Commentary Magazine


Contentions

Carried Interest — A Bipartisan Issue

I wrote in my previous post that I would blog on carried interest shortly.

Hedge funds earn income in two ways. First, they charge their customers a management fee, usually something on the order of 1.5 percent. Second, they take a hefty slice of the capital gains earned in successful investments, often 25 percent.

So, say a man has a $1 million account at a hedge fund and, after a very successful year, his account is worth $2 million. The fund would charge him $30,000 as a management fee and take $250,000 as its share of the profits, leaving him with $1,720,000 in the account. Even with the large fees, a 72 percent return on capital in a single year ain’t bad.

But the hedge Fund owners only have to pay tax on their share of the profit at the capital gains rate, 15 percent. Why?

It beats me. Unlike the customer, they have no money at risk (they don’t share in any net losses). It is a pure fee for service, although, to be sure, measured in capital growth. Hedge fund managers don’t deserve a tax break on their fees any more than lawyers, dentists, or, alas, writers do.

But, why didn’t the Democrats, who ran both houses of Congress from 2007 to 2011, bring this to a screeching halt? Good question. Could it, perhaps, have something to do with the fact that hedge fund managers tend to share these windfalls with politicians in the form of campaign and PAC contributions?



Join the discussion…

Are you a subscriber? Log in to comment »

Not a subscriber? Join the discussion today, subscribe to Commentary »





Welcome to Commentary Magazine.
We hope you enjoy your visit.
As a visitor to our site, you are allowed 8 free articles this month.
This is your first of 8 free articles.

If you are already a digital subscriber, log in here »

Print subscriber? For free access to the website and iPad, register here »

To subscribe, click here to see our subscription offers »

Please note this is an advertisement skip this ad
Clearly, you have a passion for ideas.
Subscribe today for unlimited digital access to the publication that shapes the minds of the people who shape our world.
Get for just
YOU HAVE READ OF 8 FREE ARTICLES THIS MONTH.
FOR JUST
YOU HAVE READ OF 8 FREE ARTICLES THIS MONTH.
FOR JUST
Welcome to Commentary Magazine.
We hope you enjoy your visit.
As a visitor, you are allowed 8 free articles.
This is your first article.
You have read of 8 free articles this month.
YOU HAVE READ 8 OF 8
FREE ARTICLES THIS MONTH.
for full access to
CommentaryMagazine.com
INCLUDES FULL ACCESS TO:
Digital subscriber?
Print subscriber? Get free access »
Call to subscribe: 1-800-829-6270
You can also subscribe
on your computer at
CommentaryMagazine.com.
LOG IN WITH YOUR
COMMENTARY MAGAZINE ID
Don't have a CommentaryMagazine.com log in?
CREATE A COMMENTARY
LOG IN ID
Enter you email address and password below. A confirmation email will be sent to the email address that you provide.