Tax Code Closing in Around the 1%

One of the biggest tax loopholes that helps keep hedge fund managers in the top 1 percent would be closed by new legislation introduced this week by Rep. Sander Levin (D-Mich.).

Currently, people who manage other people’s money—like 1 percenter Mitt Romney did at Bain Capital—only pay 15 percent tax on the income they receive as compensation, compared with the up-to-35-percent many Americans pay on their income. Says Levin:

There is absolutely no reason why income earned for managing other people’s money shouldn’t be taxed in the same way as income earned teaching or working in a factory. This loophole for years has unfairly enabled some of the highest-paid individuals in the country to sharply reduce their tax bills and it is time to close it once and for all.

The technical term for those earnings is carried interest. In exchange for providing the service of managing their investors’ assets, fund managers often take a portion of a fund’s profits, or a carried interest, usually equal to 20 percent of such profits. When a significant portion of funds profits are long-term capital gains, the carried interest is taxed at the 15 percent capital gains rates.

Levin’s bill—The Carried Interest Fairness Act—would force the 1 percenters to pay taxes on that income at the same rate we all pay on our income.

In a recent editorial, The Los Angeles Times wrote:

Romney’s ability to pay a lower percentage than many taxpayers who aren’t wealthy will only feed the concerns about widening income inequality in the United States. But this isn’t a case of the rich playing by a different set of rules than everyone else. It’s a case of the rules benefiting them far more than most.