable, so they won't like that too much, but so what.

[sd]

Bernard,

This is simply wrong for many non traditional asset classes including all private equity funds. Such funds don't trade in assets that are publicly and regularly priced. They buy entire companies and take them private - meaning there is no sense in which returns can be measured until those companies are sold off - often many years after they were acquired.

The profits on a given PE fund are simply not knowable until the fund has liquidated at the end of its life. A PE fund isn't like a mutual fund that has a tiny % of its capital invested in hundreds, even thousands of different companies. A typical PE fund will be invested in 10, maybe 20 companies over its entire life. The ending returns of the fund (i.e. the profits on which the carry is calculated) can't be known until each of those companies is sold off because with such a small number of investments every single one can have a huge impact on overall fund performance.

You can't tax someone on income when you don't know how much income they are making.

[Bernard Yomtov]

sd,

True for PE, but not for funds that trade assets.

And I wonder whether you disagree with my call option notion. Isn't that more or less your argument to Emma Anne?

To put it another way, suppose I buy a small company and hire a manager, to whom I give options as an incentive. This seems conceptually no different that what a fund investor does. Why shouldn't the fund manager be subject to the same tax rules as the business manager?

[sd]

Bernard,

I think your call option point is moot. Even if we felt that the economics of carried interest mirror those of an option in principle, there is no way to price that option.

Black-Scholes (sp?) is only valid in certain circumstance, one of which is that the underlying asset is liquid and efficiently priced. The whole point of PE is that the underlying assets are neither liquid nor efficiently priced. Nor can the volatility (another key input to option pricing models) be accurately estimated ahead of time on a unique collection of privately held businesses.

[Bernard Yomtov]

sd,

1. You keep coming back to PE and ignoring funds that trade liquid assets.

2. There are many non-public companies that award options to managers. While valuation may be inexact, it is done, and there are tax consequences.

3. Since you agree in principle that the carry is a call option, and argued to Emma Anne that the value of the initial grant ought to be taxed as ordinary income, I take it your objection is around the problem of valuing the option. I don't consider this insuperable. Black-Scholes is not the limit of valuation methods.

But let it go. While I am not 100% sure of the rules, which are a bit complex, I think an (ordinary) manager awarded an option which cannot be valued may simply hold it, and pay ordinary income tax on the ultimate profits. So again the question is why the fund manager is different.

[piotr]

By the way, why is it "politically unfeasible" to abolish the special treatment of capital gains if you add a proviso sparing "phantom income" from taxation? To wit, allowing to increase the cost basis by the rate of inflation if an asset is held for an entire year? (The stinker could be in applying the same principle to mortgage interest).

Ordinary middle class has few capital gains outside tax-deferred pension savings and real-estate gains on their houses, so I do not see much of political downside.

And in the discussed case, a manager can either report the option as having initially value zero, and gain nothing from the inflation of the cost basis, or something more.

Actually, the possibility of structuring bonuses as capital gains is a powerful argument against treating different classes of income differently. Sub-millionaire have few possibilities to transmute their income from one class to another, but multimillionaires have plenty of them.

[bigTom]

To follow up on piotr:

If we were interested in fairness, we would tax interest/dividends and captital gains similarly to ordinary income, with the single proviso that we would apply a correction factor for inflation. So interest would be exempt up to the rate of inflation, but taxed as ordinary income afterwards, as would capital gains.

The only advantage of the current low rates (aside from a one-time increase in equity prices from the reduction), is that a low rate decreases tax revenue variability, as capital gains are heavily dependent on recent market performance. On an indivdual level as an owner of some taxable mutual funds, it is impossible to properly with-hold, since gains are not reported until after the tax year is over. On the government side, revenue predictions are made difficult because of unknown capital gains. But is this sufficient justification for the economy distorting, and regressive nature of the current system?

[baileyman]

In order to tax partnerships as proposed you have to establish some norm that all capital participates in gains in proportion to it's ownership percentage. Then you can say any non-proportional allocation of gains represents a taxable event. So you cn then tax the carry. BUT, then you have to realize EXPENSE for the other partners.

