A common hedge fund and private equity manager compensation arrangement includes two parts, that could be something like this:
*The manager receives a fee of 2% of the value of the fund and presently this is taxed at ordinary rates.
*The manager also receives 20% of the annual profits of the fund and presently this is taxed at a very attractive capital gain tax rate.
Clearly,
the part that is a tax loophole is that all fund manager compensation
should be taxed at ordinary rates, particularly for the larger hedge
funds. Frankly, it is just crazy, from a fairness standpoint, to allow hedge fund managers a much
lower tax rate than what working stiffs must pay.
My recommendation is to tax all fund
manager compensation for managing hedge and private equity funds at ordinary income tax rates, starting in 2013.
But also, I think that the Net Business Income of all pass through entities, like Partnerships, LLCs, and REITs, should have a somewhat lower income tax rate at the individual level than that related to compensation.
Thus, my recommendation is that, starting in 2013, all compensation of Hedge Fund and Private Equity Managers should have a top income tax rate of 39.6%, as is stipulated in the Tax Code.
However, I think that, starting in 2013, all Net Business Income should be income taxed at the individual level at a top income tax rate somewhere between the 35.0%, which is applicable for 2012, and the 39.6% top tax rate, as is stipulated in the Tax Code starting in 2013.
I also think that a logical, fair conclusion here is to split the difference, and use a top income tax rate on Net Business Income passed through of 37.3%, starting in 2013.
But a lot more important to maximizing US job creation is to also apply much lower income tax rates on Net Business Income passed through at the individual level to the lower amounts of Net Business Income passed through.
Thus, I think a US Fiscal Cliff fair trade-off is for the US Government to use the huge Tax Revenue inflow from disallowing any Hedge Fund and Private Equity Manager Compensation to be eligible for the lower capital gain tax rate to lower the income tax rates at the individual level for all Net Business Income.
And Congress needs to make a clear demarcation as to what constitutes compensation and what constitutes Net Business Income of Hedge Fund and Private Equity Managers.
