During the negotiations regarding raising the nation’s debt ceiling, congressional Republicans have gone to the mat to defend all manner of unwarranted tax breaks, including those for oil companies and corporate jet owners. Despite the drain on the Treasury caused by these tax breaks — and the negligible benefit they provide — Republicans have threatened to allow the nation to default on its obligations rather than abandon them.
One of the tax breaks upon which President Obama has focused is a provision that allows hedge fund managers — who make billions annually — to receive a substantial tax break. This particular tax break, known as the carried-interest loophole, allows hedge fund managers to treat the money they receive from investors as capital gains, subject to a 15 percent tax rate. Though this money is a paycheck received for services, just like a movie star receiving a bonus if her movie does well, it’s treated as investment income.
Since hedge fund managers are some of the richest people in the country, this tax break actually causes a significant loss of revenue. In fact, according to calculation by RJ Eskow, closing this loophole would raise more than $4 billion per year just from the 25 richest hedge fund managers:
The top 25 hedge fund managers in the United States collectively earned $22 billion last year, and yet they have their own cushy set of tax rules. If they operated under the same rules that apply to other people — police officers, for example, or teachers — the country could cut its national deficit by as much as $44 billion in the next ten years.
That may seem like a lot of revenue to raise from just a few people, but it’s simply what would happen if the income hedge fund managers receive to manage other people’s money was treated the same as income earned by other workers. Economist Robert Reich estimates that closing the hedge fund loophole could raise as much as $20 billion a year in revenue, overall.
It would take the combined income of 441,000 middle-class families to equal the income made by just the 25 richest hedge fund managers. The top hedge fund manager at the moment, John Paulson, makes more hourly than most Americans will earn in a lifetime, while paying a lower tax rate. This is an egregious loophole, but the GOP refuses to consider it as part of a deal to avoid default and an economic catastrophe.