Without obliterating hundreds of years of "sweat equity" precedent, I can't think of a way to do what people want to do. Partnerships pass through. Change that,and you can tax carry.

[wood turtle]

Sometimes there may be inequities, but the lower rate is trying to compensate, sometimes very ineffectively, for the inflationary factor.

[anne]

"Sometimes there may be inequities, but the lower rate is trying to compensate, sometimes very ineffectively, for the inflationary factor."

Possibly the most absurd comment in the history of comments, though possibly we should consider, "This is a thorny issue. But at the very least I think we should not levy ordinary income tax rates on the full value of the carry."

What utter absurdity; suddenly we are incapable of understanding what income is especially when income ranges from millions to billions. Such is self-serving madness.

[anne]

"Anne, carried interest isn't taxed every year because it can't be. Its 20% of the profits of the fund and the profits of the fund can't be known until the fund closes - typically years after the fund forms."

Such is self-serving madness; almost but not quite the height of absurdity. As though there is no longer accounting because we have learned meaningless phrases such as "carried interest." But, then again, I do so enjoy when guys learn to talk dirty. I could do a number on carried interest, but this is a family blog. Quick, sit on the chilren.

[anne]

"Sometimes there may be inequities, but the lower rate is trying to compensate, sometimes very ineffectively, for the inflationary factor."

How much did you earn last year? (I use the word earn loosely.)

About $1.7 billion; before inflation, but lower taxes should make that right, not that I'm actually paying taxes yet, but when and if I ever do, well, inflation growls and bites. Grrrrr.

[anne]

"Sometimes there may be inequities, but the lower rate is trying to compensate, sometimes very ineffectively, for the inflationary factor."

Private equity fund managers selling apples, apples mind you. Oh, the pity, the pity. There is a special kind of mean-spirited madness about that really is beyond parody.

[anne]

There is an article about a young man, a summer counselor, in Minneapolis who saved who knows how many school children on a bus sliding to the Mississippi. The young man left auto-mechanic school himself this past Christmas because he could not afford the darned tuition. I suppose that leaving school for lack of tuition was fortunate for lots of children, but there is a greedy madness about us that is beyond all understanding.

Imagine carried interest and the growl of inflation allow for income from the millions to tens and hundreds of millions to the billion to be taxed when taxed as though the income were no income, and a young man leaves school for lack of tuition while there is somehow no tuition for schooling through western Europe.

[anne]

Now, having sat on the children, try to impress us again with all the dirty talk about carrying inflated thornys. Sort of like dirty dancing, sparing the dancing, or like that. Children with no health care insurance, heroic kids out of school when they should be in school, a city ruined, a bridge fallen, a needlessly lunatic but tragic occupation, and the wealthiest people in the country are too stupid to figure know how much income taxes they should be paying.

No; I am not going to Confession this week and likely not next week either; Amen.

[anne]

http://www.nytimes.com/2007/08/03/us/03bus.html?hp

August 3, 2007

Stunned Victim Turns Hero in Busful of Children
By ELLEN BARRY

MINNEAPOLIS — By the time they reached the Interstate 35W bridge, the children on the bus were waterlogged and serene, some still in their bathing suits, ready to go home. It was a rare moment of quiet, and as the bus crossed over the Mississippi River a few of the counselors, barely out of adolescence themselves, had dropped off to sleep in their seats.

What happened then is difficult to describe, even a day later. Angi Haney, a counselor, realized first that she was not in her seat, and then that she was not touching any part of the bus, and then that “we were just all flying in the air.” T.J. Mattson, a 12-year-old with wire-rimmed glasses, looked out a window and saw water on the other side. Dust filled the bus, blotting out its passengers.

And then they came to rest. Jeremy Hernandez, the whip-thin 20-year-old who works as the summer program’s gym coordinator, remembers time seemed to congeal. Then something broke the spell, and his heart began pounding, and he jumped over two rows of seats and kicked open the back door. He remembers coolers flying, and he remembers passing along children to strangers lined up like a bucket brigade.

