Consider this scenario: You invest $1million in a parcel of land, and hire a manager to take care of it. The manager draws a comfortable salary of, say, $100,000 per year for his work, and pays normal income taxes on that amount. But the manager also has a “kicker” that pays him 20% of the annual gain in the market value of your property. If your property increases in value to $1,200,000 after one year, the manager gets a $40,000 bonus (20% of the $200,000 gain). But that bonus is taxed as “capital gains”, at only a 15% rate. Wow, what a deal: without any of his own capital at risk, the manager gets to take 20% of the gains resulting from your investment (i.e., YOUR risk), and pays tax at the same rate that you, the investor, have to pay.
Now multiply that $1MM by 1000 other investors whose risk capital totaling $1Billion is “managed” by a hedge fund guru, drawing a $500,000 annual salary, and getting a kicker of $20 – 40 MILLION, taxed as capital gains, with no investment risk taken by the manager. That is the sweet little deal that Wall Street hedge fund managers will be fighting like hell to keep – who wouldn’t want to get that kind of “income” with no personal financial risk and low taxes to boot?
If President Obama does one thing right, it will be to blow up this most egregious rip-off of American taxpayers. There will be no tears shed for these guys.