Disappointment of the Day: Senator Schumer Champions Special Tax Treatment for Billionaires

Amy Traub

Disappointment of the Day: Senator Schumer Champions Special Tax Treatment for Billionaires

It must be pretty nice to be taxed like a hedge fund manager. Despite the many millions you are compensated, most of your income isn't taxed at the 35% rate, like ordinary income for the top tax bracket. Unlike your highly-paid colleagues in other industries, a nifty IRS loophole allows you to pay just 15% in taxes on much of your compensation. On paper, it works because a big chunk of your pay is considered capital gains, not ordinary income. The real world effect is that you get taxed at a similar rate as the guy who makes your morning latte.

The Economic Policy Institute estimates that $6.3 billion in tax revenue is lost every year by providing hedge funds with privileged tax status, with an equivalent amount lost annually by providing these tax benefits to private equity mangers.

For a federal government stretched at the seams, trying to foot the bill for two wars, increased homeland security, veterans' health care, health coverage for poor kids, crumbling national infrastructure, investments in renewable energy, efforts to make college more affordable, or just making the tax code more fair to middle-class Americans you'd think ending the low-tax loophole for billionaires would be high on the list of new revenue sources. And you'd be right.

But yesterday the New York Times reported that hedge fund managers have a new champion in their effort to keep legally dodging the taxes the rest of us pay: none other than New York Senator Charles Schumer.

I don't want to think that this self-described advocate for the middle class favors maintaining the hedge fund loophole solely because of hefty campaign contributions from that industry, but his stated reasons for backing the special tax treatment sound weak indeed.

First, consider the absurdity of the Senator's concern that the industry is being "unfairly singled out." Subjecting hedge fund and private equity managers to the same tax rates the rest of us pay on earned income amounts to just the opposite.

Next Senator Schumer talks about "protecting an industry vital to his home state," but fails to look at how realistic it is that the highly-compensated managers of hedge funds and private equity firms would actually leave the country.

What's more, the Senator assumes it is purely a good thing to have hedge funds based in New York. Certainly, the City and State do benefit from the economic activity and tax revenue. But there may be costs as well. To what extent do the outsize, under-taxed earnings of hedge fund billionaires distort residential real estate costs, contributing to the city's crisis of affordable housing, the displacement of the poor and the disappearance of middle-class neighborhoods? I don't know the answer. But I do know that hedge fund and private equity managers get plenty of privileges. Special privileges in the tax code are plain unfair to the rest of us.