“I just acted,” Mr. Hernandez said Thursday. “I just moved. My feet were just moving. My body was following.”

The people gathered at the Waite House, the center in the Phillips neighborhood that sponsored the bus trip, were shocked, but their shock was mixed with joy. Of the 61 children and others in the school bus who plunged along with the bridge, only 14 required hospitalization, and 10 of those were quickly released. None died.

Instead, they returned to the center a day later — some with cuts and bruises, some unmarked — and swept one another up in hugs. “It’s one of those things,” said Anthony Wagner, president of Pillsbury United Communities, a nonprofit organization that operates the Waite House. “Five seconds, 10 seconds earlier, they would’ve been in the river. I think a miracle happened.”

Waite House is a low-slung brick building in Phillips, a south-side neighborhood whose population in 2000 was almost 12 percent American Indian, compared with 2.2 percent in the city as a whole. The area is also home to Hispanic immigrants and East African refugees; photographs in Waite House’s hallway show Cinco de Mayo celebrations, American Indian powwows and young girls in elaborate Hmong ceremonial dress.

Wooden houses with small yards line the streets, but children growing up in Phillips are hardly sheltered, said Kelly Morgan, who has lived there for several years. Forty percent of them live below the poverty line, according to census figures.

“You see everything you’d see on a New York street corner,” Ms. Morgan, 45, said.

For the 60 children who attend Waite House’s summer programs, a reward comes once a week: they pile into buses for a field trip like Wednesday’s, to a water park. On the trip back, they were singing a “really dorky” song in Spanish, about an elephant, said Monica Segura, 19, the center’s summer coordinator. The children remarked on the river as they passed over it, she remembered, and then the bridge dropped from under them.

Ms. Segura grabbed two children who were directly in front of her, but others fell on top of one another and started screaming. The front of the bus was wedged against a guardrail, blocking the doors. The silence was broken, she said, by Mr. Hernandez, who “jumped over the seats and kicked out the door.”

Mr. Hernandez sat beside her, looking self-conscious as she told the story. He was wearing a white tank top and low-slung jeans, and his first name was tattooed in elaborate letters on his left bicep. He had hoped to become an auto mechanic, he said, but dropped out of a training program at Christmastime because he could no longer afford the tuition....

[anne]

Pay the miserable piddling taxes and afford a few things to build this country's strength like we could afford a few things even during the Depression. Ah, and enough, enough immediately, with the lunacy of war and occupation.

[anne]

http://economistsview.typepad.com/economistsview/2007/08/paul-krugman-a-.html

August 3, 2007

Paul Krugman: A Test for Democrats
Edited by Mark Thoma

Paul Krugman on good Democrats, bad Democrats, and the ugly thing the bad Democrats are about to do:

A Test for Democrats, by Paul Krugman, Commentary, New York Times: It's been a good Democrats, bad Democrats kind of week. The bill expanding children's health insurance that just passed in the House makes you want to stand up and cheer. Reports that Senator Charles Schumer opposes plans to close the hedge fund tax loophole make you want to sit down and cry.

Let's start with the good news: The House bill ... would provide coverage to five million children who would otherwise be uninsured.

The bill is so good that it has Republicans spluttering. "The bill uses children as pawns," declared Representative Pete Sessions of Texas. Yes, the Democrats are exploiting children — by providing them with health care.

The horror, the horror!

What's especially encouraging is the way House Democrats were willing to take on the insurance companies. The bill pays for children's health care in part by cutting subsidies to Medicare Advantage, a privatization scheme that yields big profits for insurers...

All in all, the bill is both a fine piece of legislation and a demonstration that Democrats can stand up to special interests. Happy days are here again.

Or maybe not.

The hedge fund tax loophole is a crystal-clear example of unjustified privilege. ... For example, ... pension fund ... manag[ers] ... are taxed ... at rates up to 35 percent. But if that money is invested with a hedge fund ... the fees the ... manager receives ... are mainly taxed as capital gains, with a maximum rate of 15 percent. ...

We're told that the tax rate on hedge fund managers has to be kept low to encourage risk-taking. But the managers aren't risking their own money. The only risk ... is the uncertainty of their fees — and as any ... salesman who depends on commissions can tell you, most people with uncertain incomes don't get any special tax breaks.

We're also told that management fees would rise, reducing returns to investors... — as if someone with a $100-million-a-year hedge fund job would walk away if his take-home pay fell from $85 million to $65 million.

And we're talking about a lot of lost revenue here. The Economic Policy Institute estimates ... $6.3 billion a year — the cost of providing health care to three million children. Of that total, almost $2 billion a year ... goes to just 25 individuals.

If being a Democrat means anything, it means opposing this kind of exorbitant privilege. Yet ... Mr. Schumer says that he opposes any increase in hedge fund taxes unless tax breaks for the energy and real estate industries are also eliminated, and pigs start flying. Seriously, his claim that he really would support closing the hedge fund loophole if other, deeply entrenched tax privileges were eliminated ... is a fig leaf that hides nothing.

Mr. Schumer ... insists that the large financial contributions that hedge funds make to his party aren't influencing him. Well, I can't read his mind, but from the outside his position looks remarkably like money-driven politics as usual. And that's not acceptable.

Look, the worst thing that could happen to Democrats is for voters to conclude that there's no real difference between the parties, that when you replace Republicans with Democrats, all you do is replace sweet deals for Halliburton with sweet deals for hedge funds. The hedge fund loophole is a test — and it's one that Mr. Schumer is failing.

[anne]

http://www.nytimes.com/2007/08/02/health/policy/02health.html?hp

August 2, 2007

House Passes Children's Health Plan 225-204
By ROBERT PEAR

WASHINGTON — Over angry Republican objections, the House on Wednesday passed a sweeping expansion of the Children's Health Insurance Program, financed with increases in tobacco taxes and cuts in subsidies to private Medicare insurance plans for older Americans.

The bill embodies the Democrats' vision for health care, taking a step toward the goal of universal coverage while reversing what they see as Republican efforts to "privatize Medicare."

By a vote of 225 to 204, the bill passed, with support from 220 Democrats and 5 Republicans. Ten Democrats joined 194 Republicans in voting against it. The bill would provide coverage for more than four million uninsured children in low-income families, prevent cuts in doctors' Medicare payments scheduled for Jan. 1 and raise the federal cigarette tax 45 cents a pack, to 84 cents.

It would also increase assistance to low-income Medicare recipients and eliminate co-payments for most preventive care provided to Medicare recipients....

[anne]

http://www.nytimes.com/2007/08/03/washington/03health.html?hp

August 3, 2007

Senate Passes Children's Health Bill, 68-31
By ROBERT PEAR

WASHINGTON — The Senate defied President Bush on Thursday and passed a bipartisan bill that would provide health insurance for millions of children in low-income families.

The vote was 68 to 31. The majority was more than enough to overcome the veto repeatedly threatened by Mr. Bush. The White House said the bill "goes too far in federalizing health care."

But Senator Max Baucus, Democrat of Montana and chief sponsor of the bill, said, "Millions of American children have hope for a healthier future tonight."

The bill would increase spending on the popular Children's Health Insurance Program by $35 billion over the next five years.

"Covering these children is worth every cent," said Senator Orrin G. Hatch, Republican of Utah, who helped create the program 10 years ago.

The House passed a much larger bill on Wednesday, presenting negotiators with a formidable challenge in trying to work out differences between the two measures.

Still, the strong commitment to the issue by Democratic leaders virtually guarantees that they can work out a compromise before Sept. 30, when the program is set to expire. But that compromise is likely to be unacceptable to Mr. Bush....

[anne]

Notice that there will likely be a President veto of the bill, and the House of Representatives majority is not large enough now to override a veto. Also, the Senate bill adds $35 billion for the health care needs of uninsured children from low-income families, but this $35 billion is over 5 years as opposed to an increase in the military budget (not including increased spending on Iraq) that is already at $44 billion just for the coming year. We can afford whatever we wish to afford.